CDW Corp

NASDAQ:CDW

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. And welcome to the CDW First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference maybe recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Brittany Smith, VP of Investor Relations and Financial Planning and Analysis. Please, go ahead.

[Brittany Smith, VP, IR and Financial Planning and Analysis]

Thank you. Good morning, everyone. Joining me remotely today to review our first quarter financial results are Chris Leahy, our Chief Executive Officer; and Collin Kebo, our Chief Financial Officer.

Our first quarter earnings release was distributed this morning, and is available on our website, investor.tdw.com, along with supplemental slides that you can use to follow along during the call.

I’d like to remind you that certain comments made in this presentation are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. Those statements are subject to risks and uncertainties that could cause actual results to differ materially. Additional information concerning these risks and uncertainties is contained in the earnings release and Form 8-K we furnished to the SEC today and in the company’s other filings with the SEC.

CDW assumes no obligation to update the information presented during this webcast. Our presentation also includes certain non-GAAP financial measures, including non-GAAP operating income and non-GAAP earnings per share. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You’ll find reconciliation charts in the slides for today’s webcast and in our earning release and Form 8-K we furnished to the SEC today.

Please note that all references to growth rates or dollar amount increases in our remarks today are versus the comparable period in 2019 unless otherwise indicated. In addition, all references to growth rates for hardware, software and services today represent US net sales only and do not include the results from CDW UK or Canada. Also, there was one more selling day in the first quarter of 2020 as compared to 2019.

Replay of it this webcast will be posted to our website later today. I also want to remind you that this conference call is the property of CDW and may not be recorded or rebroadcast without specific written permission from the company.

With that, let me turn the call over to Chris.

[Christine Leahy, CEO]

Thank you, Brittany. I first want to take a moment to share our respect from CDW to all who are suffering hardships or loss as we face this COVID-19 health crisis, and also to recognize the extraordinary sacrifices and contributions being made by so many who are devoting themselves to serving others.

I’ll begin this morning with a high level overview of first quarter results and drivers of performance. I’ll also discuss how we are addressing the coronavirus pandemic and its impact on our co-workers, customers and operations and share some thoughts on the balance of 2020.

Collin will then take you through a more detailed look at our first quarter financials, as well as our liquidity position and capital allocation strategy. We’ll move quickly through our prepared remarks to ensure we have plenty of time for Q&A.

We had a very strong first quarter. Net sales were $4.4 billion, 9.2% above last year on average daily sales basis, adjusted for the impact of one more business day in the first quarter of 2020 than 2019, and up 9.4% in constant currency.

Non-GAAP operating income was $304 million, an increase of 5.8%. This includes a $29 million increase in our credit loss reserve to reflect the macroeconomic environment due to COVID-19. Non GAAP net income per share was $1.38, up 11% on a reported basis, and up 11.3% in constant currency.

As the quarter progressed in March, we served a meaningful increase in customer demand. CDW teams orchestrated solutions for client’s devices, accessories, collaboration tools, security and others from our broad portfolio to address our customer’s remote work in business continuity needs.

We experienced solid results across the US business with all five US channels growing high single-digits and solid local performance from our international teams. This growth came from both existing and new customers.

To address anticipated supply constraints we leveraged our scale, distribution centers, extensive logistics capabilities, strong vendor partner relationships and healthy balance sheet and liquidity position, fulfilling our customers and prospects urgent and critical IT needs. We procured the supply in key categories early and managed through longer industry lead times for our customers in a supply-constrained environment.

Our net sales performance for the quarter was balanced with 9% growth for both US hardware and software and 26% services growth. In March, customer priorities quickly redirected to remote workforce enablement and work continuity, driving strong transactional performance of almost 20%. During this time, customers de-prioritized infrastructure and less urgent service projects, resulting in a low single digit year-over-year decline for solutions.

Cloud customers spend and gross profit increased double-digits drive by strong growth in collaboration, security and productivity, workloads consistent with remote workforce enablement.

We generated strong double-digit growth in product categories that enabled work from home and operations continuity plan, including client devices both notebook and desktops, video, collaboration tools, configuration services and security.

Our teams orchestrated a seamless combination of these products and services plus others from our broader portfolio to provide full solutions to our customers. Clearly the team delivered strong performance. I am proud of and grateful to our co-workers who persevered for our customers.

Now, looking more closely at our customer end-markets performance, our corporate and Small Business teams both delivered over 8% growth, driven by double-digit growth in transactional categories as the team successfully developed work from home capabilities for our customers. The Government team increased sales almost 15%, Federal had another excellent quarter with sales up double-digits primarily driven by the census project.

The state and local team also delivered double-digit growth driven by strong transactional and solutions performance that enabled remote work capability and crisis readiness efforts.

Education increased 17% with strong double-digit growth in both higher ed and K-12. Customers in both markets were focused on enabling remote learning capabilities.

Our healthcare team delivered 7% growth primarily driven by transactional product categories to adapt to the new care delivery environment.

Other, which represents our UK and Canadian operations increased 3% on a reported basis. UK was up low constant currency. That was on top of four years of first quarter double-digit growth. The UK team has been instrumental in helping with the government’s response to COVID-19, providing crucial technology to the new critical care field hospitals as well as enabling remote work capabilities for our customers. Canada increased double-digits, also driven by remote work enablement and strong demand from healthcare and education customers.

Our first quarter operating and financial performance reflected the combined power of our balanced portfolio of customer end-markets, our full suite of solutions and services that can address even rapidly shifting customer priorities across the IT landscape and our ongoing success executing our three-part strategy for growth.

I want to take a minute to review each of these for two reasons. First, because these are important drivers of CDW’s first quarter performance and second they provide frame work to think about CDW’s performance under various macroeconomic condition.

As you know we have five US sales channels, that each generated annual net sales of 1.5 billion in 2019. Corporate, small business, government, education, this scale enables us to further align sales teams into vertical customer end-markets, including Federal Government, State and Local Government, K-12 and higher education. Providing us insights into our customers’ objectives and goals and positioning us as a trusted partner.

In addition, we have our UK and Canadian operations, which together delivered over US$2 billion of net sales in 2019. The diversity of our customer end-markets serve us as well with macro or other external challenges impact various industries and business differently. This is especially relevant in the current environment.

Next, the breadth of our offerings, with over 100,000 products, services and solutions for more than 1,000 vendor partners, we are well-positioned to meet our customers’ total needs across the spectrum of IT and can pivot quickly to trends and customer demand.

And, finally, our three-part strategy for growth, which is, first, to acquire new customers and capture share, second, enhance our solutions capabilities; and, third, expand our services capabilities.

Each pillar is crucial to our ability to profitably assess, design, deliver and manage the integrated technology solutions our customers want and need today and in the future.

Before I turn to our thoughts about the balance of the year, I want to provide insights into our managing COVID-19 impact on our business. To holistically manage our response in mid-February, we activated a cross-functional response team led by executive committee members.

The team leveraged our pre-established crisis management protocols to ensure we responded as quickly as possible. The team has three key principles, safe guard the health and well-being of our co-workers, serve the mission-driven needs of our customers and partners, and support ours communities.

One of the key actions, we took to maintain the impact of the virus on our customers, on our co-workers and our operations was to implement a global work-from-home order from office co-workers in mid-March. We have excellent IT infrastructure and support so the transition to work from home was shift and seamless. We are monitoring developments closely, developing plans accordingly, and we will be prepared for our return to office at the appropriate time.

We are focused on our co-workers’ safety and well-being in the workplace. To do this at our three distribution and configuration centers, we are operating under precautionary measures advised by public health authorities, including social distancing, segment and shift, personnel protective equipment, enhanced facilities cleaning and temperature screening for anyone entering the facilities.

Currently, all distribution and configuration centers are fully operational. At the end of March to limit the virus spread after a few co-workers tested positive for COVID-19, we decide to close our Vernon Hills, Illinois distribution center for several days and to require a shift to configuration center co-workers to self-isolate.

These actions did not have a material impact as the team’s leveraged flexibility in our distribution and capabilities where possible. Our distribution center in Las Vegas fulfilled customer orders and orders were drop shifted directly to customers, and where not shipping times modestly increased.

I regard our exceptional co-workers and our unique culture to be a meaningful competitive advantage. Our team has responded to the current environment in exemplary ways. One example is our internal dig marketplace created to match areas of our business where demand has spiked, with internal talent on temporary assignment.

Another example is the reallocating of our sales and technical resources to where the growth is and will be going, which we successfully did during the great recession. We will again be nimble by identifying and implementing ways to optimally utilize our highly skilled co-workers.

In addition and consistent with our strong culture of giving CDW has and continues to contribute meaningfully to support the COVID-19 response efforts locally in the US, UK and Canada.

Now let me turn to our 2020 financial performance. As a result of COVID-19 and the unknown duration and depth of its impact, we withdrew our 2020 targets on April 16, as most all companies are doing. The near term impact of COVID-19 on some customers we serve could be meaningful, with some ed markets impacted more significantly than others.

Consistent with prior experience where commercial customers have reacted relatively quickly to economic conditions, we anticipate the demand will be lower for some of our small business and corporate customers.

We expect demand from our public customers to be relatively firmer, led by resiliency in our federal channel, due to the Census project and the IT priorities we support, including infrastructure upgrades and security enhancements to remain top priorities.

Demand will likely be next for our other public channels, with budget uncertainty for healthcare, state and local and education customers. We continue to track stimulus support and, where possible, help our customers navigate the various programs.

Regarding product categories, we expect customers to prioritize mission-critical IT spending and for some to push out longer term solutions projects, including infrastructure projects and service engagement. In recent weeks, our focus has shifted to helping our customers manage their work from home environments at scale.

Solutions that – solution for that includes security, network augmentation to accommodate new demand, remote performance management, virtual desktops and effective application management.

Longer term, we expect our customers and prospective customers to design and implement technology driven strategies to not just survive, but to thrive. We expect to see an acceleration in digital transformation, cloud migration and automation strategies, as companies invest to successfully compete in the future.

We believe that technology will be as or more essential to all sectors of our economy, and will play an increasingly important role in the years ahead. We intend to continue to help our customers navigate the complex IT landscape.

During our 35 year history, CDW has a successful track record of evolving with customer needs in the ever-evolving IT industry. We are committed to continuing to invest in our three-part strategy, including capabilities that will position us to best serve our customers, optimize our productivity and enhance our competitive position.

As we do so, we will keep a watchful eye on the impact of COVID-19, the macro environment, and other unpredictable variables, such as potential supply disruptions, trade policies and the upcoming US election.

CDW will continue to do what we do best, leverage our competitive advantages to help our customers address their IT priorities and achieve their strategic objective. And out-execute our competition. While this is a particularly uncertain and challenging time for all, I’m confident that CDW will continue to grow to new heights.

Now Collin will share more details on our financial performance. Collin?

[Collin Kebo, SVP and CFO]

Thank you, Chris. Good morning, everyone. I’m going to provide more detail on our first quarter results and capital allocation priorities in the current environment.

Turning to our first quarter P&L on slide nine, consolidated net sales were $4.4 billion, up 10.9% on a reported basis, and 9.2% on an average daily sales basis, as we had one additional selling day. On a constant currency average daily sales basis, consolidated net sales grew 9.4%.

On an average daily sales basis, sequential sales decreased 4.8% versus the fourth quarter of 2019. This was better than expected and historical seasonality. As the quarter progressed and we moved into March, the impact of COVID-19 led to a meaningful increase in customer demand for client devices, accessories, collaboration tools, security and other solutions to keep other solutions to keep customers’ operations running.

While there were pockets of supply dislocation, as Chris mentioned, we leveraged our scale and distribution capabilities to help customers get access to the IT they needed for business continuity.

Some portion of the record monthly sales we achieved in March is likely attributable to a pull forward of future demand, but it’s difficult to quantify at quantify at this point.

Gross profit for the quarter was $757 million, an increase of 12.6%. Gross margin was 17.2%, up 20 basis points over last year, driven by product margin and services, partially offset by netted down revenue streams not growing as fast as net sales.

Turning to our SG&A on slide 10, our non-GAAP SG&A increased 17.6%. The increase was primarily driven by a $29 million increase in our credit loss reserve to reflect the macroeconomic environment as a result of the impact of COVID-19.

SG&A also reflects higher payroll costs consistent with higher co-worker count and higher gross profit as well as roughly $2 million of incremental COVID-19 expenses, primarily to safeguard our co-workers.

Co-worker count of 10,104 was up 670 co-workers from March 2019, with approximately 100 of the year-over-year increase from the Atheros acquisition and the remaining from organic co-worker investments. Roughly 60% of the 670 co-workers added year-over-year are in customer-facing roles.

As you know, we have a variable cost structure, given that sales commissions are paid on a percentage of gross profit and growth in co-worker count is one of our biggest investments. We have implemented hiring restrictions and are letting attrition run for a while as we closely monitor the macroeconomic and demand environments.

GAAP operating income was $246 million, up 7.4%. Our non-GAAP operating income, which better reflects operating performance, was $304 million, an increase of 5.8%. Non-GAAP operating income margin was 6.9%.

Moving to slide 11, interest expense was $38 million for both the first quarter of 2020 and 2019. Our GAAP effective tax rate, shown on slide 12, was 20.7% in the quarter, up 50 basis points compared to last year. This resulted in first quarter tax expense of $44 million.

To get to our non-GAAP effective tax rate, we adjust taxes consistent with non-GAAP net income add-backs, including excess tax benefits associated with equity-based compensation, which is shown on slide 13. For the quarter, our non-GAAP effective tax rate was 25.9%, up 10 basis points versus last year’s rate.

As you can see on slide 14, with first quarter weighted average diluted shares outstanding of $145 million, GAAP net income per share $1.16, up 13.1%. Our non-GAAP net income was $200 million in the quarter, up 7.9% over last year. Non-GAAP net income per share was $1.38, up 11% from last year. The increase in the credit loss reserve equates to approximately $0.15 per share.

Turning to the balance sheet on slide 15, liquidity is a clear priority in the current environment. As of March 31st, cash and cash equivalents were $214 million and net debt was $3.3 billion. Our cash plus revolver availability was $1.2 billion.

Subsequent to quarter end, we bolstered our liquidity position by issuing $600 million of senior unsecured notes at a coupon of 4.8% for general corporate purposes. Additional measures to enhance liquidity includes suspending share repurchases and implementing various cost savings initiatives.

Free cash flow for the quarter was $116 million, as shown on slide 16. This is lower than normal seasonality and below last year’s $303 million for several reasons. One, because sales growth was back-end loaded in the quarter, the receivables associated with those sales are sitting on the March 31 balance sheet.

Two, we mixed out of vendors with extended payment terms. And three, we leveraged our scale and distribution centers to increase investment in inventory to better support customers in a supply-constrained environment.

Moving to slide 17. The three month average cash conversion cycle was 20 days, up 3 days from last year’s first quarter. The balance sheet dynamics I just described are somewhat moderated when you look at three month average working capital metrics because of how sales phasing played out in the quarter.

Looking ahead, our working capital metrics could be impacted as we strategically invest in inventory or due to pressure on receivable collections as customers are impacted by the macroeconomic environment.

One of our greatest assets is our long-term customer relationships, and we know it’s important to be there for customers during challenging times like we were during the Great Recession. We will continue to balance managing customer’s working capital needs, while appropriately managing risk.

For the quarter, we deployed a $195 million of cash to shareholders, which included $54 million of dividend and $141 million of share repurchase at an average price of approximately $123 per share.

Turning to capital allocation on slide 18. As I mentioned earlier we are focused on liquidity and have reassessed other uses of capital within that context. Our priorities are, first, continue to pay the dividend. Today, we announced a quarterly cash dividend of $0.38 per common share, reflecting CDW’s strong liquidity position and confidence in the cash flow generation capability of the business. We expect to evaluate any changes in the dividend in the fourth quarter of this year consistent with historical timing. Future dividends will be subject to board approval.

Second, ensure we have the right capital structure in place. We remain comfortable with the current target net leverage ratio of 2.5 times to 3 times for several reasons. One, we have no debt maturities in 2020 and just $57 million, due in 2022.

Two, the weighted average interest rate on the debt portfolio was 3.9% pro forma for the $600 million notes issued in April. So cash interest is manageable. And three, our debt capital structure was covenant light. We ended the quarter with net leverage at 2.2 times slightly below the low end of our target range and flat to year end 2019.

Our third capital allocation priority is to supplement organic growth with strategic acquisitions, a challenging economic environment could present attractive M&A opportunities. So we remain active in evaluating targets.

Any decision to deploy capital for acquisitions will be a function of our usual screens, strategic rationale, operating and cultural fit and financial return all within the context of liquidity at that point in time.

Fourth, as I noted previously, we suspended our share repurchase program to enhance liquidity with first quarter buybacks of 1.1 million shares. We have already offset expected dilution associated with stock compensation for this year.

The decision on when to resume stock buybacks will depend on several considerations, including the macroeconomic environment, liquidity and working capital, leverage and other potential uses of cash, such as M&A.

Lastly, on the topic of capital. We intend to continue capital expenditure investments in the business. We have a CapEx light model, historically, running around 0.5 point of sales or slightly more. We believe it’s important to continue prudently investing in the capabilities that will allow us to better serve customers, drive productivity and ultimately emerge from this crisis in a stronger competitive position.

While we have withdrawn 2020 targets, and will not be providing an updated financial outlook, I do want to provide insights into what we’re seeing roughly five weeks into the quarter.

On the demand side, customer activity has been mixed. We entered April with a healthy backlog of remote workforce enablement solutions, which contributed to solid shipment growth in April.

However, writings and corporate and small business were down double digits year-over-year, which will weigh on shipments going forward. This is consistent with past experience, where we’ve seen commercial customers react sooner to macroeconomic conditions.

On the other hand, public sector writings were up year-over-year, reflecting strength in government and K-12 and more muted demand in higher education and health care. Our international businesses are generally seeing similar trends with their customers. You may recall that both the UK and Canada have a lower mix of sales to public sector customers than the US.

On the supply side, we continue to navigate through a fluid environment with pockets of dislocation extending lead times in certain categories. We are in constant contact with our vendor partners whose manufacturing operations are generally back up and running. Freight is a challenge, resulting in pricing surcharges and price increases on certain products.

On the operating front, both distribution centers in the US continue to be fully operational since the brief closure of our Vernon Hills, Illinois distribution center at the end of March.

Finally, I want to provide an update on the device as a service solution to the US Census Bureau. The contribution to first quarter sales was generally in line with expectations. In March, the Census Bureau temporarily suspended field data collection activities and steps are being taken to reactivate field offices next month.

In April, the Census Bureau announced it was seeking statutory relief from Congress for an additional 120 days, which would extend the window for field data collection and self-response to October 31. The delay is expected to shift a modest amount of net sales from to Q4 from Q2.

Finally, we are working with the Census Bureau to help meet the customers’ objective of making up lost time due to COVID-19. CDW expects to provide additional devices, enabling the Census to have more workers in the field. As a result of these changes, we now expect the Census project to contribute up to approximately 140 basis of incremental sales growth in 2020.

The rollout schedule is fluid, so we could see revenue shift from 2020 into 2021. We will continue to provide updates on the Census as we progress through 2020.

That concludes the financial summary. With that, I’ll ask Olivia to open it up for questions. Can we please ask each of you to limit your questions to one, with a brief follow-up. Thank you.

[Operator]

[Operator Instructions] And our first question coming from the line of Amit Daryanani from Evercore. Your line is open.

[Amit Daryanani, Evercore]

Good morning, guys. Thanks for taking my question. I guess, maybe to start off with Collin or Chris, I was just hoping you could spend a few minutes maybe just comparing how CDW performed through the ‘08, ‘09 recession and what are sort of the puts and takes when one compares SARS to what’s going on right now. Maybe you can kind of frame that up that would be really helpful.

And then, just - I’ll ask my second question as well upfront. How does the share gain narrow to work for CDW in an environment like this? Is it easier? Are customers more willing to engage with new vendors? Or is that something that happens in our post-COVID post-recession world? Thank you.

[Christine Leahy, CEO]

Okay. Hi Amit, good morning, it’s Chris, and I’ll start, and then Collin can add in. When we think back to the 2009 recession, first of all, I would say, as we all know, two downturns are the same. And with respect to where we sit today, we can’t tell with any level of certainty what’s going to happen.

This is that essence, the health crisis and the economic issues are derivative. But if we look back to 2008 and ‘09, it can be informative. So, if we look at the segments, corporate and small business, they did tend to react more quickly, as Collin suggested in his script to the downturn. And if you look at our investor deck, you can see that corporate was down 22% and small business declined small business declined 18%, so significantly.

The public sector channels, as we’ve mentioned, were more resilient, and we saw growth in government and education. Health care was a little flat. But I would think about coming out of the recession, we saw corporate, small business and health care grow quite nicely.

And if you think about similarities, the business model that we have, the resiliency of that business model, our ability to stick with our customers and to offer them a wide slot of products, particularly coming out of the recession, remains strong.

As I think about today, we are in a stronger financial position than we were in 2008 and ‘09. And I remember, Amit, meeting interest obligations in ‘09, when we were at 10 times debt leverage, which was our peak. Today, we have, obviously, a strong balance sheet. And we have more opportunistic outlook.

I would also say that, technology today has become much more essential to our customers’ strategy, hard stop. There’s been increasing complexity. The breadth of our portfolio, what we sell, our evolution, has grown.

And so today, we’re better positioned than ever to help our customers through this downturn. But the lack of visibility that we all have still makes it difficult to predict with any level of certainty. Collin?

[Collin Kebo, SVP and CFO]

Yeah, Chris. I don’t know that I have much more to add to that. That was a pretty thorough review. I mean, as you think about, the various channels, as we’ve said corporate small business reacted sooner. GDP bottomed, I think, in the fourth quarter of 2008 and then improved sequentially. It was still down a bit year-over-year over the next couple of quarters.

We saw corporate and small business react very swiftly in the first quarter of ‘09. So that first quarter declined more than the full year. And then, the rates of decline improved as we move throughout the year. But as Chris said, look, every recession like this is different, so not much more to add other than that.

[Christine Leahy, CEO]

Yeah. Amit, I’d add one more thing. And I’ll come back to your second question is when you think about the complexion of our resources. And remember, we’ve got over 3,000 technologists today. And we’re really very well positioned to support customers and where they’re heading.

As we think about what might accelerate coming out of this current situation, we’ve got physical distance. Digital is now mandatory. It’s a prerequisite for market survival, frankly. And we’re very well positioned to help our customers with that.

But on your second question on taking market share, we did acquire a healthy dose of new customers. We had product to offer them. And we could get it to them quickly. So we feel confident that we were able to take share in this environment.

[Amit Daryanani, Evercore]

Thank you very much for the answers. Appreciate it.

[Christine Leahy, CEO]

Sure.

[Operator]

Our next question coming from the line of Matt Cabral with Credit Suisse. Your line is now open.

[Matt Cabral, Credit Suisse]

Yeah. Thank you very much. Just given the magnitude of uncertainty that’s out there right now, can you just talk a little bit about how you’re thinking about managing the expense base versus the desire to maintain investment? And just how we should think about the flexibility of SG&A this time around compared to prior downturns?

[Christine Leahy, CEO]

Matt, it’s Chris, and I’ll start, and then Collin, you can add in. Listen, you know we have a naturally variable cost structure. And just as it did in 2008 and ‘09, we benefit from that as we go through downturns like this.

I would say that we’ve been proactive and prudent. We consider to manage our business prudently, part of what we need to do every day. But the team has been at this in a very granular level on a daily basis, watching a couple of things.

Obviously, demand we’re very focused on sales trends by channel, gross profit that we’re seeing in NGLI and we’re managing that and looking at that more closely than we ever had.

Obviously from a liquidity position, Collins and his team have been very granular around our cash collections and other things that impact our liquidity. So I would say, number one, we’ve been very proactive and very detail oriented and making changes and moves quickly, as opposed to waiting.

As Collin mentioned in his prepared remarks, I think we’ve already done things like change events and other expenses that we can do. We do have a performance excellence team and we’ve talked about this before, it’s called reinvent to reinvest and they have - they’ve actually contributed meaningfully over the past few years to our results. And they are laser focused on our operating model and ensuring that we are being as efficient and effective as we possibly can.

So as we go through this frankly, what we’re doing is we’re managing the business, but we aren’t being shy about, really finding places to improve from an operational perspective of the business, so that we can continue to invest as we move forward.

And some of that might be not moving some resources, we’re working on that. We’ve got resources that actually can flex across the business. That’s part of the beauty of the types of sellers and technical folks that we have in terms of their experience and their capabilities and our training programs, which are such an engine for us. So we’re also moving resources on the right opportunities. Collin?

[Collin Kebo, SVP and CFO]

Yeah. I guess I would just add, again, Matt, we have a variable cost structure. Sales compensation, pay down gross profit is our biggest expense. And our biggest investment is in people cost and so letting attrition run add some variability to the cost structure.

Obviously, we’ve taken a look at other parts of the cost structure, travel, events and things like that that don’t make sense in this environment. As Chris mentioned, ongoing productivity and efficiency is a part of the culture, and we’ve dialed that up. And we’ll continue to be disciplined in managing costs, and we’ll make adjustments based on market conditions and the demand – the demand environment as we go down the road here. But we are going to prudently invest in the business, so that we do emerge from this crisis in a stronger competitive position.

[Matt Cabral, Credit Suisse]

Got it. And then in the prepared remarks, you talked about supply constraints a few times. Can you just talk about what availability of product looks like across your business right now? And going forward, just how you’re thinking about managing inventory given the lack of visibility versus the potential for any future disruption of the supply chain?

[Collin Kebo, SVP and CFO]

Yeah, sure. I would say, I think we used the word fluid or dynamic. It’s choppy out there. We are running heavy on inventory just because we felt it made sense to carry additional days of safety stock. We provide pre-orders to some of our customers, and they get a lot of benefit out of that. So we’re doing that to try to mitigate some of the choppiness in the market.

I would say, unsurprisingly, there’s a lot of demand for notebooks. So that’s where we have taken some of our inventory positions, as well as within the Chromebook market, obviously, given the strain that this has placed on our education systems.

And then I would say we’ve seen lead times pick up in some other categories on the solutions side of the business in servers. It’s not, I would say, disruptive per se, but just extended lead times.

And then I did comment a little bit about where we have seen some price increases, and that’s primarily due to just increased freight costs that our OEM vendor partners are incurring and the passing along of some of those costs. So we have seen some price increases in client devices as well as within servers.

[Matt Cabral, Credit Suisse]

Thank you.

[Operator]

Our next question coming from the line of Adam Tindle with Raymond James. Your line is open.

[Adam Tindle, Raymond James]

Okay. Thanks and good morning. Chris, I just wanted to start with some questions around the structural changes to the structural changes to the competitive landscape. Obviously, there’s a number of clients out there in the industry that are hurting and you’re in a position to issue $600 million of debt at attractive financing terms to help those clients. But industry landscape is very fragmented, there is many small players that won’t have visibility.

So maybe if you could just touch on how you see the competitive landscape changing as this unfolds? What structural changes are you thinking about?

[Christine Leahy, CEO]

Yeah. Matt, I want to make sure I understand your question. You’re talking about customers; you’re talking about others within the channel that are competitors for CDW?

[Adam Tindle, Raymond James]

Other competitors in the channel to CDW and whether that leads to basically more industry consolidation over time as time as you potentially gain share through this?

[Christine Leahy, CEO]

Yeah. Thanks for the question. I think, look, when there is a downturn of any kind that is severe, it exposes weaknesses across any industry. And not like - not unlike other industries, I think we will see that certainly in our industry. And as we’ve said, we’ll continue to keep our eye on opportunistic M&A.

And I wouldn’t say that we would - you’ve heard me say this before, I wouldn’t say that we’re focused on a roll up, but we certainly are focused on M&A that fits our various lenses that you know well. It’s strategic fit, operational fit, cultural fit, makes financial sense. We haven’t turned that lens off, and we will continue to look.

[Adam Tindle, Raymond James]

Okay. And just as a follow-up, Collin, on the $65 million debt offering, part of that, you talked about helping our clients. Just, if you could double-click on what you mean by that? It would seem to be a bridge to help maybe on payment terms. So why not tap the revolver for that? And also the systems and processes you’re putting in place to control risk as you do so? Thanks.

[Collin Kebo, SVP and CFO]

Yeah. Sure. Thanks, Adam. I think in terms of the $600 million, just in this kind of environment, given the uncertainty and with the wide range of outcomes out there and very difficult to probability assess where those outcomes are going to be, we just felt it was prudent to go and get excess liquidity.

And I think most companies in corporate America that have the ability to do so, went ahead and did that we were able to get it at an attractive rate at four and an eight. So, we viewed it as relatively inexpensive insurance in case you know these outcomes, go to a more bearish place, but in the event we don’t need the insurance. It’s relatively cheap capital that we can deploy offensively.

In terms of what we would do with that, we are mindful of the pressure that that’s out there for customers, so I think in terms of investing in working capital. I talked a fair amount about potentially using some of that within inventory and to help smooth out some of the disruption, that’s out there and that would competitively advantage CDW as well as help our customers get access to the IT they need sooner rather than later.

From a receivables perspective, obviously our customers are under pressure and they’re managing their own liquidity circumstances and looking at their cost structures and things like that.

One of the things that CDW does is we orchestrate financing solutions for our customers, so obviously our OEM vendor partners and others make financing available and so we’ve been very active in making those solutions available to our customers and that obviously helps both the customer, but also helps us manage our DSO risk. There are certain situations where customers are under pressure and we’ll deal with those on a case-by-case basis.

In terms of how we’re managing risk, we did a pretty thorough review of the portfolio in terms of credit limits and where we had exposures to various industries and customers and adjusted credit risk appropriately. Again managing or balancing some of these long standing customer relationships we have, while still protecting the balance sheet and ensuring we had an appropriate risk profile in place.

And obviously again like every other company in corporate America we are very closely monitoring our daily cash collections and understanding where risks might be emerging in the portfolio and then adjusting credit limits accordingly.

[Adam Tindle, Raymond James]

Very helpful. Thanks, Collin.

[Collin Kebo, SVP and CFO]

Thanks, Adam.

[Operator]

Our next question coming from the line of Ruplu Bhattacharya from Bank of America. Your line is open.

[Ruplu Bhattacharya, Bank of America]

Hi. Thank you for taking my questions. For the first question, I’d like to ask, how many of your co-workers are currently still working from home. And how did that impact your ability to close deals in the first quarter?

Or maybe if you can just help us quantify the impact of COVID-19 on both the top line and the operating profit line in calendar 1Q? Thank you.

[Christine Leahy, CEO]

Yeah, good morning. It’s Chris on the co-workers, we have a north of 80% of our co-workers are now work from home, and the others are in our distribution centers configuration centers and onsite engineers and a few security folks are also on site, so it’s a fairly large portion of our workforce. And, I’ll give kudos to our technology teams and all of those individuals because the move to work from home was swift and seamless.

Our IT infrastructure was ready to go. And it was almost eerie how few hiccups we had on that Monday morning. My view on their productivity is it’s been incredibly strong and in many ways, you might have heard this from other companies.

This is driving even higher levels of productivity in some areas and greater connection between our own workforce and with our customers, it’s been really quite interesting to see.

In terms of dimensionalizing impact from COVID-19 on the numbers, I just think that’s almost impossible to do. As we mentioned, we know we saw the surge in March because of work-from-home and remote work needs. And now there were some pull forward redirection of investment into that first quarter. But to quantify it just seems impossible to do.

[Ruplu Bhattacharya, Bank of America]

Okay. Thanks for that, Chris. And just as a quick follow-up. As we stand, as we sit here today, can you comment on the business mix you’re seeing between client devices and netted down items? And how do you see that impacting margins? Thanks.

[Collin Kebo, SVP and CFO]

Yes, I mean as we commented in the prepared remarks, Ruplu, client devices, very strong in the quarter and particularly as we exited the quarter. And also in my prepared comments, I talked about how we had a pretty healthy backlog then that we carried into April that contributed to solid shipment growth. You can assume that a lot of that was in the client device category.

In terms of 100% gross margin items, they did not grow as fast as the rest of the business in the first quarter. I think that was largely driven by the focus on client devices and video and accessories and all the other things that you would need to enable, work-from-home and learn from home and things like that.

I think it remains to be seen what’s going to happen as we go forward in terms of how some of those 100% gross margin items perform. It’s logical that those things are cloud, we’d see strong growth on a go forward basis in previous environments, when things have slowed down, we have seen customers sweat assets.

And you can see warranties and software assurance and things like that pick up as well. But I think we’ll need to see what happens over the next few quarters here before I’d want to make a more definitive call on what happens with that portion of that business.

[Ruplu Bhattacharya, Bank of America]

Okay. Thanks for all the details. Appreciate it.

[Collin Kebo, SVP and CFO]

Yes.

[Operator]

Our next question coming from the line of Katy Huberty with Morgan Stanley. Your line is open.

[Katy Huberty, Morgan Stanley]

Thank you and good morning. A clarification question. First, when you referenced the double-digit declines in late March and April for the corporate sector, was that a revenue comment or that was new bookings that won’t impact the reported results for several months?

And then one of the clearest trends, and you talked about this in your prepared remarks is an acceleration adoption of public cloud. Can you just talk about what you’re doing to enable the sales force or expand the portfolio of services to capture more value from that shift? Thank you.

[Collin Kebo, SVP and CFO]

Katy, I’ll take the first one and maybe Chris will take the second. Just to clarify my comments. When I was talking about what we were seeing, those were comments really for the first five weeks of the second quarter, so primarily April. And when I said shipments, we saw solid growth as a result of the backlog. You can think of that as equivalent to revenue.

When we talk about writings or bookings, and that’s what I referred to as being down double-digits in corporate and small business, those at some point turn into future shipments or invoices. So that’s more of a leading indicator. Hopefully, that clarifies it for it.

[Katy Huberty, Morgan Stanley]

That’s perfect. That’s what I figured. I wanted to make sure.

[Collin Kebo, SVP and CFO]

Yeah. Okay. And then I think…

[Christine Leahy, CEO]

Yeah. I’ll take your question, Katy. Good morning. On cloud, as you know, we’ve been building our capabilities around cloud and the hybrid multi-cloud work environment now for years. And when we think about cloud generally, I think about it adding even more complexity to the choices that our customers need to make and you add the uncertainty of the world that we’re in today, there’s even another layer of complexity.

Even simple cloud choices like the video and call solutions that we all are using now creates complexity for the IT staff as they’ve got to enable co-workers to use it consistently, and at high-performance levels, et cetera. So this plays very well into our value proposition.

We have, as you know, I think, we have over 250 cloud offerings on our line card, and we’re essentially – our value prop is we’re vendor and technology and consumption and consumption agnostic.

So we can play that trusted adviser role for organizations as they’re sorting through what their strategies ought to be. And frankly, when we talk to customers now, the questions, because they’re moving so quickly, is help us figure this out, what should we do, how should we do it?

We’re having those types of questions around assessing and design more frequently than ever before. So you think about professional services, managed services for public and hybrid cloud. Those are areas that we have been investing and we’ll continue to invest in.

So we can help our customers assess their options, where to migrate and how to evaluate how to integrate, how to support the deployment and then how to manage cloud workloads. So I would say, it’s a full spectrum from a CES design, integrate and manage across a multi-cloud world.

[Katy Huberty, Morgan Stanley]

Thank you.

Operator

Our next question coming from the line of the line of Maggie Nolan with William Blair. Your line is open.

[Maggie Nolan, William Blair]

Hi. You’ve talked about kind of reallocating sales and technical resources and maybe this builds on that previous question a little bit. But obviously, some of that has probably been done to meet the surge in demand in March and into April that you saw.

But can you take a little bit more of a bit more of a medium-term outlook on that? Where are the strategic changes coming into play as we think about the coming quarters and the rest of the year?

[Christine Leahy, CEO]

Yeah, Hi, Maggie. So in connection with the resources, yeah, think about it a couple of different ways. One is you think – I think about our sales organization and where demand is and how we can help generate demand and also help customers facilitate through stimulus packages and things like that. So some of the more resilient end markets, we’re ensuring that we’ve got the sales organizations well aligned from a resource perspective there.

From a technology perspective, we’ve been building capabilities across the full spectrum of solutions and certainly focused on the most pressing solutions right now. We talked about network augmentation, things like that. But we are building our cloud capabilities, our automation capabilities.

Aptris was a great example of an acquisition that brought us extremely strong capabilities in a cornerstone IT software application and Scalar is another great example of doubling the size of our business up in Canada through a strategic acquisition of organization that has, from your cloud capabilities, both professional services, all the capabilities, both professional services, all the way through to managed capabilities.

And we continue to add those in the US as well. You might be familiar we introduced our CDW Amplified Services last year. And one key focal area, a pillar of those services is around a multi-cloud environment. So we’ll continue to focus there.

The other area that I think, we all believe is going to be accelerating is helping customers with their digital needs. Digital now is a matter of survival in addition to competitive advantages. We hear it across the board. Even retail fast food organizations, who are taking a real accelerated approach to digital.

Our technology organization has solutions architects as well as engineers who can support in the design and deployment of digital strategies. And so we’ll expect to see more and more of that, I think, over the next few months. Those might not come to fruition perhaps until later in the year. But certainly, we are having those conversations now.

[Maggie Nolan, William Blair]

Thanks. And then as we think about some of the segments, obviously, you’ve stated it’s very difficult to see where demand is going to come from in terms of the client base.

But if we think about the segments in the context of your growth strategy, in particular, picking up market share. Is there a strategic change there, particularly maybe around small business, which is something that was starting to get traction? And obviously will change in this environment?

And then would be interested to hear what you’re hearing from clients in higher ed and education in general as well, given some of the dynamics going in that segment at the moment.

[Christine Leahy, CEO]

Yeah. Okay. So let me try and take those in order. In terms of strategic shift, the way I’d think about it is our overall strategy and the value proposition to our customers, it stays the same in terms of diversified portfolio of end markets, breadth of product and services that we offer to meet the customers’ needs now and in the future.

In terms of new segments potentially or within segments, we also sub-segment and sub-verticalization is a focus of how we serve our partners and our customers more effectively. And so certainly, coming out of this environment, I could envision some additional sub-segmentation or markets that we serve in a different way or a more concentrated way.

On the small business side, we’ve been investing in our e-commerce capabilities over the last several years when we started the small business of stand-alone unit, 2.5 years ago, and we’ve been seeing great results.

And I would expect in this environment and in the future, that digital will play a continuing bigger role in small business. But just as it will, with respect to the rest of our segments, I expect to see kind of the human and digital combination be very strong.

Within education, on the K-12, we’ve seen strength there. And as you know, there’s the educators are focused on access and equity. There’s a large proportion of students across the world and across the US that do not have access to endpoint devices, client devices and/or the Internet. And there’s quite a focus on ensuring as e-learning is expected to continue, that those devices get into their hands. And so we’re helping try to support that.

On the higher ed side, we saw strength in the first quarter, as we said. But equally, we think that budget, I’ll call it budget concerns, as we go into the latter half of the year in a couple of the segments, could weigh on demand, and we’ll have to see how that plays out.

[Maggie Nolan, William Blair]

Thanks so much.

[Operator]

Our next question coming from the line of Shannon Cross with Cross Research. Your line is open.

[Shannon Cross, Cross Research]

Thank you very much. I was wondering, Collin, you talked a bit about what you’ve seen in the past five weeks. And I was wondering if you could talk a bit more -- you mentioned stimulus or maybe, Chris, you did during your conversation.

I’m just curious if you’ve seen any near-term changes in discussions as some of the dollars have started to hit the small businesses as well as some of the states are starting to open up. So that’s almost sort of maybe a change in conversation in the last couple of weeks? And then I have a follow-up. Thank you.

[Collin Kebo, SVP and CFO]

Yes. I think it’s difficult to say, Shannon, what -- how those stimulus dollars have changed the tone of the conversation in just the past few weeks because it has been moving so quickly. I think those are part of longer-term conversations with our customers and some of the resources we bring to bear and helping them understand how those stimulus dollars are ultimately going to flow from care.

So for example, in education, I think there’s $13 billion -- $30 billion roughly split between higher end and K-12, and it follows public funding and title one and things like that. And helping our end-user customers understand how those funds might be made available to them and ensuring that they have their best opportunity to go ahead and access.

And there’ve also been modifications made to e-rate and timing changes. And again, just helping our customers understand those. So I would say, it’s unlikely that it has factored into the trends that I referenced in April. I think it’s more of a go-forward opportunity.

[Shannon Cross, Cross Research]

Okay. Thank you. And then I was curious, in the discussions with some of your customers, when obviously priority shifted during the quarter to more work from home and just business continuity. The longer-term projects that you had sort of in place, have those been canceled, pushed out? Have any customers started to revisit a time line for some of those? I am just again trying to get into the mindset of your customer base. Thank you.

[Christine Leahy, CEO]

Yes. Yes, Shannon, thanks for that question. All of the above, I would say. And it is such a -- I’ll call it almost diverse experience, depending on the industry, depending on the customer. We have not seen a large portion of customers cancel projects. That’s the number one thing.

We have seen more customers who have just diverted their resources and their attention to the more urgent needs. And they’re still focused on urgent needs in terms of optimizing the work from home or remote working situations that they’re in. There’s a lot of focus on that right now.

But equally, we have seen some customers who are coming back. We’ve got some larger digital transformation projects that customers have actually accelerated. And we’re working with them across the board because, as I said before, it’s a matter of obviously survival, but also competitive advantage coming out of this.

So it’s quite a wide range, and I’m not sure there’s much that we can pull out of that in way of trend. We’re just staying close to our customers and ensuring that we keep the projects going forward that can. But very few have canceled, canceled, Shannon.

[Shannon Cross, Cross Research]

Thank you, very much.

[Operator]

Our next question coming from the line of Matthew Sheerin with Stifel. Your line is open.

[Matthew Sheerin, Stifel]

Yes, thanks. Good morning and thanks for all your candid answers so far. Just one quick follow-up from me regarding your comments on the Census project in federal. It sounds like trends in federal continue to be normal in terms of seasonal demand. The only change being, Collin, your discussion about some of those Census projects get pushed out from Q2 to Q4. So could you give us some more color on that and confirm that?

[Collin Kebo, SVP and CFO]

Yes, Matt. As both Chris and I said, we expect federal to hold up relatively well from a budget perspective. And the time change I referenced was primarily due to the devices being in the field longer, which is spreading the revenue over a longer period of time, largely from Q2 into Q4.

[Matthew Sheerin, Stifel]

Okay. And just actually one more follow-up. Just regarding and the surge in demand, near-term demand you’re seeing for work at home solutions. And you know that that’s one slow trend that we’ve seen over the last couple of years as is technology as a service, where there’s a leasing component. Are you seeing any acceleration in that as customers look at their own capital requirements and their own balance sheets and perhaps look to that as a service model?

[Collin Kebo, SVP and CFO]

Yes, Matt. I would say, I mean, in terms of the most recent surge, the objective was speed and getting it deployed rapidly. So most of that transacted in a traditional way. I think as we go forward and customers are wrestling with their own budget challenges, I think, we could see that option enter into the discussion more than it has historically. But in terms of the recent surge, it was primarily transacted in a traditional purchase model.

[Matthew Sheerin, Stifel]

Got it. Okay. Thanks a lot.

[Operator]

Our next question coming from the line of Paul Coster with JPMorgan. Your line is open.

[Paul Coster, JPMorgan]

Yeah, quick follow-up question on work for home, if you don’t mind. Has this demand drawn you into at-home sort of shipments, at-home installations, at-home maintenance of the client technology. If it has, is that a good business to be in? And is it sort of yielding in any sort of value-added opportunities of any materiality?

[Christine Leahy, CEO]

Yeah, it’s Chris. It has in some ways because of the urgency of getting the devices where they needed to be. And CDW’s team did a really great job of moving shipments. So, you know, give you an example. When you’ve got a shipment for 10,000 devices, that goes to one location. And those 10,000 devices now need to go to 10,000 locations or 5,000 locations. That’s not easy to do. And the organization did a great job being flexible and responsive there.

In terms of continuing to support, yes, we are adding additional hardware, software and support services to these work-from-home and remote requirements. But generally, we’re - those are being managed centrally through the IT group of the organization. So it feels like it’s more just a dispersed workforce, if you will, managed centrally. And that’s something that we’re highly capable of doing.

[Paul Coster, JPMorgan]

Got it. And then, Collin, you mentioned that you sense there’s a pull-forward for work-from-home, of course, that’s intuitively correct. So I’m just wondering at what point you’ll know whether or not there’s real pull-forward, and if it’s sort of post factor, then I guess it doesn’t really matter, but when do you think you’ll know and how do you think you’ll know?

[Collin Kebo, SVP and CFO]

Yeah. Good question, Paul. I’m not convinced we’re ever really going to know because I think the wildcard here is, how much is pull-forward of something that was going to be purchased anyway versus what’s an incremental use case, meaning that companies, school districts, government agencies never intended for these co-workers or students or teachers to have had mobile devices. And it’s effectively a shift from their IT budget to a use case that they didn’t know that they were going to need. And I think it will be nearly impossible to ultimately parse that out.

[Paul Coster, JPMorgan]

Yeah, okay. Thank you.

[Operator]

Our next question coming from the line of Keith Housum with Northcoast Research. Your line is open.

[Keith Housum, Northcoast Research]

Good morning. Chris, I hope you can provide a little bit of color in terms of the ability to access client facilities. Historically, how important has that been to the CDW sales process?

And I guess, as we look at the potential that, some customers may some customers may not allow any visitors on-site for the next several months. How are you guys looking at that for the next several months? And could that be an impact on sales?

[Christine Leahy, CEO]

Hi, Keith. Yeah, great question. Thank you. There are a couple of different levels there. Let me just start first with the service engineers. And then move into the sales organization.

Our service engineers, we broke immediately into several components, what could be done remotely and what needed to into several be done on-site and then provided them with the protective equipment and peace of mind that they could go on-site with customers.

And they have been doing that and doing that very effectively. But we did break that into pieces. And remote access can get us very far in some of the work we’ve had to do for work from home. Regarding our sellers, I’ll come back to the comments I mentioned earlier.

Certainly, in-person connections and meetings at the office, and relationship building live has always been important to any relationship sales organization. But the -- I don’t want to call it surprising.

But it’s been a really positive discovery for me in any event is the incredible way that our sales organization is staying connected with our customers, almost more deeply than in person. So I think what we’re going to start to see is, flexible ways of working. Our hybrid world will probably become our workforce hybrid world.

And they’ll all do what they need to do to make the connections and serve the customers and ensure that we can have learning sessions and white boarding sessions that are as effective as possible. And some of that might go back to kind of the way it was prior to this epidemic.

But I also think we’re going to see some significant changes. The other thing I would say is our sales organization, as you know, is a legacy inside organization that goes back a long way. And so the teams have been built with resources wrapped around them that have, in many cases, been remotely accessed.

So it’s not a new thing for our sellers, and our solutions architects and engineers to be on collaborative tools actually helping to solve solutions. So I hope that answers the question. I think we’ll see a little bit of a new world going forward. And I feel like the team has already been effective. And we’ll take the learning’s and continue to drive even greater and deeper relationships with our customers.

[Keith Housum, Northcoast Research]

Okay. I appreciate that. And then, Collin, just a follow-up to the commentary regarding the $29 million credit reserve. I guess how does that compare to, I guess, the average quarter? And then, are you already starting to see some credit deterioration or is this some credit deterioration or is this in anticipation of what you expect to see later in the quarter and the rest of the year?

[Collin Kebo, SVP and CFO]

Yeah, Keith. I’ll take the last one first. I think it’s too soon to see any credit -- any material credit deterioration. I think it’s in anticipation of what we expect to come down the road.

When you look at our balance sheet, you’ll see that at March 31st, the reserve was approximately $35 million, which is a little bit more than 1% of our outstanding customer receivable balance.

Historically, that balance has been much lower. If you look at where it was at year-end or in the year ago period, it’s been running around $7 million to $8 million previously. So we used a variety of data points to estimate the reserve.

We looked at historical information, what our experience was back in 2008, 2009, current conditions. And again, estimates of what we think could be coming.

[Keith Housum, Northcoast Research]

Great, Collin. I appreciate it. Thank you.

[Operator]

I’m not showing any further questions at this time. I would like to turn the call back over to Chris Leahy for closing remarks.

[Christine Leahy, CEO]

Thank you. Thank you all for staying on a little longer with us. Concluding today’s call, I want to once more recognize the remarkable dedication of our co-workers around the globe and their extraordinary commitment to serving our customers, our partners and all CDW stakeholders. They continuously reaffirm my conviction that we will enjoy better days ahead. I’m so proud and grateful to be part of this team. So thank you to the team.

And thank you to our customers and our partners for the privilege and opportunity to serve you during these times and to our investors and analysts for participating in this call. We appreciate you and your continuing interest in and support of CDW. Collin and I look forward to talking with you again next quarter. Until then, stay healthy, stay safe and be well. Thank you.

[Operator]

Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation. You may all disconnect. Good day.