Christopher Glynn: Thank you. Good morning. So got a lot of demand questions. Just wanted to talk about some of the kind of non-operating cost items. On the $30 million to $40 million other expense range, sounds like foreign exchange is a big part of that. But my experience, non-operating FX adjustments are often very unpredictable, period-specific and even end-of-quarter mark. So curious what’s going on there with that $30 million to $40 million? And then on interest, with the quarter in the books and better view on the cash flow linearity, curious why that’s still a $40 million range interest line item.
Dave Schulz: Yes. Chris, let me address the other non-operating. So in the first quarter, we recorded $10 million, which was primarily related to the Egyptian pound, where we saw a significant devaluation occur in the beginning of January and then another devaluation 10 days later. So that is the balance sheet revaluation of the assets and liabilities that we have within that market. To put that into context, all of 2022, we had a $10 million other expense non-operating. So we’ve matched the full year 2022 in just the first quarter. It is an estimate at this point that we are going to continue to see additional devaluation, particularly upon that Egyptian pound currency. Again, it’s our estimate at this point. That will be impacting.
But as you mentioned, Chris, it is extremely volatile and very difficult to predict, but we at least wanted to call that out that if this continues, we have at least $10 million already in the first quarter. There could be additional risk. We’ve included that in our assumptions for the outlook. On the interest expense, when you take a look at where we were relative to the guidance we provided in February, we have borrowed more money here in the first quarter. We’ve also seen interest rates increased about 35 basis points. So from that perspective, we’ve assumed that we will be carrying higher debt levels in our initial assumption, but then also the interest rate environment continues to be volatile and has been increasing. So we’ve reflected that appropriately in our assumptions.
Christopher Glynn: Thanks for that Dave. And just to stick with the other expense. Are you hedging against additional Egyptian pound devaluations during the year essentially?
Dave Schulz: At this point, we are not because it’s extremely expensive in order to provide that. And in some cases, the instruments are not even available is our current view of the market.
Christopher Glynn: Sorry. I meant the guidance hedge against that risk. I wasn’t talking about a financial hedging instrument.
Dave Schulz: Yes. We’ve provided you with what we believe is the appropriate range given that risk. Obviously, the additional non-operating other expense is a headwind to our EPS guide at the midpoint, but we believe we’ve got the right outlook for EPS for the full year, not changing it this early in the year.
Christopher Glynn: Thank you.
Operator: The next question is from David Manthey with Baird. Please go ahead.
David Manthey: Good morning. Thank you. First, I was wondering if you could outline the puts and takes…
John Engel: Good morning, David.
David Manthey: Good morning. Could you outline the puts and takes relative to the 60 basis points year-to-year gross margin increase? And specifically, can you address, do you think there’s any inflationary inventory benefit in the first quarter gross margin? And then secondarily, could you discuss the contribution there from rebates and what’s the typical high low range? I know that’s a lot, but hopefully, you can touch on those.
Dave Schulz: Certainly. So the 60 basis point improvement in gross margin year-over-year was — only had a benefit of about 10 basis points from supplier volume rebates versus the prior year. Remember, when we booked our supplier volume rebates in the first quarter of 2022, we had a much different forecast for the full year, and that contribution of supplier volume rebates as a percentage of sales was increasing throughout the back half of the year. So as we think about the synergies that we’ve built in to 2023, particularly as it relates to supply chain, and we’ve built in the expectation on our supplier volume rebates, we’ve got about a 10-point benefit versus Q1 of 2022. The real driver of the gross margin enhancement has been the gross margin improvement program, and we have continued to push that across our organization, make adjustments and improvements to how our field is able to better understand how to price for value for the products and services that we’re providing.
So it was really much more of that transactional margin improvement. Going back to your question on are we seeing any of the profit and inventory being one of the drivers, we’re not. I think, one of the reasons that our pricing came down is we did see some commodity costs come down in the back half of 2022 and in the beginning of 2023. So actually, we had a headwind on some of our pure commodity categories, again, very small percentage of our business, maybe mid single-digits, but that was a headwind on those commodity-based products given the global market environment. So we don’t believe that this is a profit and inventory issue. It’s really the benefit we’re getting from our margin improvement program.
David Manthey: Okay. Thank you for that. And then second, to hit on the cash conversion cycle here, but my calculation is something like 84 days. It looks like historically, they’ve been in the 60 to 70 range. I mean how many days do you think you can take out by year end? Is there a target? Do you suppose to get back to that previous range? And maybe you could just discuss where that might come from, where the days will come from, whether it’s DSO, DPO inventory days.
Dave Schulz: Yes. Let me address specifically on inventory. And depending on the calculation that you’re looking at, we essentially saw our inventory days increased by 11 days in 2022. We don’t believe it’s prudent to assume that we can get all of that back in 2023, give some of the challenges with the supply chain. What we are expecting, though, is that we will get about half of that improvement back, and we will continue to grow net working capital at less than half the rate of sales. So our primary focus when it comes to net working capital is really on the inventory. When I take a look at our receivables and our payables days, they’ve been relatively stable. We know that there were some higher accounts receivable balances through the end of March, just looking at our collections the last two weeks of March versus the first two weeks of April, we saw a nice pickup in our collections in April. So our primary focus when it comes to net working capital is inventory.
David Manthey: I appreciate, Dave. Thank you.
Operator: The next question is from Chris Dankert with Loop Capital. Please go ahead.
