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Executives

Thomas J. Tossavainen – Chief Financial Officer

Michael J. Grebe – Chairman and Chief Executive Officer

Kenneth D. Sweder – Chief Operating Officer

Analysts

Scott Gaffner - Barclays Capital

David Manthey - Robert W. Baird & Co., Inc.

Jeffrey Germanotta - William Blair & Company, LLC

Keith Hughes - Suntrust Robinson Humphrey

Matthew McCall - BB&T Capital Markets

Sean Connor - BB&T Capital Markets

[Yun Kwan] – Barclays Capital

Garland Buchanan - Babson Capital

Interline Brands Inc. (IBI) Q1 2009 Earnings Call May 1, 2009 9:00 AM ET

Operator

Good morning. My name is [Regina] and I will be your conference operator today. At this time I would like to welcome everyone to the Interline Brands first quarter 2009 conference call. (Operator Instructions) Thank you.

I would now like to turn the call over to Tom Tossavainen, Chief Financial Officer. Please go ahead.

Thomas J. Tossavainen

Thank you Regina. Good morning everyone and welcome to the Interline Brands earnings call for the first quarter of 2009. Joining me on today’s call is Michael Grebe, our Chairman and Chief Executive Officer and Ken Sweder, our Chief Operating Officer. Mike will provide an overview of our first quarter performance as well as a discussion on current market conditions in the MRO space. Ken will then discuss certain operational initiatives and I will review our financial results in more detail. Mike will then end with some closing remarks before we open the call to your questions.

Before we begin let me remind you that some of the statements made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected or implied due to a variety of factors. We may also discuss certain non-GAAP financial measures which are described in greater detail in this morning’s release. We refer you to recent Interline Brands filings with the SEC for a more detailed discussion of the risks that could impact the company’s future operating results and financial condition. These factors are also described in greater detail in the press release on the company’s website.

I will now turn the call over to our Chairman and Chief Executive Officer, Michael Grebe. Mike?

Michael J. Grebe

Thanks Tom. The team here at Interline has continued to manage the business very carefully in the current turbulent environment. We responded to market conditions in the near term without compromising our long term strategy and vision. Since the beginning of the economic downturn, our focus has been and will continue to be managing the business prudently by adjusting our cost structure and maximizing cash flow generation. I’m pleased to report that we have executed extremely well on both fronts this quarter.

In accordance with our previously announced initiatives, we delivered a net $0.02 benefit in cost actions during Q1, $0.07 of cost reductions less $0.05 of one time severance and distribution center closure costs. We remain on track to achieve our 2009 full year target of $0.31 of cost related benefits and look forward to realizing the full benefits of our actions in the years ahead. Perhaps more importantly we generated a record $60 million in free cash flow during the first quarter. In total over the past two quarters we generated over $100 million in free cash flow, far beyond our initial expectations of $30 to $40 million we shared with you six months ago. I’m very proud of our teams’ achievement and relentless focus on execution.

As a result of this strong free cash flow we ended the first quarter with a healthy cash balance of over $80 million. We remain focused on managing our liquidity and effectively deploying our capital. To this end we paid down over $42 million in debt this quarter, bringing our total debt reduction over the past two quarters to $55 million or 13% of our total debt outstanding. We also continued to be very proactive with our distribution network consolidation efforts. We have already realized both operational and financial benefits from these activities and look forward to realizing even more benefits moving forward. Ken will have more to share on that in just a moment.

I’m confident that we have taken the appropriate steps to manage the business in the current environment and even more optimistic about our long term position when market conditions improve. With that I would like to share with you some of our performance highlights from the quarter.

Overall, the sales environment continues to be challenging for our industry. Visibility remains extremely low and like our other distribution peers we are not at a point where we see a meaningful recovery in the very near term. That said, we continue to benefit from the relative stability of our mix of maintenance, repair and operations products that we have seen in recent quarters. Our janitorial and sanitation offering remains a bright spot in our portfolio and we continue to push our channels to leverage strength and demand.

Despite headwinds let me give you a few examples of where we think we are or can take market share. We made solid progress in executing our institutional product sales initiatives. We now have over 350 sales professionals with access to this product line, up from 130 at the end of 2008. While still early we are seeing improving sales traction despite the tough economic climate with the average sales professional now generating nearly $1,300 per month as new institutional product sales. This average has increased each month in 2009 and we are now on an annual run rate in excess of $5 million of revenues. This sales initiative is incremental to our base of approximately $350 million in institutional sales and is at a gross margin above our average for the company.

Next, we continue to see traction with our national account program initiatives. For example, while overall sales in facilities maintenance are down, we are still signing a healthy number of new national and regional agreements. This is a testament to our attractive product and service platform and bodes well as conditions begin to improve.

As another key focus area, our solid portfolio of both branded and exclusive brand products continues to position our brands as value leaders within their segments. We think this is particularly attractive right now as certain customers heighten their focus on product cost. For example, last year we introduced a line of import exclusive brand paper products, the demand for which has increased recently and enables us to penetrate certain accounts more successfully.

Finally, we have increased focus and incentives surrounding new account acquisition across all of our brands in order to offset core accounts spending less and to further position Interline Brands for growth when demand firms up. I would also like to mention that during April we completed a systems integration of Eagle Maintenance Supply, a janitorial and sanitation supplier that we acquired back in August of last year. Adding Eagle’s products to our portfolio further bolsters our offering to institutional customers and confirms our ability to quickly leverage acquisitions of this size successfully and efficiently. We will continue to approach our business development activities in the near term with a cautious yet opportunistic view.

Let me shift gears for a moment to discuss the major headwinds impacting demand in our industry during the first quarter. First and foremost, the housing market continues to be stagnant, well below historical averages and estimates do not predict a recovery in the very near term. This has led to continued soft demand in our professional contractor and specialty distribution businesses.

Additionally we have seen continued softness in the apartment market driven by higher vacancy rates, up 120 basis points year-over-year and the largest sequential decline in effective rents in years. In previous cycles the apartment market tend to move less with the housing market. However, we are operating in unprecedented times and both markets are challenged. This has impacted certain segments of our multi-family housing business, particularly our renovations plus business which was down nearly 50% for the quarter.

Despite the challenges in the residential markets, these businesses are well positioned with strong customer relationships, one of the most comprehensive suites of products and services, and now a more efficient distribution network from which to serve our customers nationally. When home building and remodeling activity resumes to more normalized levels we look forward to significant performance improvements in these areas.

In light of these factors our results by market served were as follows. Our facilities maintenance end market was down 6.7% on an average daily sales basis and declined 9.2% on an average organic daily sales basis. Rounding out our performance by markets served, our professional contractor business declined 27.3% and specialty distribution was down 9.4%.

Before I turn the call over to Ken let me provide some backdrop to the operational initiatives he will discuss in greater detail. As we have discussed over the past few quarters, we remain focused on executing our vision and improving our long term position by optimizing our distribution footprint. During the first quarter we completed the consolidation of five distribution centers with more to be completed during this quarter. Ken and his team have been working tirelessly to insure we manage these consolidations with minimal business disruption. Early signs indicate they have done an outstanding job. We remain truly excited about the opportunity to reduce our operating costs and to streamline our distribution network without compromising our customers’ experience. Ken?

Kenneth D. Sweder

Thanks Mike. I would like to provide you with updates on a few key items today, our network consolidation efforts, inventory management and gross margins. As Mike mentioned we’ve been quite active in both rationalizing our distribution footprint and further developing plans under our longer term distribution strategy. During the first quarter we successfully completed the consolidation of five distribution centers and we are on track to close the remaining five locations before the end of this quarter. This progress is well on schedule. We have already closed a majority of the square footage we intended to consolidate. We continue to expect $4 million in annualized savings associated with these actions.

We’re also realizing the protective benefits from our two newest distribution centers in Richmond, Virginia and Auburn, Massachusetts. Both of these facilities are beginning to generate additional operating leverage. We have lowered our cost per square foot and improved inventory efficiency and fill rates. While we are excited about the progress we have made, we continue to assess our network to identify opportunities for further optimization. Given the success of these buildings we are moving ahead with another center in southern California this quarter. This will consolidate three centers into one. As we discussed in our last call, our 2009 projections still include another distribution center opening late in 2009. However, this remains subject to finding the right space and economics and insuring it aligns with our longer term distribution plans. We will keep you posted on our progress throughout the year.

Finally, we are moving forward with plans to close eight under performing Barnett professional contractor showrooms this quarter. These are in addition to the 10 pro centers we closed late last year and the 10 distribution center closures we announced last quarter. As a result of the additional eight pro center closures we expect to generate over $1.2 million of annualized savings.

To summarize our consolidation efforts to date, including the five distribution centers we will close this quarter, we have closed a total of 15 facilities representing 350,000 square feet, adding in the known consolidations we have discussed with you but have not yet completed the total increases to 28 facilities representing over 600,000 square feet. The second quarter expense associated with these three actions, closing the five remaining DCs, completing our southern California projects and closing eight additional pro centers will total $0.04 versus the original $0.03 we had communicated previously.

The second area I would like to touch on is inventory management. Recall that in the third quarter of 2008 we increased inventory to support the ramp up of our western national distribution center, our new institutional MRO product rollout, and final AmSan information systems conversions. We have since reduced inventory by $20 million in the fourth quarter and an additional $12 million in the first quarter without any impact to our service levels.

Equally as important we continue to manage, control and tighten our network. We are not only destocking where it makes sense but driving sustainable improvements across our global supply chain. For example, we are investing in technology related enhancements to our replenishment systems to become even more efficient users of capital. As we head into the summer months, I would like to remind you of our seasonally stronger sales in the second and third quarter. Last year our 2Q and Q3 sales were about 10% higher than our first and fourth quarter sales, which is fairly typical for our business. To support this higher demand we typically invest in inventory during the summer quarters, which we expect to be the case this year albeit at more modest levels given the current environment.

Finally, I want to address our gross margin performance. Our gross margin for the first quarter was up sequentially from the fourth quarter but 50 basis points lower than the same period last year. The reduction was the result of three factors, lower selling margins as a result of the soft demand environment, some shift in product mix and 11 basis point impact due to our new west coast national distribution center. As we have said on recent earnings conference calls we feel that gross margins will remain a very high focus area for us. It seems like many other distributors are now saying the same thing. We foresee some continuing pressures in this area due to soft demand and changing commodity prices. However, we do not expect to see major or wholesale deviations from our historic, healthy gross margins.

At this time I would like to turn the call over to Tom to review our financial results in greater detail. Tom?

Thomas J. Tossavainen

Thanks Ken. The first quarter of 2009 we generated net sales of $256.8 million, an 11.2% decline versus the prior year quarter. Excluding sales derived from acquisitions our organic sales declined 12.9% in the quarter. As a percent of total sales our end market breakdown is as follows, 72% from facilities maintenance, 16% from professional contractors and 12% from specialty distribution.

Gross margin for the first quarter of 2009 was 37.6% a decline of 50 basis points versus the prior year quarter. SG&A expenses for the quarter were $83.9 million, down $1.1 million or 1.3% from the same period last year and represented 32.7% of sales for the quarter. SG&A expenses include $6.1 million of costs that we highlighted in our earnings release this morning. Just to reiterate, these include a $3 million charge for bad debt expense resulting from a customer seeking Chapter 11 bankruptcy protection, $2.4 million of expenses related to our previously announced reduction in force and planned consolidation of certain distribution centers, and a $700,000 charge associated with the adoption of FAS 141R, a new accounting standard on business combination.

Overall, expenses are down as we have realized significant reductions in our cost structure during the first quarter. We are well on our way to delivering a $0.31 benefit to earnings in 2009 from our various cost initiatives.

Let me spend just a moment on our bad debt expense and reserves before moving on. We have increased our accounts receivable reserve to adjust for higher levels of risk in our portfolio stemming from an unprecedented market environment. One sizable customer accounts for the vast majority of the increase in our reserve provision. We had a relationship with this customer for over five years and in March the customer was unable to refinance his debt and as a result was forced to seek Chapter 11 protection.

In response we have now fully reserved for the full amount of our exposure which, in addition to previous reserves, resulted in a charge of $3 million or $0.06 per share in the first quarter. While we will pursue our claims to the fullest extent, it remains [that] to recoup some of our loss in the future we felt this was a prudent course of action. This customer was clearly unique in terms of size and of our exposure. Excluding this one customer our [inaudible] exposure is $1.2 million or less than 1% of our gross receivable balance. While current market conditions have clearly heightened the risk of customer foreclosure or bankruptcy, we believe that our credit policies, diversity of customer accounts, established reserves and the manageable size of our individual exposures position us well from a risk standpoint going forward.

Moving on down the income statement, our operating income in the first quarter of 2009 was $8 million or 3.1% of sales compared to 7.3% for the prior year quarter. Interest expense was $5.4 million in the quarter, down 30.5% from the prior year quarter primarily due to reducing our debt by $55.5 million over the past six months as well as lower interest rates.

In the first quarter we purchased 36.4 million face value of our senior subordinated notes with $34.2 million in cash, resulting in a net gain of $1.8 million or $0.03 per share. We also paid down $6.2 million of other debt, primarily term loan B, for a total reduction of debt of $42.6 million in the first quarter. Combined with our debt pay down in the fourth quarter we have lowered our outstanding debt by $55.5 million which is expected to save over $4 million or $0.08 per share in interest expense annually.

Net income for the quarter was $2.9 million or $0.09 per diluted share compared to $8.7 million or $0.27 per diluted share in the first quarter of 2008. This $0.09 per share is inclusive of the $0.03 gain from the bond repurchases and the $6.1 million or $0.12 per share in costs discussed earlier.

Let’s now move on to the balance sheet. Our strong cash flow generated in the fourth quarter of 2008 and the first quarter of 2009 have helped us maintain a very strong cash position which as of quarter end was $80.7 million. We generated $62.6 million in cash from operating activities, driven largely by working capital improvements. We allocated $2.4 million of that to capital expenditures, resulting in $60.2 million in free cash flow for the quarter which, as Mike mentioned, is a record achievement for Interline.

With respect to accounts receivable during 2008 we started to see a progressive slowdown in our customer sales and payments alike. This trend has continued during the first quarter. Our traditional measure of average DSO which looks at a rolling five quarter averages has remained relatively stable at 47 days compared to 48 days last quarter and Q1 last year. Our DSO calculated on a spot rate or 90 day basis is also relatively unchanged since the fourth quarter and indicates a slight improvement over Q1 of last year. However, we do not yet see a measurable indication of improved customer payment pattern. We believe we are appropriately addressing the increase in risk associated with bad debts in this environment and will continue to conservatively manage our accounts receivable reserve levels going forward.

Finally I’d like to address the cost and benefits of our recent operational improvement actions previously announced. In the second quarter we expect a $0.07 net benefit from these initiatives, reflecting $0.11 in gross benefits and $0.04 in one time cost. For the full year 2009 we anticipate a $0.31 net benefit which is based on $0.44 in gross benefits and $0.13 in one time costs incurred throughout the year. These figures include a small $0.01 adjustment to account for the closures of the eight additional pro centers that Ken discussed earlier. To be clear on these numbers you can also refer to Slide 26 of our most recent investor presentation posted to the Investor Relations section of our website at www.interlinebrands.com.

Stepping beyond 2009, our anticipated incremental net benefits are $0.11 in 2010 and $0.06 in both 2011 and 2012. We are extremely proud of the work that we have done to generate strong cash flow and improve our liquidity position. We are also excited to realize the anticipated benefits from our cost actions and leverage the operational efficiencies from our distribution network initiatives.

At this time I would like to turn the call back to Mike for some closing comments. Mike?

Michael J. Grebe

Looking ahead we expect to see continued soft demand in most of our major markets though we are confident that we are positioned well to compete successfully in both the near and the long term. As always we continue to strengthen our sales efforts in our most stable markets, we are executing our cost actions to drive higher profitability, and we are continuing our ongoing rationalization of our distribution network to improve our efficiencies.

We’d like to provide you once again with an interim quarter to date sales update. April sales for our facilities maintenance end market were down 11.1% on an average daily sales basis and declined 13.4% on an average organic daily sales basis. Professional contractor and specialty distribution sales were down 29.8% and 15.1% quarter to date respectively. But also note that the Easter holidays fell in April this year as opposed to March last year.

In addition, based on our exceptional cash flow generation year-to-date I would like to provide a revised forecast for the full year 2009. We now expect to generate at least $65 million in free cash flow for the year, up significantly compared to our previous announced target of at least $35 million. Our revised cash flow guidance reflects a few key points.

First, our cash flows are somewhat seasonal as evidenced by the $100 million in free cash flows we generated in the past six months. The fourth and first quarters are traditionally our strongest with respect to cash flow. As Ken mentioned earlier, this is due in large part to seasonally weaker sales relative to the second and third quarter. To support higher demand in the seasonally stronger summer months, we typically invest in inventory during the second and third quarters which we expect to be the case this year, albeit at more modest levels given the difficult environment.

Second, I would also like to point out that the $40 million in free cash flow generated in the fourth quarter of 2008 included some timely inventory reductions and other actions which were unique to that period. And third, we have just completed two exceptionally strong cash flow quarters driven by improved working capital management. With those efficiencies already reflected in our model, significant incremental gains become somewhat harder to achieve, but we will evaluate our business as we do every quarter for cash flow optimization.

In summary, we have taken several important steps towards realizing a more profitable and efficient company. In the near term we have aligned our sales efforts to match market demands, and we have worked to streamline our operating platform to support our customers nationally. Given all the actions we have implemented, the company is well positioned for margin improvement and growth once the market recovers.

Our cash position is strong, and we will continue to de-lever the business as opportunities present themselves. Our long term strategy remains sound and I am confident that we will emerge a stronger competitor than ever when market conditions improve.

Regina, I would now like to turn the call back to you for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Scott Gaffner - Barclays Capital.

Scott Gaffner - Barclays Capital

I just wanted to dig in a little bit deeper. You said you didn’t want to call a bottom yet but on the last call I think you said January was down 14.1 and then February was running 11.1% down month to date. And then you gave us the April organic number was down 13.4%. Can you kind of talk us through what happened in February and March and whether you see that as sort of a stabilization trend?

Thomas J. Tossavainen

On a total organic basis our numbers kind of, January, February, March through April we were down 14.1% in January, roughly 12% in February was kind of a final number, since I think when we talked to you last it was sort of mid-quarter. March was down 12.5 and April on a total organic basis is down 16.7%. And I guess in that regard we think we’re seeing what most other players and most other distributors are seeing was that February and March seemed to be a little better than January, April seemed to be worse and I think we’re all trying to figure out sort of the impact of Easter in those numbers, it was in this year and not in last year. For us we do have some institutional business and some education exposure, so that tends to impact us or that holiday tends to impact us a little bit. So that’s kind of how those numbers shake out at this point.

Scott Gaffner - Barclays Capital

And then just on the pricing environment, I mean last quarter we were talking about sort of moderation in pricing. Are you seeing anything pick up there? Or are you still seeing pressure? And maybe what you’re seeing out of some of your competitors as far as are they becoming highly promotional and how you’re combating that?

Kenneth D. Sweder

Sure, Scott, a few dimensions there. First of all, from a product kind of cost perspective, you know we continue to see nothing out of the ordinary either on kind of costs up or costs down. In fact we’ve seen a lot of moderation in terms of the kind of the relative costs of our products and kind of given our global supply chain we’ve seen you know actually a little bit of cost down opportunities as we continue to import products from overseas. So nothing out of the ordinary there.

In terms of kind of the top line and margin related yes, you know, as we sort of talked about earlier we continue to see some challenges in terms of heightened price competition, but that said it’s nothing that we see as kind of totally out of the ordinary. We’ve always operated in a very, very competitive environment and while that is particularly tough right now, there have been no wholesale changes there.

Scott Gaffner - Barclays Capital

And then just one last one on the bad debt expense. I feel like the commentary was great. I appreciate that. But could you just give us maybe some more detail as to where you’re seeing the greatest amount of weakness from your customers? I mean, is it in one particular segment? And then as far as customers that are this size, the $1.2 million size, I mean how many of those customers do you have and how are you sort of tracking those customers to see where we could see some more potential there for bad debt expense?

Thomas J. Tossavainen

Sure. Let me take your second question first and I’ll double back more on the general AR trends that we’re starting to agree we’re continuing to see in the first quarter. I want to add that the one customer was clearly unique in terms of size and exposure, you know, and as I mentioned excluding this one customer our next largest individual account exposure is $1.2 million or less than 1% of our gross receivable balances. But a little further, you know, our top 10 largest accounts receivable balances which range from $500,000 to $1.2 million represent less than 6% of our gross receivable balances. So we feel like we have a pretty well diversified portfolio there.

On a more broader scale, in terms of what we’re seeing you know there certainly are some differences between the various customer end types and across the market, ranging from the contractors to apartment complexes and institutions like hospitals. However, we generally are seeing slowing trends across virtually all of our customers and end markets. And we see many different types of customers being challenged and continue to be challenged by the economy that we’re in today.

Operator

Your next question comes from David Manthey - Robert W. Baird & Co., Inc.

David Manthey - Robert W. Baird & Co., Inc.

Could you tell us what the growth year to year in your jan/san business was this quarter?

Michael J. Grebe

The organic change year-over-year for our jan/san business was roughly down 4% for the quarter, Dave.

David Manthey - Robert W. Baird & Co., Inc.

And do you have a breakdown for institutional overall or do you not break it down that way?

Michael J. Grebe

We can do that on this call, Dave. Institutional on an organic basis was down about 7% overall.

David Manthey - Robert W. Baird & Co., Inc.

And then on the gross margin improvement, could you tell us was it primarily selling mix or was it selling margin that impacted the better gross margin? Meaning were you selling more of the low margin big ticket items this quarter, is that what drove it?

Thomas J. Tossavainen

Sure. Sure. Good question. We actually saw a few things there. One again we saw sequential improvement quarter-to-quarter but year-over-year declines of 50 basis points so from Q1 ’08 to Q1 of ’09. So it was actually three primary things, Dave. Sure, we did see some pricing pressure given the economic climate. And of course while it is kind of difficult to nail down completely issues of mix, we did see some mix shift during the quarter so let me give you one example. Things like electrical products and some of our higher margin plumbing products. Those things you typically carry higher gross margins, they ended up giving things like the declines in pro contractor becoming a slightly lower overall percentage of our total sales mix. And so that actually drove a part of the overall 50 basis points decline.

And finally just to reiterate we did see about an 11 basis point impact due to the continued ramp up of our western national distribution center. So while that’s less than in the prior quarter, there was still some impact there as we further kind of optimized that against our eastern NDC.

David Manthey - Robert W. Baird & Co., Inc.

Ken, in your monologue you discussed the longer term distribution strategy. You referenced that. I’m just wondering, could you tell us a little bit about what that is? And as you look at your distribution network and the consolidations you’re going through today why not continue consolidating for the next five years rather than stopping with the current consolidations?

Kenneth D. Sweder

Sure. Great point. Just a few different dimensions there. One is we wanted to kind of parse this out so that it’s manageable for our sales team, for our operations team, you know, over the course of kind of each and every quarter. Coupled with that, we continue to parallel process. So you heard us last quarter talk a little bit about hey we’re going to try to be very opportunistic in times and closures against lease expirations and such. While we’re doing that we continue to formulate a longer term that will insure that again over the course of a few years we can rescale this enterprise. And that is exactly what we’re doing.

So you’ve seen 10 very, very quick closures. With that you are seeing other closures pursuant to these larger centers. And as we’re able to work through a lot of the math on our longer term plans, we will absolutely continue to drive additional consolidations and closures in the coming quarters. Frankly, some of that just takes time, right? It takes time to work through the math in terms of consolidations and freight and labor rates and demand pools and such, but know that A, we are working on it and B, most likely within the next quarter or two we will have more specifics there. So bottom line is this, Dave, we do not see ourselves stopping with our consolidations and frankly we think that this is absolutely the right time to be doing this, so that we can disproportionately benefit as our, you know, revenue starts to increase.

Operator

Your next question comes from Jeffrey Germanotta - William Blair & Company, LLC.

Jeffrey Germanotta - William Blair & Company, LLC

I noticed, you know, within working capital and there was a big increase in accounts payable. Is there something new there and will that continue or what occurred in the quarter?

Thomas J. Tossavainen

Sure, Jeff, you know if you look at our [PAYP] balance we had about $86 million at the end of the quarter compared to $68 at the end of ’08. You know, if you looked at our traditional DPO nothing materially different over the long term there. Looking over the last rolling five quarters our days payable are approximately flat to prior year, and about two days higher than last quarter. But as you can imagine, Jeff, in the current economic environment like any high performing distributor we’re going to manage the business to properly balance the cash flow demands of our customers and our suppliers alike.

With that said, as you know, our supplier partners are foundational to our success so we always balance the opportunity for quick payments offered by our suppliers against the ongoing cash flow requirements of the business. And I truly believe we have that balance and are managing our cash positions prudently while not materially impacting cash discounts or those very important supplier-partner relations.

Jeffrey Germanotta - William Blair & Company, LLC

Ken was talking about a lot of the details of the distribution center closures and this is a bit of a follow on to Dave’s questions, too. Was everything Ken talking about included in the $0.31 net benefit that we’ve been previously discussing for 2009? Or were some of those initiatives over and above that?

Kenneth D. Sweder

Those were all included in that $0.31 for the benefit of ’09, Jeff. Now however as we’ve looked at our cost structure we’ve continued to build upon the plans to take costs out of the business and as part of that what was new was we did expand our initiatives once again to close an additional eight professional contractors showrooms. So there’s a slight adjustment in there, a little bit of a cost of $0.01 to do it and that’s offset by the benefits that were derived from those over the remainder of the year.

Jeffrey Germanotta - William Blair & Company, LLC

Over the year past you have added a sizable number of sales people. Can you talk about what you’re seeing in terms of performance there and how that investment’s paying off?

Michael J. Grebe

Jeff, it’s Mike. There’s been a limited few areas where we’ve tried to invest in new sales reps. Lots of times that comes in terms of new national account reps that are going after corporate sales customers. And as I said on my section of the commentary, we think we’re getting good traction in those areas. And the value proposition that we have with those customers is very, very solid. Now in an economic environment like this it’s hard to gauge your improvement in a declining environment, but we think we’re taking share, we’re poised to take share in those arenas.

I guess the other thing that we’re very proud of more so than adding new sales reps is adding new products that is going to drive further, deeper wallet share gain from our customers. And we’re very proud of that $5 million run rate. Now I know that doesn’t sound like a massive number on top of $1 billion plus, but to be in some respects three or four months into that scenario, getting customers to think of us as a broader line supplier, we think that’s a big move for the company. So we generally like the traction that we’re seeing from our sales rep and product initiatives.

Jeffrey Germanotta - William Blair & Company, LLC

If I may, as a follow up on the sales rep question are you seeing customer account base rise despite lower average order sizes? Or are – how do you separate those two dynamics?

Michael J. Grebe

Good question. I think what we’re seeing, Jeff, across a lot of our brands and a lot of regions is what a lot of the people that have good market share like us are seeing which is we’re holding our own with our existing good customers, we’re retaining that market share, but our good customers are just ordering less product. They’re ordering with the same frequency, the same number of shipments on our trucks for delivery, but they’re ordering less per order. And that’s usually the biggest dynamic that we have our eyes on because obviously you want to make sure that you’re managing your fixed costs and your variable costs to that. I’d say that our customer accounts are improving in certain areas, but those gains aren’t where we want them to be at this stage and that’s why we said we’re spending a lot of time and going to be investing a lot of our marketing dollars and our incentive dollars at going after and retaining or achieving new accounts.

Operator

Your next question comes from Keith Hughes - Suntrust Robinson Humphrey.

Keith Hughes - Suntrust Robinson Humphrey

Given your commentary on the market and the debt pay down does this change how you view acquisitions in the near term for the company? Are we still kind of on the sidelines on that or what’s your view?

Michael J. Grebe

On the short term, Keith, as I said we’re going to be very cautious, right? And some of that relates to the environment with respect to the credit markets and so forth, but a lot of that relates to wanting to be acquisitive in an environment where lots of the people that you’re talking to have choppy results. You know, it’s very hard to look at numbers for any potential acquisition candidate right now and get a great feel as to what their underlying performance is. So again I would say that we’re going to be very, very cautious. However, as you know, acquisitions have always played a key strategic part in our growth strategy. We feel like we’ve got a great operating platform here. And I think what we’ve been able to accomplish with the Eagle Maintenance acquisition shows that we are able to quickly take advantage of synergies in a favorable acquisition environment.

So I guess the best answer I have is we’re going to be very cautious at this time, but as markets loosen up we’re going to make sure that we are very opportunistic in the way we look at acquisitions. And again we think that’s always been a big strategic value creator for the company and for our shareholders.

Keith Hughes - Suntrust Robinson Humphrey

You talked about the customer bankruptcy in the quarter, but if we look more at your competitors are you starting to see any of your competitors’ exhibit financial distress type behavior in the way they deal with supplier and customers?

Michael J. Grebe

Some of that information is going to be very anecdotal, Keith, but I guess it’s kind of widely established that there are times like this that occur economically and a lot of the market share gains that occur or market share shifts that occur, occur at times like this. And I think a lot of that has to do with smaller competitors running into pressure. So to dovetail with what Ken had said, are we seeing wholesale impact on our gross margins that we don’t think we can survive with? No. We think that the pressures that we have on our gross margins are ones that we can manage through.

Keith Hughes - Suntrust Robinson Humphrey

I’m not really talking about discounting. I’m talking more about, you know, specific customers wanting to push out receivables with the various suppliers, probably common suppliers with you guys, things of that nature.

Michael J. Grebe

Again, we’re seeing some of that, you know, and any time you get in a tough environment like this, I mean, people sharpen their pencils. They sharpen at the pricing level, they’ll sharpen it at the receivables level, so we’re seeing some of that. We’re also seeing some small suppliers struggle and small suppliers go out of business. So there’s a lot going on in the marketplace, not anything right now that we don’t think we can manage through.

Operator

Your next question comes from Sean Connor - BB&T Capital Markets

Sean Connor - BB&T Capital Markets

I just had a question on the multi-family business. Clearly that’s under pressure given the vacancy rate data point that you talked about, but I just wanted to see if there’s any difference in a remodel versus the maintenance side of that business. Are you seeing any sort of, I guess, stronger performance out of that, the maintenance part of the multi-family business?

Michael J. Grebe

Sure. The multi-family numbers that I mentioned earlier include, for example, our renovations plus business which is the renovations and rehab portion of a division that we use within the multi-family space. Just to calibrate that particular division for you, that business was down almost 50% in Q1 as I mentioned and it was down about 67% in Q2.

Now what we can add to that, in addition to that division being way down which is aimed at wholesale renovations and rehabs, within our kind of let’s call it our normal multi-family business, there are the smaller renovations and rehabs which can be a new refrigerator in an apartment unit, or a little bit of CapEx. We can’t split that out from our existing normal maintenance business because it doesn’t come to us as a separate order or whatever. But we can see from our numbers that those types of products, those big ticket items that typically are involved in a renovation rehab are down.

So what it feels like to us is renovations rehab activity is way off. We’ve expected it to be way off. We don’t see that changing much. We are seeing some REIT operators pull in their belts and de-stock a little bit but the regular repair and maintenance of small items within an apartment unit still feels somewhat steady to us. So that’s kind of our take on multi-family in general.

Sean Connor - BB&T Capital Markets

I’m sure the REIT operators are beginning to restock a little bit. Do you anticipate that getting worse? I mean, we’ve seen, you know, in some of our other [inaudible] de-stocking trends are kind of – they had happened, I guess, a quarter ago maybe and now they’re starting to looking at maybe I guess bottoming into Q2. But if they’re just now beginning to start that process, do you expect that pressure to really be there going the next couple quarters?

Michael J. Grebe

Certainly it’s our hope that whatever de-stocking is occurring is starting to run its full cycle. As we’ve been in this business for a long time, we’ve never seen a de-stocking period able to last more than a couple of months, maybe two quarters. Now there are occasions where if business gets really challenged for the REIT operator it’s possible, for example, that they can cannibalize a vacant apartment for a faucet and put it into a repair of an occupied apartment. That’s happened. We’ve seen that in the past. But we’ve never seen it occur for very long. So again we’re in kind of unprecedented times here, but it feels like we should be kind of at the end of that type of cycle, but hard for us to predict.

Sean Connor - BB&T Capital Markets

On the specialty distributors in the pro contractor segment, it looks like I guess the last couple of quarters, you know, from my year-over-year decline perspective, the specialty distributors business has done better than the professional contractors. What are the dynamics driving that?

Kenneth D. Sweder

Sure, Sean. It’s Ken. Just a few points there. One is we have seen some relative benefit with our Copperfield brand and so as you can imagine that brand books us a lot on hearth and energy heating and such. So as we saw things like oil prices increase we saw more demand there. We’re optimistic that some of those patterns will continue, given kind of a heightened focus on energy efficiency and such. So that’s one of the key drivers.

Sean Connor - BB&T Capital Markets

Is Easter the only holiday or Easter the only business day in this quarter that will make this quarter a day less than I guess the prior year?

Michael J. Grebe

Let us check on that just to be sure and we’ll get back to you on that on this call.

Operator

Your next question comes from [Yun Kwan] – Barclays Capital.

Yun Kwan – Barclays Capital

A quick question on the debt repurchases. Can you just refresh us on where you guys are at in terms of the availability on your RP basket and whether you can do anymore debt repurchases?

Thomas J. Tossavainen

Sure. From our basket under our agreements we are generally done with those purchases for this year.

Yun Kwan – Barclays Capital

And just a quick question on SG&A and how to think about that on a go forward basis, it looks like the SG&A expense even adjusting for the bad debt expense for the quarter is creeping up a bit. Is that just costs under absorption issues and how should we think about that going forward?

Michael J. Grebe

Sure. This is Mike. Again as you point out we did have a lot of what we feel are one time costs in those SG&A expenses, but certainly even after adjusting for those we were a bit higher and that really has a lot to do with sales continuing to be challenging during the quarter as well as a lot of the initiatives that we’ve put in place, dating way back to August and also in January have not started to fully flow through or those benefits have not started to flow through our P&L. We are proud of the fact that during the quarter we lowered our cost structure compared to the prior year in a number of key areas. We’re down roughly $5 million in compensation and benefits, a little more than $2 million in delivery expense, $1 million in travel expenses and so forth.

Now some of those are variable or somewhat variable. Delivery expenses will rise somewhat as sales go back up. But as you also heard me say earlier, a lot of times we’re making the same number of deliveries but just for a lower amount of sales unfortunately because our customers need less. So we believe that as all of our various initiatives kick in and we get those full benefits that our operating expenses will get back in line and as markets recover our operating margins are going to recover to our old levels and beyond. That’s our mindset and that’s the way we’re looking at how we run the business this year.

Operator

Your next question comes from Garland Buchanan - Babson Capital.

Garland Buchanan - Babson Capital

Referring to a previous question around concentration of accounts receivable, do you have any information on the geographic concentration for those larger accounts?

Kenneth D. Sweder

Sure. You know, generally our larger accounts are sold to the multi-family housing states which is apartment units all over the country in every major metropolitan area across the state. So it’s very, very diversified and spread out throughout the country for us.

Garland Buchanan - Babson Capital

So you would say then you don’t have any kind of specific geographic risk?

Kenneth D. Sweder

I think that’s generally a fair statement. I mean, you know, we have a strong business in the Northeast and in the Southeast and have some strong presence throughout the country and so I think that’s a very general – a good general statement.

Operator

And at this time there are no further questions.

Thomas J. Tossavainen

Regina, thank you and thanks for everyone for joining our call today.

Operator

This concludes today’s conference. Thank you very much for your participation. You may now disconnect.

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Source: Interline Brands Inc. Q1 2009 Earnings Call Transcript
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