Q2 2019 Earnings Call · 2019-07-24 · • New product information management system • Less...
Transcript of Q2 2019 Earnings Call · 2019-07-24 · • New product information management system • Less...
Q2 2019 Earnings CallW.W. Grainger, Inc.
July 24, 2019
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Safe Harbor Statement and Non-GAAP Financial MeasuresAll statements in this communication, other than those relating to historical facts, are “forward-looking statements.” Forward-looking statements can generally be identified by their use of terms such as “anticipate,” “estimate,” “believe,” “expect,” “could,” “forecast,” “may,” “intend,” “plan,” “predict,” “project” “will” or “would” and similar terms and phrases, including references to assumptions. Forward-looking statements are not guarantees of future performance and are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from such statements. Forward-looking statements include, but are not limited to, statements about future strategic plans and future financial and operating results. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, among others: higher product costs or other expenses; a major loss of customers; loss or disruption of source of supply; increased competitive pricing pressures; failure to develop or implement new technology initiatives; the implementation, timing and results of our strategic pricing initiatives; the outcome of pending and future litigation or governmental or regulatory proceedings, including with respect to wage and hour, anti-bribery and corruption, environmental, advertising, privacy and cyber security matters; investigations, inquiries, audits and changes in laws and regulations; disruption of information technology or data security systems; general industry, economic, market or political conditions; general global economic conditions; currency exchange rate fluctuations; market volatility; commodity price volatility; labor shortages; facilities disruptions or shutdowns; higher fuel costs or disruptions in transportation services; natural and other catastrophes; unanticipated and/or extreme weather conditions; loss of key members of management; our ability to operate, integrate and leverage acquired businesses; changes in effective tax rates; our common stock, including volatility in our stock price; and other factors which can be found in our filings with the Securities and Exchange Commission, including our most recent periodic reports filed on Form 10-K and Form 10-Q, which are available on our Investor Relations website. Forward-looking statements are given only as of the date of this communication and we disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.
Additional information relating to certain non-GAAP financial measures referred to in this presentation, including net sales in constant currency, adjusted gross profit, adjusted operating margin, adjusted segment operating earnings, adjusted tax rate, adjusted net earnings and adjusted diluted earnings per share, is available in the appendix to this presentation and our most recent earnings release.
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($ in millions) Q2 2019 Q2 2018% vs. PY
Fav/(Unfav)
Sales $ 2,893 $ 2,861 1%
GP 1,121 1,111 1%
SG&A 741 767 3%
Op Earnings $ 380 $ 344 11%
EPS $ 4.67 $ 4.16 12%
(% of sales) Q2 2019 Q2 2018bps vs. PY
Fav/(Unfav)
GP Margin 38.7% 38.8% (10)
SG&A Margin 25.6% 26.8% 120
Op Margin 13.1% 12.0% 110
• Reported results included a $3 million benefit to operating earnings and a $0.03 benefit to EPS primarily related to a reduction in lease obligations in Canada.
• The remaining slides reference adjusted results, which exclude restructuring items.
Q2 2019 Reported Results – Total Company
Note: Numbers may not foot due to rounding.
DG MacphersonChairman and Chief Executive Officer
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Strategic Pillars
High-Touch Solutions Model
Compelling value-added MRO solutions delivered to customers through teams of experts and curated digital experiences
Endless Assortment Model
Easy purchasing through a streamlined and transparent online relationship that
provides access to everything a business customer needs
Business Models
• U.S.
• Canada
• Mexico
• Cromwell
• Fabory
• Zoro
• MonotaRO
Businesses Pillars
• Advantaged MRO Solutions
• Differentiated Sales and Services
• Unparalleled Customer Service
• Expansive Product Assortment
• Innovative Customer Acquisition Capabilities
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• Strong operating performance despite slower global economy
and investments in Zoro
• H1 2019 daily sales up 3.0% on a constant currency basis
• H1 2019 company operating margin of 13.0%, up 50 bps
• H1 2019 company incremental margin1 of 42%
• H1 2019 company operating cash flow2 up 14%
• Cost take out initiatives complete; focused on driving
profitable growth through the U.S. and endless assortment
models
• Canada top line recovery tracking slower than anticipated;
volume starting to stabilize
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H1 2019 Performance Highlights and 2019 Outlook
Note: Reference slides 21 to 23 for GAAP vs. non-GAAP reconciliation. 1. Incremental margin is calculated by the year-over-year difference in adjusted operating earnings on a daily basis, divided by the year-over-year difference in net sales on a daily basis. 2. Please refer to our Q2 press release on the IR website for the statement of cash flows.
• Maintaining total company guidance for:
• Gross profit margin,
• Operating margin, and
• Earnings per share
• Lowering estimate for market growth:
• From 1% to 4% growth to -1 to 2% growth
• Lowering total company sales growth outlook:
• From 4% to 8.5% to 2% to 5% growth
• Largely due to softer than expected demand
environment and performance at AGI and
Cromwell
2019 OutlookH1 Performance Highlights
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U.S. Large and Midsize Sales Performance
*Q4’18 sales are normalized for a negative 1 ppt. impact from Christmas/New Years timing. U.S. Large revenue of $6.8 billion and U.S. Midsize revenue of $1.0 billion as of 12/31/2018. 1. In the U.S. MRO market estimates are based on data from Global Insight (July 2019).
U.S. Large: daily sales growth on $6.8 billion of revenue
U.S. Midsize: daily sales growth on $1.0 billion of revenue
2%
4%2%
6%
9%8%
6%
7%
5%
2%
0%
5%
10%
15%
Q1 Q2 Q3 Q4* FY
2017 2018 2019
0%
9%
-2%
15%20% 18%
14%
16%
9%5%
-5%
5%
15%
25%
35%
Q1 Q2 Q3 Q4* FY
2017 2018 2019
U.S. MRO Market 20191 2-2.5% ~1% (1)-2% (1)-2% (1)-2% 2-2.5% ~1% (1)-2% (1)-2% (1)-2%
Estimated Estimated
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Advantaged
MRO Solutions
U.S. Growth Initiatives
Foundational Incremental
Differentiated
Sales and
Services
Unparalleled
Customer
Service
• Seamless customer experience
• Stocked assortment/availability
• Fulfillment – same/next-day complete
• Louisville distribution center operational in 2020, increased stocking capacity
• CRM* improvements driven by customer information and analytics
• Industry strategies
• Seller effectiveness
• KeepStock®
• Product and customer information improvements
• Website improvements
• Marketing improvements
• Marketing investments
• Merchandising and product adds
• Expanded services
• Select seller additions
• Corporate account growth
*CRM = Customer Relationship Management
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• Expanding the assortment:
• YTD have added 400K items
• Adding 10 million items over the next 3-5 years
• New product information management system
• Less reliance on Grainger Supply Chain
• New analytics platform
• Adding new engineering, marketing and analytics talent
• Running the MontoraRO playbook
Growing Zoro U.S.
Growth Initiatives
Tom OkraySenior Vice President and Chief Financial Officer
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Q2 2019 Adjusted Results – Total Company
• Daily sales increased 1.0%, 2.0% on a constant currency basis, composed of:
• Volume growth of 1.5%
• Price inflation of 0.5%
• GP rate normalized for the timing of the N.A. sales meeting declined 35 bps
• Operating margin normalized for the timing of the N.A. sales meeting increased 30 bps
• Operating cash flow of $323 million increased 30%
Note: Reference slides 21 to 23 for GAAP vs. non-GAAP reconciliation. Numbers may not foot due to rounding.
($ in millions)Q2 2019 Q2 2018
% vs. PYFav/(Unfav)
Sales $ 2,893 $ 2,861 1%
GP 1,121 1,112 1%
SG&A 744 753 1%
Op Earnings $ 377 $ 359 5%
EPS $ 4.64 $ 4.37 6%
(% of sales) Q2 2019 Q2 2018bps vs. PY
Fav/(Unfav)
GP Margin 38.7% 38.9% (15)
SG&A Margin 25.7% 26.3% 65
Op Margin 13.0% 12.6% 50
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Q2 2019 Adjusted Results – United States
• Daily sales up 2.0% vs. prior year, composed of:
• Grainger Brand (Lrg. +Mid) +2.0%
• Volume up 1.5%
• Price up 0.5%
• Intercompany +0.5%
• Specialty Brands -0.5%
• GP rate normalized for the timing of the N.A. sales meeting was up 10 bps
• Operating margin normalized for the timing of the N.A. sales meeting increased 60 bps
Note: Reference slides 21 to 23 for GAAP vs. non-GAAP reconciliation.Numbers may not foot due to rounding.
($ in millions)Q2 2019 Q2 2018
% vs. PYFav/(Unfav)
Sales $ 2,222 $ 2,175 2%
GP 885 858 3%
SG&A 502 503 0%
Op Earnings $ 383 $ 355 7%
(% of sales) Q2 2019 Q2 2018bps vs. PY
Fav/(Unfav)
GP Margin 39.8% 39.5% 35
SG&A Margin 22.6% 23.1% 50
Op Margin 17.2% 16.4% 85
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Q2 2019 Adjusted Results – Canada
• Daily sales down 23.0% vs. prior year, down 20% on a constant currency basis:
• Price up 3.0%
• Volume down 23.0%
• SG&A favorable 26% vs. prior year due to 2018 cost take-out actions
Note: Reference slides 21 to 23 for GAAP vs. non-GAAP reconciliation. Numbers may not foot due to rounding.
($ in millions)Q2 2019 Q2 2018
% vs. PYFav/(Unfav)
Sales $ 135 $ 177 (23%)
GP 44 60 (27%)
SG&A 47 62 26%
Op Losses $ (3) $ (2) (2)%
(% of sales) Q2 2019 Q2 2018bps vs. PY
Fav/(Unfav)
GP Margin 32.4% 33.9% (150)
SG&A Margin 33.7% 34.9% 120
Op Margin (1.2%) (0.9%) (30)
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Q2 2019 Adjusted Results – Other Businesses
• Daily sales increased 6.5%, 9.5% on a constant currency basis:
• Price and volume up 9.5%
• Endless assortment daily sales growth of 17.0%, 19.0% on a constant currency basis
• Operating margin decline impacted by growth investments in the Zoro U.S. business.
Note: Endless assortment businesses include Zoro U.S. and MonotaRO in Japan. International portfolio comprised of Cromwell (including ZoroU.K.), Fabory, Mexico, other Latin America businesses and China. Reference slides 21 to 23 for GAAP vs. non-GAAP reconciliation.
($ in millions)Q2 2019 Q2 2018
% vs. PYFav/(Unfav)
Sales $ 663 $ 622 6%
GP 192 194 (1%)
SG&A 165 151 (10%)
Op Earnings $ 27 $ 43 (38%)
(% of sales) Q2 2019 Q2 2018bps vs. PY
Fav/(Unfav)
GP Margin 29.0% 31.1% (220)
SG&A Margin 24.9% 24.2% (70)
Op Margin 4.1% 7.0% (290)
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2019 Guidance
AdjustedYTD 2019A
2019 Guidance as of 4/22/2019
2019 Guidance as of 7/24/2019
Sales ($ billions) $5.7 $11.7 – $12.2 Lowering to
U.S. Market (price + volume) ~1.5% 1% - 4% (1)% - 2%% vs. prior year (daily, constant currency)* 3.0% 4% - 8.5% 2% - 5%
Gross Profit Margin 38.9% 38.1% - 38.7% Maintain
bps vs. prior year (20) (60) – 0
Op Margin 13.0% 12.2% - 13.0% Maintain
bps vs. prior year 60 20 - 100
Tax Rate 25.5% 24.5% - 27.5% Maintain
EPS $9.14 $17.10 - $18.70 Maintain
% vs. prior year 7% 2% - 12%
Note: Guidance as of 7/24/2019. Reference slides 21 to 23 for GAAP vs. non-GAAP reconciliation. Numbers may not foot due to rounding.
*Actual results are on a daily, constant currency basis. Sales guidance includes expectations for foreign-exchange.
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Performance Expectations
• U.S. revenue to grow 300 to 400 basis points faster than market
• Canada volume stabilization and profitable growth
• Continued strong growth of the endless assortment model
• Strong SG&A leverage
• Continued operating margin improvement
Q&A
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Appendix
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• Retail: up High-Single Digits
• Government: up Mid-Single Digits
• Commercial: up Mid-Single Digits
• Light Manufacturing: up Low-Single Digits
• Contractor: up Low-Single Digits
• Heavy Manufacturing: down Low-Single Digits
• Natural Resources: down Mid-Single Digits
Q2 2019 U.S. Sales By Customer End Market
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Quarterly Daily Sales
Company Q2 2019 Daily Sales
Month
Constant
Currency
FX
Impact
Reported
Sales
April 2.0% 1.5% 0.5%
May 1.0% 1.0% 0.0%
June 3.0% 0.0% 3.0%
Q2 Daily Sales 2.0% 1.0% 1.0%
Q2 2019 Daily Sales vs. Q2 2018
Drivers Company United States Canada Other Businesses
Volume 1.5% 1.5% (23.0%) 9.5%
Price 0.5% 0.5% 3.0% --
Intercompany -- 0.5% -- --
Specialty Brands (U.S.) -- (0.5%) -- --
Foreign Exchange (1.0%) -- (3.0%) (3.0%)
Change vs. Prior 1.0% 2.0% (23.0%) 6.5%
% of Company Revenue 100% 72% 5% 23%
Selling Days
2019 2018 2017
1Q 63 64 64
2Q 64 64 64
3Q 64 63 63
4Q 64 64 63
Full Year 255 255 254
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Q2 2019 GAAP to Non-GAAP Reconciliations
Three Months Ended June 30,
2019Gross
Profit % 2018Gross
Profit %
Gross profit reported $ 1,121 38.7% $ 1,111 38.8%
Restructuring, net - - 1 0.1
Gross profit adjusted $ 1,121 38.7% $ 1,112 38.9%
Six Months Ended June 30,
2019Gross
Profit % 2018Gross
Profit %
Gross profit reported $ 2,216 38.9% $ 2,203 39.1%
Restructuring, net 1 - 1 0.1
Gross profit adjusted $ 2,217 38.9% $ 2,204 39.2%
Three Months Ended June 30, %
2019 2018Operating earnings reported $ 380 $ 344 10%
Restructuring, net branch gains (United States) 2 6
Restructuring (Canada) (4) 12
Restructuring (Other Businesses) - 2
Restructuring (Unallocated expense) (1) (5)
Subtotal (3) 15
Operating earnings adjusted $ 377 $ 359 5%
Six Months Ended June 30, %
2019 2018Operating earnings reported $ 743 $ 679 9%
Restructuring, net branch gains (United States) 2 2
Restructuring (Canada) (2) 23
Restructuring (Other Businesses) - 3
Restructuring (Unallocated expense) (1) (5)
Subtotal (1) 23 Operating earnings adjusted $ 742 $ 702 6%Three Months Ended
June 30,
Six Months Ended
June 30,
2019 2018
Bps
impact 2019 2018
Bps
impact
Gross profit margin adjusted 38.7 % 38.9 % (15) 38.9% 39.2% (30)
North American sales
meeting (0.4) (0.2) (0.3) (0.3)
Gross profit margin
normalized 38.3 % 38.7 % (35) 38.6% 38.9% (30)
Three Months Ended
June 30,
Six Months Ended
June 30,
2019 2018
Bps
impact 2019 2018
Bps
impact
Operating margin adjusted 13.0 % 12.6 % 50 13.0 % 12.5 % 50
North American sales
meeting (0.4) (0.3) (0.1) (0.1)
Operating margin normalized 12.6 % 12.3 % 30 12.9 % 12.4 % 50
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Q2 2019 GAAP to Non-GAAP Reconciliations Three Months Ended Six Months Ended
(in millions of dollars) June 30, June 30,
2019 2018 2019 2018
Sales
United States $ 2,222 $ 2,175 $ 4,371 $ 4,283
Canada 135 177 271 359
Other Businesses 663 622 1,296 1,210
Intersegment sales (127) (113) (246) (225)
Net sales to external customers $ 2,893 $ 2,861 $ 5,692 $ 5,627
Reported operating earnings
United States $ 381 $ 349 $ 745 $ 706
Canada 1 (14) (4) (34)
Other Businesses 27 41 57 77
Unallocated expense (29) (32) (55) (70)
Reported operating earnings $ 380 $ 344 $ 743 $ 679
Company operating margin 13.1% 12.0% 13.1% 12.1%
ROIC* for Company 31.4% 28.4%
ROIC* for United States 45.3% 46.1%
ROIC* for Canada -1.9% -13.9%
*The GAAP financial statements are the source for all amounts used in the Return on Invested Capital (ROIC) calculation. ROIC is calculated using operating earnings divided by net working assets (a 3-point average for the year-to-date). Net working assets are working assets minus working liabilities defined as follows: working assets equal total assets less cash equivalents (3-point average of $265.5 million), deferred taxes, and investments in unconsolidated entities, plus the LIFO reserve (3-point average of $406.5 million). Working liabilities are the sum of trade payables, accrued compensation and benefits, accrued contributions to employees' profit sharing plans, and accrued expenses.
Three Months Ended
(in millions of dollars) June 30,
2019Operating Margin % 2018
Operating Margin %
Segment operating earnings adjusted
United States $ 383 17.2% $ 355 16.4%
Canada (3) -1.2% (2) -0.9%
Other Businesses 27 4.1% 43 7.0%
Unallocated expense (30) N/A (37) N/A
Segment operating earnings adjusted $ 377 13.0% $ 359 12.6%
Six Months Ended
(in millions of dollars) June 30,
2019Operating Margin % 2018
Operating Margin %
Segment operating earnings adjusted
United States $ 747 17.1% $ 708 16.5%
Canada (6) -2.0% (11) -3.0%
Other Businesses 57 4.4% 80 6.7%
Unallocated expense (56) N/A (75) N/A
Segment operating earnings adjusted $ 742 13.0% $ 702 12.5%
ROIC* for Company 31.4% 29.3%
ROIC* for United States 45.4% 46.2%
ROIC* for Canada -2.8% -4.5%
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Q2 2019 GAAP to Non-GAAP Reconciliations Three Months Ended
June 30, %
2019 2018
Net earnings reported $ 260 $ 237 10%
Restructuring, net of branch gains (United States) 1 5
Restructuring (Canada) (3) 9
Restructuring (Other Businesses) - 2
Restructuring (Unallocated expense) - (4)
Subtotal (2) 12
Net earnings adjusted $ 258 $ 249 4%
Six Months Ended June 30, %
2019 2018
Net earnings reported $ 513 $ 469 9%
Restructuring, net of branch gains (United States) 1 1
Restructuring (Canada) (1) 17
Restructuring (Other Businesses) - 3
Restructuring (Unallocated expense) - (3)
Subtotal - 18
Net earnings adjusted $ 513 $ 487 5%
Three Months Ended June 30, %
2019 2018
Diluted earnings per share reported $ 4.67 $ 4.16 12%
Restructuring, net of branch gains (United States) 0.02 0.11
Restructuring (Canada) (0.06) 0.21
Restructuring (Other businesses) - 0.04
Restructuring (Unallocated expense) (0.01) (0.09)
Total pretax adjustments (0.05) 0.27
Tax effect (1) 0.02 (0.06)
Total, net of tax (0.03) 0.21
Diluted earnings per share adjusted $ 4.64 $ 4.37 6%
Six Months Ended June 30, %
2019 2018
Diluted earnings per share reported $ 9.14 $ 8.23 11%
Restructuring, net of branch gains (United States) 0.03 0.03
Restructuring (Canada) (0.03) 0.40
Restructuring (Other businesses) - 0.06
Restructuring (Unallocated expense) (0.01) (0.08)
Total pretax adjustments (0.01) 0.41
Tax effect (1) 0.01 (0.09)
Total, net of tax - 0.32
Diluted earnings per share adjusted $ 9.14 $ 8.55 7%
(1) The tax impact of adjustments is calculated based on the income tax rate in each applicable jurisdiction, subject to deductibility limitations and the company's ability to realize the associated tax benefits.
Three Months Ended June 30,
Six Months Ended June 30,
2019 2018Bps
impact 2019 2018Bps
impact
Tax rate reported 25.6 % 23.4 % 220 25.5 % 22.5 % 300
Restructuring, net (0.1) (0.1) — —
Tax rate adjusted 25.5 % 23.3 % 220 25.5 % 22.5 % 300
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Irene Holman
Vice President, Investor Relations
847.535.0809
Monica Gupta
Director, Investor Relations
IR Contacts