q3 2019 earnings call · 2019-10-25 · note: reference slides 19 to 21 for gaap vs. non-gaap...

Q3 2019 Earnings CallW.W. Grainger, Inc.

October 23, 2019

2

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.

DG MacphersonChairman and Chief Executive Officer

4

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

5

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 (October 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

4%2%

6%

9%8%

6%

7%

5%

2%2%

0%

5%

10%

15%

Q1 Q2 Q3 Q4* FY

2017 2018 2019

9%

-2%

15%20% 18%

14%

16%

9%5%

5%

-5%

5%

15%

25%

35%

Q1 Q2 Q3 Q4* FY

2017 2018 2019

U.S. MRO Market 20191 2-2.5% ~1% ~0% (1)-2% 2-2.5% ~1% ~0% (1)-2%

Estimate Estimate

6

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

7

• Expanding the assortment:

• Currently 3.1 million SKUs in the assortment

• Plan to add 10 million items over the next 3-5 years

• New product information management system

• Less reliance on Grainger Supply Chain

• Ability to add SKUs faster than Grainger process

• Launched branding campaign in September and new analytics platform

• Adding new engineering, marketing and analytics talent

• Running the MonotaRO playbook

Growing Zoro U.S.

Growth Initiatives

Tom OkraySenior Vice President and Chief Financial Officer

9

Q3 2019 Adjusted Results – Total Company

• Daily sales increased 2.5%, composed of:

• Volume growth of 2.5%

• Price inflation and FX were flat

• GP margin down 80 bps in Q3 driven by negative price/cost spread in the U.S. and the performance of the endless assortment businesses

• Operating margin declined 20 bps driven by lower gross profit margin

• Year-to-date operating cash flow up 3.5%

Note: Reference slides 19 to 21 for GAAP vs. non-GAAP reconciliation. Q3 2019 had 64 selling days, one more than the prior year period. Foreign exchange had no impact on total company sales in the quarter. Numbers may not foot due to rounding.

($ in millions)Q3 2019 Q3 2018

% vs. PYFav/(Unfav)

Sales $ 2,947 $ 2,831 4%

GP 1,099 1,079 2%

SG&A 760 747 (2%)

Op Earnings $ 339 $ 332 2%

EPS $ 4.26 $ 4.19 2%

(% of sales) Q3 2019 Q3 2018bps vs. PY

Fav/(Unfav)

GP Margin 37.3% 38.1% (80)

SG&A Margin 25.8% 26.4% 60

Op Margin 11.5% 11.7% (20)

10

Q3 2019 Adjusted Results – United States

• Daily sales up 2.5% vs. prior year, composed of:

• U.S. Segment (Lrg. +Mid.) +2.5%

• Volume up 2.5%

• Price inflation was flat

• Intercompany +0.5%

• Specialty Brands -0.5%

• GP margin was down 80 bps driven primarily by negative price/cost spread

• Year-to-date U.S. price/cost spread is positive, excluding the pricing reset

• Operating margin flat vs prior year driven by diligence in managing expenses

Note: Reference slides 19 to 21 for GAAP vs. non-GAAP reconciliation.Numbers may not foot due to rounding.


% vs. PYFav/(Unfav)

Sales $ 2,277 $ 2,188 4%

GP 866 851 2%

SG&A 523 522 0%

Op Earnings $ 343 $ 329 4%


Fav/(Unfav)

GP Margin 38.0% 38.9% (80)

SG&A Margin 23.0% 23.8% 80

Op Margin 15.1% 15.1% 0

11

Q3 2019 Adjusted Results – Canada

• Daily sales down 14.5% on a constant currency basis, composed of:

• Price up 1.0%

• Volume down 15.5%

• GP margin improved 50 bps driven largely by inventory management efficiencies

• SG&A favorable 22% vs. prior year due primarily to 2018 cost take-out actions

• Operating margin was profitable in the quarter, for the first time in 2019

Note: Reference slides 19 to 21 for GAAP vs. non-GAAP reconciliation. Numbers may not foot due to rounding.


% vs. PYFav/(Unfav)

Sales $ 129 $ 149 (14%)

GP 42 47 (13%)

SG&A 41 51 22%

Op Earnings $ 1 $ (4) 107%


Fav/(Unfav)

GP Margin 32.1% 31.6% 50

SG&A Margin 31.8% 34.9% 310

Op Margin 0.3% (3.3%) 360

12

Q3 2019 Adjusted Results – Other Businesses

• Daily sales increased 9.0% composed of:

• Price and volume up 9.0%

• Endless assortment sales growth of 19.5% on a daily basis

• Operating margin decline impacted by growth investments in the Zoro U.S. business and underperformance at Cromwell

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 19 to 21 for GAAP vs. non-GAAP reconciliation.


% vs. PYFav/(Unfav)

Sales $ 673 $ 610 11%

GP 193 182 6%

SG&A 163 141 (15%)

Op Earnings $ 30 $ 41 (26%)


Fav/(Unfav)

GP Margin 28.5% 29.8% (130)

SG&A Margin 24.1% 23.2% (90)

Op Margin 4.4% 6.6% (220)

13

2019 Guidance

AdjustedYTD 2019A

2019 Guidance as of 7/24/2019

2019 Guidance as of 10/24/2019

Sales ($ billions) $8.6 $11.4 – $11.7Maintain

U.S. Market (price + volume) ~1.0% (1)% - 2%% vs. prior year (daily)* 2.0% 2% - 5%

Gross Profit Margin 38.4% 38.1% - 38.7% Maintain

bps vs. prior year (40) (60) – 0

Op Margin 12.5% 12.2% - 13.0% Maintain

bps vs. prior year 30 20 - 100

Tax Rate 25.1% 24.5% - 27.5% Maintain

EPS $13.40 $17.10 - $18.70 Maintain

% vs. prior year 5% 2% - 12%

Note: Guidance as of 10/23/2019. Reference slides 19 to 21 for GAAP vs. non-GAAP reconciliation. Numbers may not foot due to rounding.

*Actual results are on a daily basis. Sales guidance includes expectations for foreign-exchange.

14

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

16

Appendix

17

• Retail: up High-Single Digits

• Commercial: up Mid-Single Digits

• Government: up Low-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

Q3 2019 U.S. Sales By Customer End Market

18

Quarterly Daily Sales

Company Q3 2019 Daily Sales

Month

Constant

Currency

FX

Impact

Reported

Sales*

July 2.0% -- 2.0%

August 3.5% -- 3.5%

September 1.5% -- 1.5%

Q3 Daily Sales 2.5% -- 2.5%

Q3 2019 Daily Sales vs. Q3 2018

Drivers Company United States Canada Other Businesses

Volume 2.5% 2.5% (15.5%) 9.0%

Price -- -- 1.0% --

Intercompany -- 0.5% -- --

Specialty Brands (U.S.) -- (0.5%) -- --

Foreign Exchange -- -- (1.0%) --

Change vs. Prior 2.5% 2.5% (15.5%) 9.0%

% of Company Revenue 100% 73% 4% 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

*Total company monthly sales performance is based on U.S. sales days. Adjusting for local country sales days, monthly sales performance would be consistent throughout the quarter.

19

Q3 2019 GAAP to Non-GAAP Reconciliations

(in millions of dollars) Three Months Ended September 30,

2019Gross

Proft % 2018Gross

Profit %

Gross profit reported $ 1,099 37.3% $ 1,079 38.1%

Restructuring, net - - - -

Gross profit adjusted $ 1,099 37.3% $ 1,079 38.1%

(in millions of dollars) Nine Months Ended September 30,

2019Gross

Proft % 2018Gross

Profit %

Gross profit reported $ 3,315 38.4% $ 3,282 38.8%

Restructuring, net 1 - 1 -

Gross profit adjusted $ 3,316 38.4% $ 3,283 38.8%

(in millions of dollars)Three Months Ended

September 30, %

2019 2018

Operating earnings reported $ 338 $ 189 78%

Restructuring, net branch gains (United States) - 3

Restructuring (Canada) 1 -

Restructuring (Other businesses) - 1

Impairment charges (Other businesses) - 139

Subtotal 1 143

Operating earnings adjusted $ 339 $ 332 2%

(in millions of dollars)Nine Months Ended

September 30, %

2019 2018

Operating earnings reported $ 1,081 $ 868 24%

Restructuring, net branch gains (United States) 2 5

Restructuring (Canada) (1) 23

Restructuring (Other businesses) - 4


Restructuring (Unallocated expense) (1) (5)

Subtotal - 166

Operating earnings adjusted $ 1,081 $ 1,034 5%

20


(in millions of dollars)Three Months Ended

September 30, %

2019 2018

Net earnings reported $ 233 $ 104 123%

Restructuring, net of branch gains (United States) - 2

Restructuring (Canada) - -

Restructuring (Other Businesses) - 1


Restructuring (Unallocated expense) - -

Subtotal - 136

Net earnings adjusted $ 233 $ 240 -3%

(in millions of dollars)Nine Months Ended

September 30, %

2019 2018

Net earnings reported $ 746 $ 573 30%

Restructuring, net of branch gains (United States) 2 4

Restructuring (Canada) (1) 17

Restructuring (Other Businesses) - 4


Restructuring (Unallocated expense) (1) (4)

Subtotal - 154

Net earnings adjusted $ 746 $ 727 3%

(in dollars per share)Three Months Ended

September 30, %

2019 2018

Diluted earnings per share reported $ 4.25 $ 1.82 134%

Restructuring, net of branch gains (United States) - 0.06

Restructuring (Canada) 0.01 (0.02)

Restructuring (Other businesses) - 0.02

Impairment charges (Other businesses) - 2.42

Total pretax adjustments 0.01 2.48

Tax effect (1) - (0.11)

Total, net of tax 0.01 2.37

Diluted earnings per share adjusted $ 4.26 $ 4.19 2%

(in dollars per share)Nine Months Ended

September 30, %

2019 2018

Diluted earnings per share reported $ 13.40 $ 10.04 33%

Restructuring, net of branch gains (United States) 0.03 0.09

Restructuring (Canada) (0.02) 0.39

Restructuring (Other businesses) - 0.07

Impairment charges (Other businesses) - 2.43

Restructuring (Unallocated expense) (0.01) (0.08)

Total pretax adjustments - 2.90

Tax effect (1) - (0.20)

Total, net of tax - 2.70

Diluted earnings per share adjusted $ 13.40 $ 12.74 5%

(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.

21


Three Months Ended Nine Months Ended

(in millions of dollars) September 30, September 30,

2019 2018 2019 2018

Sales

United States $ 2,277 $ 2,188 $ 6,648 $ 6,471

Canada 129 149 400 508

Other Businesses 673 610 1,969 1,820

Intersegment sales (132) (116) (378) (341)

Net sales to external customers $ 2,947 $ 2,831 $ 8,639 $ 8,458

Operating earnings reported

United States $ 343 $ 326 $ 1,088 $ 1,032

Canada -- (4) (4) (38)

Other Businesses 30 (99) 87 (22)

Unallocated expense (35) (34) (90) (104)

Operating earnings reported $ 338 $ 189 $ 1,081 $ 868

Company operating margin reported 11.4% 6.7% 12.5% 10.3%

ROIC* for Company 30.4% 24.5%

ROIC* for United States 44.0% 44.7%

ROIC* for Canada -1.3% -10.7%

*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 4-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 (4-point average of $151.7 million), deferred taxes, and investments in unconsolidated entities, plus the LIFO reserve (4-point average of $411.1 million). Working liabilities are the sum of trade payables, accrued compensation and benefits, accrued contributions to employees' profit sharing plans, and accrued expenses.

(in millions of dollars) Three Months Ended September 30

2019Operating Margin % 2018

Operating Margin %

Segment operating earnings adjusted

United States $ 343 15.1% $ 329 15.1%

Canada 1 0.3% (4) -3.3%

Other Businesses 30 4.4% 41 6.6%

Unallocated expense (35) N/A (34) N/A

Segment operating earnings adjusted $ 339 11.5% $ 332 11.7%

ROIC* for Company

ROIC* for United States

ROIC* for Canada

(in millions of dollars) Nine Months Ended September 30,

2019Operating Margin % 2018

Operating Margin %

Segment operating earnings adjusted

United States $ 1,090 16.4% $ 1,037 16.0%

Canada (5) -1.3% (15) -3.1%

Other Businesses 87 4.4% 121 6.6%

Unallocated expense (91) N/A (109) N/A

Segment operating earnings adjusted $ 1,081 12.5% $ 1,034 12.2%

ROIC* for Company 30.4% 29.1%

ROIC* for United States 44.0% 44.9%

ROIC* for Canada -1.7% -4.5%

22

Irene Holman

Vice President, Investor Relations

[email protected]

847.535.0809

Monica Gupta

Director, Investor Relations

[email protected]

IR Contacts

mailto:[email protected]

mailto:[email protected]

q3 2019 earnings call · 2019-10-25 · note: reference slides 19 to 21 for gaap vs. non-gaap...

Documents