q1 2019 earnings call · note: there were 63 selling days in q1 2019 one less than q1 2018....
TRANSCRIPT
Q1 2019 Earnings CallW.W. Grainger, Inc.
April 22, 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 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 adjusted operating earnings, adjusted segment operating earnings, 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) Q1 2019 Q1 2018% vs. PY
Fav/(Unfav)
Sales $ 2,799 $ 2,766 1%
GP 1,095 1,092 0%
SG&A 732 757 3%
Op Earnings $ 363 $ 335 8%
EPS $ 4.48 $ 4.07 10%
(% of sales) Q1 2019 Q1 2018bps vs. PY
Fav/(Unfav)
GP Margin 39.1% 39.5% (40)
SG&A Margin 26.2% 27.4% 130
Op Margin 13.0% 12.1% 90
• Reported results included restructuring items that resulted in a $2 million charge to operating earnings and a negative $0.03 impact to EPS
• The remaining slides reference adjusted results, which exclude restructuring charges in Canada.
Q1 2019 Reported Results – Total Company
Note: There were 63 selling days in Q1 2019 one less than Q1 2018. Numbers may not sum 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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-5%0%
9%
-2%
15%20% 18%
14%
16%
9%
-5%
5%
15%
25%
35%
Q1 Q2 Q3 Q4* FY
2017 2018 2019
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.
U.S. Large: daily sales growth on $6.8 billion of revenue
U.S. Midsize: daily sales growth on $1.0 billion of revenue
1% 2%4%
2%
6%
9% 8%6%
7%
5%
0%
5%
10%
15%
Q1 Q2 Q3 Q4* FY
2017 2018 2019
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Performance Expectations 2019 and Beyond
• U.S. revenue to grow 300 to 400 basis points faster than market
• Canada volume stabilization and profitable growth
• Accelerated growth of endless assortment model
• Strong SG&A leverage
• Continued operating margin improvement
• Maintaining 2019 Guidance
Note: Guidance as of 4/22/2019.
Tom OkraySenior Vice President and Chief Financial Officer
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Q1 2019 Adjusted Results – Total Company
• Daily sales increased 3.0%, 4.0% on a constant currency basis
• Constant currency daily sales increased 4.5% after normalizing for a prior year change in accounting estimate, composed of:
• Volume growth of 3.0%
• Price inflation of 1.5%
• GP rate normalized for the timing of the N.A. sales meeting declined 15 bps
• Operating margin normalized for the timing of the N.A. sales meeting increased 80 bps
Note: There were 63 selling days in Q1 2019 one less than Q1 2018. Reference slides 19 and 20 for GAAP vs. non-GAAP reconciliation. Numbers may not foot due to rounding.
($ in millions)Q1 2019 Q1 2018
% vs. PYFav/(Unfav)
Sales $ 2,799 $ 2,766 1%
GP 1,096 1,092 0%
SG&A 731 749 2%
Op Earnings $ 365 $ 343 6%
EPS $ 4.51 $ 4.18 8%
(% of sales) Q1 2019 Q1 2018bps vs. PY
Fav/(Unfav)
GP Margin 39.2% 39.5% (30)
SG&A Margin 26.1% 27.1% 95
Op Margin 13.0% 12.4% 65
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Q1 2019 Adjusted Results – United States
• Daily sales up 3.5% vs. prior year, up 4.5% after normalizing for a prior year change in accounting estimate, composed of:
• Volume up 2.5%
• Price up 1.5%
• Intercompany sales growth 0.5%
• GP rate normalized for the timing of the N.A. sales meeting was up 35 bps
• Operating margin normalized for the timing of the N.A. sales meeting increased 50 bps
• Incremental margin of 31%
Note: Reference slides 19 and 20 for GAAP vs. non-GAAP reconciliation.Numbers may not foot due to rounding.
($ in millions)Q1 2019 Q1 2018
% vs. PYFav/(Unfav)
Sales $ 2,149 $ 2,108 2%
GP 869 850 2%
SG&A 505 497 (1%)
Op Earnings $ 364 $ 353 4%
(% of sales) Q1 2019 Q1 2018bps vs. PY
Fav/(Unfav)
GP Margin 40.5% 40.3% 15
SG&A Margin 23.5% 23.6% 15
Op Margin 17.0% 16.7% 30
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Q1 2019 Adjusted Results – Canada
• Daily sales down 24.0% vs. prior year, down 20.0% on a constant currency basis:
• Price up 4.0%
• Volume down 24.0%
• SG&A favorable 33% vs. prior year due to 2018 cost take-out actions
Note: Reference slides 19 and 20 for GAAP vs. non-GAAP reconciliation. Numbers may not foot due to rounding.
($ in millions)Q1 2019 Q1 2018
% vs. PYFav/(Unfav)
Sales $ 136 $ 182 (25%)
GP 42 59 (28%)
SG&A 45 68 33%
Op Earnings $ (3) $ (9) 60%
(% of sales) Q1 2019 Q1 2018bps vs. PY
Fav/(Unfav)
GP Margin 30.9% 32.2% (125)
SG&A Margin 33.7% 37.3% 365
Op Margin (2.7%) (5.1%) 240
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Q1 2019 Adjusted Results – Other Businesses
• Daily sales increased 9.5%, 12.0% on a constant currency basis:
• Price and volume up 12.0%
• Performance driven by 22% daily sales growth for the endless assortment businesses
• Operating margin decline impacted by growth investments in the Zoro U.S. business and performance at Cromwell in the U.K.
Note: Endless assortment businesses include all Zoro businesses and MonotaRO in Japan. International portfolio comprised of Cromwell, Fabory, Mexico, other Latin America businesses and China. Reference slides 19 and 20 for GAAP vs. non-GAAP reconciliation.
($ in millions)Q1 2019 Q1 2018
% vs. PYFav/(Unfav)
Sales $ 633 $ 588 8%
GP 185 183 1%
SG&A 155 146 (7%)
Op Earnings $ 30 $ 37 (20%)
(% of sales) Q1 2019 Q1 2018bps vs. PY
Fav/(Unfav)
GP Margin 29.3% 31.1% (190)
SG&A Margin 24.5% 24.8% 30
Op Margin 4.8% 6.4% (160)
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Reiterating 2019 Guidance
Adjusted
Q1 2019A 2019E
Progress vs.
Guidance
Sales ($ billions) $2.8 $11.7 – $12.2% vs. prior year (daily, constant currency)** 4.5% 4% - 8.5% On TrackU.S. Market (price + volume) 2% to 2.5% 1% - 4%
Gross Profit Margin 39.2% 38.1% - 38.7%bps vs. prior year (15)* (60) – 0 On Track
Op Margin 13.0% 12.2% - 13.0%bps vs. prior year 80* 20 - 100 On Track
Tax Rate 25.4% 24.5% - 27.5%
EPS $4.51 $17.10 - $18.70% vs. prior year 8% 2% - 12% On Track
Note: Guidance as of 4/22/2019. Reference slides 19 and 20 for GAAP vs. non-GAAP reconciliation.
*Normalized for the timing of our N.A. sales meetings. **Daily organic sales exclude the impact of the prior year cash basis accounting change
Closing Remarks
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Q&A
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Appendix
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• Commercial: up High Single Digits
• Retail: up Mid-Single Digits
• Heavy Manufacturing: up Mid-Single Digits
• Government: up Mid-Single Digits
• Contractor: up Mid-Single Digits
• Natural Resources: up Mid-Single Digits
• Light Manufacturing: up Low Single Digits
Q1 2019 U.S. Sales By Customer End Market
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Quarterly Daily Sales
Q1 2019 Daily Sales on a Constant Currency Basis*
Month Company
January 4.0%
February 4.0%
March 5.0%
Q1 Daily Sales 4.5%
Q1 2019 Daily Sales vs. Q1 2018
Drivers Company United States Canada Other Businesses
Volume 3.0% 2.5% (24.0%) 12.0%
Price 1.5% 1.5% 4.0% --
Intercompany -- 0.5% -- --
Foreign Exchange (1.0%) -- (4.0%) (2.5%)
Prior year change in accounting estimate (0.5%) (1.0%) -- --
Change vs. Prior 3.0% 3.5% (24.0%) 9.5%
% 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
* Normalized for lapping of prior year change in accounting estimate
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Q1 2019 GAAP to Non-GAAP Reconciliations
Three Months Ended March 31, %
2019 2018Operating earnings reported $ 363 $ 335 8%
Restructuring (United States) - 3
Branch gains (United States) - (7)
Restructuring (Canada) 2 11
Restructuring (Other Businesses) - 1
Subtotal 2 8
Operating earnings adjusted $ 365 $ 343 6%
Three Months Ended March 31,
2019Gross
Profit % 2018Gross
Profit %
Gross profit reported $ 1,095 39.1% $ 1,092 39.5%
Restructuring (Canada) 1 0.1 - -
Gross profit adjusted $ 1,096 39.2% $ 1,092 39.5%
Three Months Ended March 31,
2019 2018
Bps
impact
Gross profit margin adjusted 39.2 % 39.5 % (0.30)
North American sales meeting timing (0.3) (0.5)
Gross profit margin normalized 38.9 % 39.0% (0.15)
Three Months Ended March 31,
2019 2018
Bps
impact
Operating margin adjusted 13.0% 12.4% 0.65
North American sales meeting timing 0.3 0.1
Operating margin normalized 13.3% 12.5% 0.80
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Q1 2019 GAAP to Non-GAAP Reconciliations
(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 March 31, %2019 2018
Net earnings reported $ 253 $ 232 9%
Restructuring (United States) - 2
Branch gains (United States) - (5)
Restructuring (Canada) 2 8
Restructuring (Other Businesses) - 1
Subtotal 2 6
Net earnings adjusted $ 255 $ 238 7%
Diluted earnings per share reported $ 4.48 $ 4.07 10%
Restructuring (United States) 0.01 0.05 Branch gains (United States) - (0.13)
Restructuring (Canada) 0.03 0.19
Restructuring (Other businesses) - 0.02
Restructuring (Unallocated expense) - 0.01
Total pretax adjustments 0.04 0.14
Tax effect (1) (0.01) (0.03)
Total, net of tax 0.03 0.11
Diluted earnings per share adjusted $ 4.51 $ 4.18 8%
Three Months Ended(in millions of dollars) March 31,
2019 2018 %Segment operating earnings adjusted
United States $ 364 $ 353
Canada (3) (9)Other Businesses 30 37
Unallocated expense (26) (38)
Segment operating earnings adjusted $ 365 $ 343 6%
Company operating margin adjusted 13.0% 12.4%ROIC* for Company 31.3% 28.9%ROIC* for United States 45.1% 46.8%
ROIC* for Canada -3.9% -7.3%
*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 2-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 (2-point average of $307.8 million), deferred taxes, and investments in unconsolidated entities, plus the LIFO reserve (2-point average of $400 million). Working liabilities are the sum of trade payables, accrued compensation and benefits, accrued contributions to employees' profit sharing plans, and accrued expenses.
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Irene Holman
Vice President, Investor Relations
847.535.0809
Monica Gupta
Director, Investor Relations
IR Contacts