GWW
#Thanks <UNK>, and thanks everyone for joining us today
So the main event as <UNK> implicated was price for the quarter
And as we discussed in November, we are laser focused on creating value for our customers
Customers value our product breadth and delivery capabilities, they value our sales and service model for large customers, and they value our strong customer service capabilities overall
But we all know that our prices have been a significant source of dissatisfaction for our customers
And we really haven't been able to leverage digital capabilities like digital marketing to acquire new customers and to grow with existing customers
As a result, we've taken action to improve our pricing, so that we can grow share with existing customers and attract new customers
Now in the quarter the volume response to the pricing changes was faster, more immediate and stronger than we anticipated
Given this response, we've made the decision to accelerate our pricing actions this year
This is absolutely the right thing to do for the business and it provides Grainger with a sustainable long-term platform for future growth
It allows us to market our offer more aggressively
The decision to accelerate involves a large GP write-down in the short-term, but it is accretive to earnings over the long-term
Ron is going to talk about the changes to guidance as a result of this acceleration later in the call
Before I go into more detail on pricing, I’m going to talk about Company results for a few minutes
Now as a reminder, this morning's call is going to focus really entirely on adjusted results which exclude restructuring
So revenue in the quarter was up 1%, volume was healthy at up 5%
Our gross profit and our operating margin were significantly impacted by the pricing actions which we mentioned before
Operating earnings were down 14%, operating cash flow was actually up 13% driven mostly by working capital
So I am going to talk about non-U.S
businesses first; so our other businesses which includes our online model and our businesses in LATAM, Europe and China performed as expected
Other business sales were up 12% and that includes a 3% headwind from foreign exchange
Operating earnings for the segment were up 45%
Now the online business is driven by MonotaRO in Japan and Zoro in the U.S
continued to deliver strong sales growth of 23% and the operating margin in those businesses expanded by 100 basis points, so great progress with the online model
Switching to Canada for a moment, our sales increased 1% in local currency
The good news here is that our service levels have stabilized and we're hearing very good things from our customers in terms of those service levels
We started pricing actions in Canada where contract customers were implementing additional price increases that really are going to offset currency related COGS inflation
As you might recall, during the ERP implementation, we did not take price increases that related to currency translation we otherwise would have
The service stabilization took longer than anticipated and that has delayed the realization of our price increases
For non-contract customers, we are introducing – also introducing market-based pricing somewhat to that in the U.S
In the quarter, gross margin in Canada declined 270 basis points versus the prior year and while price increases have lagged our plans, we have seen sequential improvement month-by-month in the first quarter
Year-over-year in Canada, our operating expenses were up and that's really impacted by two things
The first is 2016 had the sale of the old Toronto distribution center that obviously did not repeat this share
So that was a gain or a benefit in 2016, not repeat in 2017. And the other is we reinstated the annual sales meeting this year which did not take place as we went through the ERP limitation in 2016. Based on continued service improvements, based on the pricing actions we are taking and starting to see some progress on and based on the strong cost actions we will put in place, we still plan to breakeven as we exit 2017. And as we go forward more fully describe our actions and progress in Canada in the coming months
So turning to the U.S
results are really all about the strategic pricing actions that we are taking
Sales in the U.S
were down 1%, but volume was up 4% entirely driven by price
So let's talk about pricing
As we discussed in November, our price structure has been a period of growth across the business
With midsized customers, it has hurt our ability to acquire new customers and it also hurt our ability to penetrate midsized customers
With large customers, pricing has been a barrier to capturing all of the volume with customers, our customers tell us time and again that they want to consolidate their purchases with us, but our price has been a barrier to that spot buy
So we took action in the quarter to lay the foundation for sustainable share gain and customer acquisition
In January, we adjusted list prices to support large customers consolidating their purchases
That resulted in some list prices going up and some going down
That was a huge change from a list price perspective in the quarter
In early February, we introduced web pricing for about 450,000 SKUs, which is essentially market based pricing
To get that pricing customers today have to opt in to that price online or on the phone
We also continue to negotiate large customer contracts with the updated pricing structure that's a process that we started in the fourth quarter of 2015. As a reminder, large contract customers generally have competitive prices
We're adjusting the structure to make it more attractive for them to consolidate all of their volume with Grainger
So our initial results from the pricing actions have been positive
We saw stronger than expected price elasticity on the list price changes that means both places where we've raised prices and places where we've lowered price
For large and midsized non-contract customers who opted into our web pricing program, volume had been declining at double-digits and is now growing at mid-single digits
Now this is off a relatively small base, but it is a representative base, it represents only a third of our assortment, and we have not yet been able to market web prices aggressively given the requirement for customers to opt into the new pricing
For contract customers where we have implemented pricing changes for the spot buy purchases
Our results are quite encouraging, total volume growth for these customers has increased from 4% to 9%
We've now work through enough contracts to get a feel for how customers will respond to these changes and these customers are very supportive of these changes
Overall, we've also seen customers buying at their new price points versus requesting quotes
This is a good sign it affirms that more relevant pricing simplifies the process and makes Grainger easier to do business with
So spending a moment on volume, we've seen the strongest volume growth in two years for the quarter
And we expect to see volume grow in the U.S
, about 6% for the year and while some of this is certainly a slightly improved market, our volume performance this year should be improved on a relative basis
So we're excited about the volume trends
Now based on these results, we've made the decision to accelerate our pricing actions into 2017. The actions will begin in the third quarter and will include three things
We will introduce web prices on the entire assortment SKUs and eliminate the opt-in requirement at that time
We will add digital marketing under the Grainger brand
So we are going to use digital marketing to acquire customers under the Grainger brand, which we've not been able to do, and we're going to accelerate the large contract customer negotiations during the period between now in the third quarter
We are excited about these actions and we expect them to speed up customer retention efforts to accelerate our customer acquisition and help us gain back the spot buy volume, and we will also help us simplify our pricing structure and accelerate our ability to lower expenses relative to our price complexity today and it also allows to put the pricing change behind us faster, enabling stronger sales growth and improved operating margins
With these changes, there is obviously an impact this year Ron will talk about, but we do expect to be back on track to hit our 2019 guidance, operating margin of 12% to 13%
Importantly, we are going to eliminate a significant barrier for our customers, while we won't have the lowest price in the market, we will be competitive which will be a very attractive for our customers given our industry leading supply chain and service model
Ron is going to talk about guidance in a minute, but our expectation is that the pricing acceleration will allow us to change our trajectory and get back to our long-term operating margin guidance by 2019. To do that we are going to have to continue on the cost leverage path that we have been on for the last few years
Now to be clear, this is a huge change for Grainger
It's not an easy one to execute, but this is absolutely the right thing to do
We will be more competitive
We will provide a much better customer experience and we are going to allow Grainger to compete leading with our strikes
So with that, I will turn it over to Ron
Cost productivity is a key component to making sure that we achieve our forward-looking goals, I think it's important to understand the progress that we've made on cost
So the chart shows that over the last four years, we've demonstrated an ability to manage expenses and to drive productivity and we're going to continue to do so going forward
We generally look at both expense to sales and expense to COGS, which is more of an activity metric to measure our progress
And you'll hear more from us as we go through the year on how we're going to get to 2019, but continuing this cost leverage path is going to be a very important part of that story and we feel like we've got strong momentum here to continue to improve our cost structure
So overall, it was a challenging quarter, but we are very focused on what matters to drive value
We continue to be encouraged by the growth and the profit improvement of our online businesses, we've stabilized service levels in Canada, we need to do a lot more to improve both price realization and the cost structure of the business
, the pricing acceleration is going to allow us to be more aggressive in our marketing efforts to drive market share gains and to allow new customer acquisition with the Grainger brand
Most importantly, we are completely focused on creating a flawless customer experience
So a change of this nature is challenging and it's complex
We know this is the right thing to do for the long-term success of the business and we are committed to making the changes needed to accelerate growth and to get back to the profitability that we expect
So with that, I will open it up to questions
Question-and-Answer Session
Good morning
I think it's a great question
And our expectation now is that we were more than breakeven in terms of profit dollars as we get the volume growth and improve our cost structure to get the operating margins back to our expectations
So it's a significant challenge in 2017 and 2018, but by 2019 we feel like our profit dollars will be at or higher than they would otherwise have been
It’s a great question
So I would say that the behavior at a customer level, so if you think about large customers who go along the new pricing model or small, mid-sized customers that opt-in to web pricing was exactly as we would have expected
I think the web pricing uptick was maybe a little higher without doing any marketing that which will be expected, but generally those two were as expected
The big change was when we altered the list prices that had a big impact – a bigger impact than we expected both on prices that we raised and prices that declined
And so that had an immediate impact that we were not fully expecting and that has been the biggest part of the surprise
Now that's long-term not particularly relevant because we will get out of the list price game and we will go to web prices and so web prices are going to be the full story
But in the short-term that has been the biggest surprise that we have
And I would just add a point, we've been talking for probably close to 10 years about unfavorable customer mix and when we make these changes, our expectation is by 2019 that's not going to be the story that we're going to have a favorable mix and start growing parts of the business that haven't been growing that are actually more profitable
Well, so that the short answer <UNK> is that it's not – it’s very similar to what we always expected in terms of the price impact overall
So the difference here is we had talked about moving the large customer contracts over three years to four years
And so we had spread out that impact over a longer period of time than we're talking about now
But the overall impact is very similar to what we always expected and most of the impact is re-pricing - resetting the price for customer acquisition and for spot buy for large customers and given the mix of our business, the spot buy for large customers initially is actually probably the bigger impact, what is the bigger impact, but none of the total expectation of impact is changed at all
So let me talk about the cost structure, maybe broadly
So on the branch issue, I think most people are familiar we've gone from [420 to 250] branches in the U.S
So we're relatively pleased with what we're actually seeing from the volume perspective in those remaining 250 branches and that's been a big shift from the recent past
The other thing to consider here is that these price changes are likely to have an impact on volume through those 250 branches, because a lot of those customers find sticker shock in our branches when they – especially small ones when they walk into them
So we want to watch that very closely, but we have a very well developed muscle for evaluating branch profitability
Overall, I would say that more of our volumes going to eCommerce, no question, winning based on eCommerce capabilities is absolutely critical
More of our volume is being shipped
Continuing to invest in our physical distribution capabilities outside of distribution center just important as a way to create competitive advantage and widen our competitive advantage
There is some changes we're making to areas like the contact centers where we are consolidating contact centers and lowering our cost in contact centers and to my point earlier, we are getting rid of cost, really in every part of the business
Our expectation is that we will get more productive in the sales force, more productive in the distribution centers, more productive in the branches, in headquarters, all of that needs to improve and that's going to be a big focus for us
So we are going to over communicate on what we're seeing from the changes we make
My expectation is that we will see the volume growth that we're talking about that will be a signpost, the expense to COGS will be a signpost and we'll talk a lot about what actions we're taking, what we're seeing from a productivity perspective
But I appreciate your comment and your question
The reality is that this is the biggest change and we had not changed enough prices yet in November to exactly know what was going to happen and it was improved at that point to talk about acceleration, we didn't know we are going to accelerate; now we do
It is a change I recognize that it's a difficult change, but we're going to basically track very closely what we're seeing from a volume, from an expense to COGS perspective, from a customer satisfaction perspective, from a customer acquisition perspective
The reality is we have not been able to acquire a customer into the Grainger brand for years and we are now going to start acquiring customers for the Grainger brand starting in the third quarter
And so that's a big shift for us and one that we're really excited about and we're confident we are going to get the results
Hi, <UNK>
So we certainly don't
Our experience with prices that we change would suggest that we are absolutely not in a race to the bottom
When we have competitive prices and they're in the ballpark we are winning the business and it allows our customers to consolidate their purchases with us
So I’m not going to talk about specific competitors, I would say there are a lot of competitors in the online space who have competitive prices, some of which are growing, many of which are growing
So when we look at the entire competitive landscape for us and going forward, we feel like having competitive prices at least in the ballpark
This price is really, really important to be able to leverage the full suite of tools that we have to grow the business to create the customer experience we need
And so there's just so many different types of competitors out there in our space that I don't think you can sort of talk about one
The whole market, we have to understand and as we look at the whole market, we are going to have prices that are competitive that makes sense and it's going to enable us to acquire new customers and to grow the existing customers
We're broader for one I guess than most of the competitors and I'm not sure who exactly you're talking about specifically, but certainly we are broader
I would also say that some of those competitors may not be talking about it, but they've already taken action in some of the things that they've done to try to mitigate it as well
So just depends - it depends who you're talking about, but we're confident in the decision we're making that it's the right thing to do
We are not going to have the lowest price
We're going to be competitive
We are going to be in the ballpark and it’s going to give us the opportunity to grow the business
Without getting into too many details, <UNK>, the good news as we know the impact of the list price change, the open web change, the changes that we've made and so we can quantify those
We would expect of course the second quarter to look similar to the first quarter in the sense that we're not making changes until the third quarter
And then the changes we make in the third quarter are similar to some of the changes we made in the first, so we're able to get reasonably comfortable with the range and that’s where that comes from
So doesn't entirely go away and we'll provide more information as we go
Red Pass is the program that also includes a free freight component for customers that will stay and depending on the type of customer there may be specific pieces of the program that make sense to the different based on the segment
So it doesn't go away entirely certainly once we have open web, the price difference between Red Pass and what customers see will be very, very small
So that is a big difference
So Christy, I would say couple of things
First of all, when we track 20 competitors on customer service metrics and on their perceptions of us, I would not actually say that our service advantage has been diminished
I would actually say we are stronger now than we've been in the 10-year that I've been with the Company on that dimension
The ability to get complete orders to customers quickly, the ability to provide great experience on the web side, on eCommerce channels and our sales force and service model with large complex customers get very, very high marks and actually higher than they've gotten historically
So I would necessarily say that's true
In terms of terminus, we're confident that we're in the ballpark from a pricing perspective
We're going to be able to grow the business
We've done a lot of work to understand what those price points are
We've analyzed it, as you might guess quite a bit
And so we're pretty comfortable that that we're going to be in a place to expand margins, operating margins, assuming we continue to get the cost leverage we've gotten
We will continue to do that, but we're pretty confident the price points were likely to end at that
So from a list price perspective, when we made the changes January 1 about two-thirds of the price has changed
There were more down than up’s at that time, but there certainly were items where we were not priced high enough and we made those decisions as well
We feel like the web – we've obviously done a lot of work already to know where web price needs to be
There are some items that we were just priced incorrectly
But in general, we will be more competitive and we will be in the ballpark and that's the strategy that we have
Well, it's less typically around product categories than SKUs within categories actually where we will see the changes that we had to make
So they weren't broad categories that we had to lower a bunch or increase a bunch in general and most of it was actually within the category where the numbers were interesting
So we've set the new pricing for fairly broad swaths of customers and we have not seen anything particularly interesting by customer end market
So we haven't seen differences for manufacturing, healthcare or commercial at this point
We have not seen big differences in terms of the reaction
And we are going to talk a lot more about Canada over the next couple of months, but they're over 50% direct-to-customer today and given the ERP change, there is still some fairly inefficient things that are happening to serve customers today
We will improve that over the next six months, so we've got a lot of room to improve and we still feel like 70% probably where we're going to end up in terms of direct-to-customer in Canada
That stills a fairly reasonable number for us
Well, I would say primarily because for large our complex customers, they have competitive prices already
What we're doing is trying to give reasonable prices in the spot buy and that is unlikely to drive significant competitive response when you do that that’s really the way we're thinking about this
The other thing is we just look at prices and what's happened with pricing in the market over time
Our need to reset price is not really based on competitive changes in the marketplace, it's really based on our own pricing and what our customers are asking for and how they buy
So we don't see the market racing to the bottom in general and we really haven't seen that over the last few years
So competitive dynamics, we are pleased with what we're seeing out of that business
We started the Cromwell direct business
Part of the thesis for buying that business was they had the supply chain and product range that allowed us to build the online model
We're seeing very nice growth with that portion of it
Currency and Brexit has had an impact on the UK economy, but the business is actually performing quite well
I would say Europe generally favor
We actually saw some decent growth in the first quarter as well
So really the entire international portfolio right now I'd say we feel like there is lots of opportunity to grow and grow margins and so in the UK we're happy with our position right now
So we manage inventories to service level expectations generally and so we are very good service levels right now in the U.S
and in most of our businesses
So in general, we're pretty happy with our inventory levels
Obviously, as you grow the business you have to add some inventory
Typically we get some productivity out of the inventory pool and don't have to add as much inventory as the growth requires
Ron do you have anything to add?
Right
Yes
That's right
That's our expectation
So in any period that's a fairly narrow period of time, if you reduce price, you will not get the volume back right away
Customers have to realize and particularly customers have to realize that our prices are now more reasonable in order for them to start buying with some frequency
So we've done a number of trials over the last three years to get comfortable with this, both with smaller customers – midsized customers through Red Pass, large customers by contract negotiations in every one of those when you change price right away, you don't get enough volume to make up for, but over time, it's actually quite attractive
So that gives us a lot of confidence in the path we’re heading now
Well, so I think it's best to talk about large complex customers on that dimension
So large complex customers often have contracts, they might have specific items that are in the contract, they might have categories that are in the contract, but they also have a discount off of list for their slow moving items
When we talk about mix, one of the things we're trying to do is to make sure that we are attractive for the entire bundle and the entire bundle would includes slow moving items and those would be better than the average margin for us, but also very attractive prices for them because those items very frequently
So we're trying to make the price structure makes sense, so that we can consolidate the entire purchasing for customers and we find customers respond very, very when we get there
Well, I don't know that there's really any – I mean with the changes complex in this challenge
I wouldn't say there's any lower hanging fruit necessarily
I would say that we are – we have built muscles around two areas that I think we are going to be very exciting for us
One is, when we get the price that right with large customers driving that volume
Our sales and service model with large complex customers is very effective
The other is our digital capabilities and when we get prices that are reasonable and we can start marketing those prices digitally that's going to help drive volume and we're very confident about that too
So those are two things that we're doing that I think is going to be very, very helpful to driving growth into the business and so we're going to track our performance against those two very, very closely to make sure that the price strategy translates into growth and translates into the customer experience and in the margin
It's not that different, I think even we had that in Q&A, if I remember in November
We talked about kind of GP being in that for the Company that 39% range, falling below 40%, but not below 39%, probably falls below 39% next year and then bounces back in 2019. As the mix in the volume benefit from mix outweighs the pricing changes, which we kind of lap as we exit 2018.
That's exactly, that's the right way to think about it
So we are being much more aggressive, much faster in terms of getting the prices reset on that volume
Good morning
So, if I understand your question correctly, I would say that the volume growth is a mix of getting that spot buy volume with large customers and acquiring new mid-size customers and penetrating them and we think we're going to get volume out of both
I would say that our experience with the online model would suggest both of those are actually pretty sticky when you've got a strong supply chain, you provide great service
So our expectation is that we'll be able to get growth both through our large contracts and through new customer acquisition with the changes we're making
Yes, I would say – yes, I’d also add that the cost leverage is in a world where you have that much price decline
We are getting significant cost leverage on an activity basis on a COGS basis, but it's a challenge obviously when you have that much price deflation
So thanks everyone for joining the call
Obviously it was a challenging quarter
I just want to conclude by saying that we are facing into the challenges we have, we're facing into them with that the information that we have now and we are confident this is the right thing to do for the long-term health of the Company
We obviously wouldn't be taking these actions if we didn't think they are right for our customers and for creating value over the long haul
There is no question about that, but we are aligned as a team, we are fully committed to making this work to driving the volume growth and to getting the margins back to where they need to be
So appreciate your time today and we'll see you soon
