GWW
#Good morning everyone and thank you for joining us
Even though our underlying operations performed is expected, given the number and the size of several fourth quarter adjustments, I thought the need to discuss them more in open detail
As <UNK> mentioned, <UNK> will cover several of the accounting adjustments as well but before we do that, I would like to share my thoughts on the performance of the business for the quarter
The fourth quarter was operationally in line with the expectations we shared in November at our Analyst Day, both from a sales and an earnings perspective
Our US business performed slightly better than expected given stronger sales performance in December in solid expense management
Our business in Canada was still underperforming is making progress and also met our expectations for the quarter with better than expected sales performance in the month of December
Both the US and Canada exceeded our sales expectation in the month of December, which we partially attribute to the favorable timing of the year and holidays and some customer year-end spending
Our single channel online business is primarily Zoro in the US and MonotaRO in Japan, continued to perform quite well, growing revenue and earning strongly in the quarter
So far, in January we're seeing some softness which we believe is related to extend the vacations that occurred in early January due to the timing of the New Year's holiday
In addition, January has a touch count both in the US and Canada
And in Canada, especially why that's some prebind that occurred prior to the new system implementation of February 1st last year
Now, this past year, we made strong progress towards positioning the business for better growth and performance in the future
Several examples include further realignment of the large customer Salesforce to focus on specific end markets
The launch of our inside sales team focused on medium-sized customers, the opening of our 1.4 million square foot new DC in the North East
We made significant progress on e-commerce both with our www
com and online model with the customer experience
We continued previously announced restructuring in the US and Canada including the closure of 69 branches, and we also initiated new pricing in the US which provide a more relevant price for new and noncontract customers across all channels including the web
Now, with that overview of the quarters of backdrop, I would like to now cover two of the adjustments that we reported today
First, our decision to write down a portion roughly half of the goodwill associated with the Fabory business; which was acquired in August of 2011. The impact EPS was $0.79. For those of you not familiar with Fabory, it is a fastener specials primarily focused in the Netherlands and Belgium
We have restructured this business on several occasions and we are seeing improved revenue and stable margins resulting from the current initiatives
And while we believe that business has potential for growth in the future
Our historical weak growth in margin performance caused us to revalue the long-term goodwill
Secondly, we took at $0.08 EPS impairment charge for some intangible assets related to our business in Columbia
Both Fabory and Columbia are fastener specials and outside of our broad line MRO portfolio
We have been taking action in the last couple of years to make sure that we focus on our core broad line MRO markets in developed economies
So, with that I would like to turn it over to <UNK> to discuss the remaining adjustments
Thanks, <UNK>
Well, I'm certainly not pleased with the need to make these adjustments in 2016. The underlying business generally met our expectations
As a result, we reiterated our sales in EPS guidance for 2017. As I mentioned earlier, we made significant changes to the business over the last year and I am excited about the future prospects for growth and profitability for the business
We are focused on our core businesses in North America, the online model in the UK
We generated $1 billion in cash flow at 2017. We expect to see free cash flow continue to grow as we will not need to spend as much in the coming years on capital expenditures as we have in the recent past
So, with that, I'd like to open the call for questions
Question-and-Answer Session
Yeah, go ahead, <UNK>
Sure, <UNK>
So, we are constantly in communication with our suppliers on price increases from our supplier community
We had some pressure in some categories but overall the pressure's been relatively modest and we don’t expect to have significant price increases throughout this year
So, we're expecting it to be relatively stable on that front
In terms of Canada, as we went through the transition with the system last year, given some of the service challenges we did not pass through a price increase that otherwise we would have been passing through last year
We have started that process now and through the first half of the year, we will be increasing prices in Canada to reflect the market
So, given what we see and there is always a lag for us
So, in terms of the commodities increasing, it takes a while for that to flow through the supplier base
At some point of commodity stay at elevator levels for a longer period of time, we typically will see some supplier cost increases and we will then pass those through
But it hasn’t been long enough yet to really force that to happen
Thank you
I'll turn that over to <UNK>
Let me try to understand the question
So, on the branch organization, is that what you are asking?
So, we now have a little 252 branches in the US
I'll focus in the US for this discussion
We've gone from 420 to 250. We've actually seen stability and even some growth in branches with those existing buildings and the volume that goes through them is quite profitable
So, we will always evaluate the branch and the branch footprint but right now we like what we are seeing out of the branches that remain open
And so, we right now wouldn't make sense for us to take any additional restructuring given what we're seeing in terms of volume into those branches
Oh, for oil and gas
Question into direct is, US of oil and gas direct is 2 arguably oil and gas has a fairly significant impact on heavy manufacturing so I don't know that we fully know but I would say organizations that produce large machinery, given oil and gas have been very affected by that and so we have seen that heavy manufacturing getting hit in the US as a result probably less than 10% of our total US business and that probably is stabilizing now as well
Probably just Canada, the timing of the recovery and margins in Canada like <UNK> said it's going to the pricing actions are going to be over the first six months and so that's going to ramp up over a longer period of time than you'd expect to see in the US from a pricing perspective
Good morning
Yeah
So, that it would be more small projects rather than large projects, <UNK>
It would still be MRO but if people are doing maintenance cleanup projects in a bigger way, sometimes will have somewhat larger orders
The order pattern had some of that but it wasn't tremendously high volume
Generally the volume was good across the broad in December and so I wouldn't read too much into the project business
I think the government flow has been very, very consistent, we continue to do very well, the military with federal government and we saw some state government strength as well
It is across the board, although the bigger head is in the energy and resource business given where volume is and that's been more challenged throughout the entire year last year
I would say that's true
Thank you, <UNK>
This is an implication at the moment
Good morning
Good morning
I think it's a little early to tell
I think some of the points you make are certainly on point, I think on US a lot this may in fact be timing and seasonal
I think in Canada there is a specific issue for us which is last January there was a lot of customer pre-buy before we went live with the system and so Canada will let goofy in both January and February
February will be a very easy compare and January is a very hard compared given the flow of what happened around that
Other than that I think we don't see any reason to think the underlying demand has changed dramatically
Not materially
A little bit better but not material
Just because the thing is when you pre-buy, right, those rebates gets capitalized, you don't take those to the P&L
So, just to give you a little bit of history that the thesis when we got that, that those are really two pieces of the thesis
One was we could expand in Central Europe through a branch expansion strategy, the other was that we could diversify its product portfolio and make it a broad liner
We really struggled with those two, the first couple of years we had the business
We ended up having to reverse course, refocus it on fasteners, it is a fastener specialist
I think there is benefits to having specials in the portfolio
I think we understand how specialist compete
Having Fabory in the portfolio and we certainly get benefits from faster buy, from the company
But that said, it's not core to what we do
Right now we need to get it performing
We need to be performing better, we need to increase profitability, get it growing but we will always consider both term but what to do with the business but we are optimistic about the path it's on and we need to continue that path first before we consider alternatives
Now, thanks
I think that Zoro's business will be very close to MonotaRO's overtime
And we continue to see expansion, we think it's going to be in the 8th this year in terms of operating margin and it will continue to get do that double digit number
Really the difference is advertising spend as we grow, so we invest a bunch to grow the business in Zoro
We are still acquiring customers that are really high rate
And as that business becomes more modest in its growth, more like MonotaRO, we would expect them the margins to be pretty much the same overtime
Good morning
Well it's really a combination of both
The fourth quarter was a easier comp and the first quarter is a tougher comp
So, there is a couple of swings to account for but I would just reiterate that especially in Canada where we saw a real pressure on margins in this last year
The challenge will be recovering that through pricing actions in the first half of the year
Those won’t happen just in the first quarter
Yeah, that's a big part of it
And then the comps
It's -1.
Good morning
We will trigger it by actively pursuing many customers and then states as well
So, we have installed completely new processes over the last year at a new system support for sellers to help make them more productive
On the inside sales team, we're giving them much more clarity on who to call on, how frequently to call, what the returns are on those calls, I think we have got a long path for improvement here since we are very early in that process and figuring it out but it's pretty exciting in terms of the data we have now and the ability to drive improvement going forward
On the inside sales team in particular?
Yeah, it's going to take probably 15 months to two years for any individual seller to get to full productivity typically
So, great I think we ---+ okay
So, thanks for the time, I really appreciate everybody being on the call
I would just summarize it the quarter basically from an operating perspective was at or maybe slightly above expectations
Hopefully, we helped to explain some of the unusual items that we had in the quarter and we are holding on guidance for 2017 and we are certainly excited about what we have done in 2016 to prepare ourselves to grow and gain profit going forward
So, thanks for your time
