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#Hello, this is <UNK> <UNK>, Senior Vice President of Communications and Investor Relations.
With me is <UNK> <UNK>, Senior Director of Investor Relations.
The purpose of this podcast is to provide you with additional information regarding Grainger's first-quarter 2016 results.
This podcast is supplemented by our 2016 first-quarter earnings release issued today April 18, and other information available on our Investor Relations website.
This material contains forward-looking statements that are based on our current view of the competitive market and the overall environment.
Future risks and uncertainties could cause our actual results to differ materially.
Please see our SEC filings, including our most recent periodic reports filed on Form 10-K and Form 10-Q which are available on the Investor Relations website for a discussion of factors that may affect our forward-looking statements.
Tables reconciling non-GAAP measures accompany the script of this podcast and today's earnings release, which are both available on our Investor Relations website.
Today we reported our 2016 first-quarter results.
While we are currently experiencing economic headwinds and our short-term results are affected, we continue to manage the business for the long-term.
Our investments in eCommerce, KeepStock and supply chain including the New Jersey and Toronto distribution centers will provide and support growth for years to come.
We have also invested in tools and processes that will make us more productive including a new CRM system and SAP in Canada and Mexico.
Now let's cover the specifics for the quarter.
A stronger than expected January, due to carryover spinning from fourth-quarter customer shutdowns and favorable holiday timing, contributed to our sales performance.
The difficult economic environment and headwind from last year's sales of seasonal products and Ebola-related products were also considerations.
Solid expense management and the timing of planned spending offset some of the gross margin pressure.
In Canada, we completed the installation of SAP which will drive better service and increase productivity over time.
However, we saw a further slowdown in February and March due to the implementation which also had an unfavorable impact on expenses.
And our single channel online businesses of Zorro in the United States and MonotaRO in Japan posted continued strong performance.
Now let's look at the quarter in detail.
Company sales increased 3%.
We had 64 selling days in the quarter, one more than the previous year.
On a daily basis, sales increased 1%, reported operating earnings declined 10%, and net earnings were down 12%.
Reported earnings per share of $2.98 were down 3% versus $3.07 in the previous year.
The first quarter in both years contained restructuring items as noted in the press release issued today, April 18.
Please refer to the adjusted results found in the press release.
All results referenced in the remainder of this podcast are adjusted unless specifically noted.
Now let's walk down the operating section of the income statement in more detail.
Gross profit margins decreased 300 basis points versus the prior year to 41.8% driven by lower performance in the US and Canada segments.
Operating expenses for the Company declined 4% driven by restructuring benefits and the timing of planned spending.
Company operating earnings declined 5% versus the 2015 quarter.
This decrease was primarily driven by lower gross profit margins partially offset by lower operating expenses.
Company operating margins were down 110 basis points versus the prior year to 13.4%.
Net income was $199 million down 6%.
Earnings per share of $3.18 were up 3% from the 2015 first quarter.
Let's now focus on performance drivers during the quarter.
In doing so, we will cover the following topics.
First, sales by segment in the quarter in the month of March; second, operating performance by segment; third, cash generation and capital deployment; and finally, we will wrap up with a discussion of our 2016 guidance and other key items.
Before we begin our sales discussion, please note that some of our businesses have a different number of selling days due to local holidays.
For consistency we use the number of selling days in the United States as the basis for our calculation of daily sales.
Company sales for the quarter increased 1% on a daily basis.
The 1% sales growth included a 4 percentage points from Cromwell acquired on September 1, 2015, and a 1 percentage point reduction from foreign exchange.
Excluding acquisitions and foreign exchange, organic sales declined 2% driven by a 3 percentage point reduction in price and a 1 percentage point reduction in lower sales of seasonal products partially offset by a 2 percentage point increase from higher volume.
By month, daily sales were as follows: up 4% in January, up 1% in February and down 1% in March.
Let's move on to sales by segment.
We report two business segments, the United States and Canada.
Our remaining operations located primarily in Asia, Europe and Latin America are reported under a grouping titled other businesses.
Our other businesses also include results from our single channel online businesses in Japan, MonotaRO, the United States, Zoro, and Europe.
Sales in the United States which accounted for 75% of total Company revenue in the quarter were down 2% on a daily basis.
The 2% decrease was driven by a 3 percentage point decline in price and a 1 percentage point decline from lower sales of seasonal products partially offset by 1% from volume growth and a 1 percentage point contribution from increased sales to Zoro, the single-channel online business in the United States.
Let's review sales performance by customer and market for the quarter and the United States.
Government was up in the mid-single digits, light manufacturing and retail were up in the low single digits, commercial was down in the low single digits, contractor and heavy manufacturing were down in the mid-single digits, reseller was down in the low double digits and natural resources was down in the midteens.
Now let's turn our attention to the Canadian business.
Sales in Canada represented 7% of total Company revenues in the quarter.
The business in Canada continues to face a challenging economy given the country's exposure to oil and gas.
Results reported in US dollars were further affected by the strong US dollar.
Sales for our business in Canada declined 25% on a daily basis and 17% on a daily basis in local currency.
The 17% decline consisted of 14 percentage points from lower volume and 6 percentage points from the SAP implementation partially offset by 3 percentage points from price.
The Canadian business installed SAP on February 1, 2016.
As expected, the business experienced lower sales following implementation as team members became acclimated to the new system.
All customer end markets were lower in the quarter.
On a geographic basis, daily sales in the province of Alberta which represents about one-third of the Company's business in Canada was down 26% in local currency.
Local currency sales for all other provinces were down 10%.
Let's conclude our discussion of sales for the quarter by looking at the other businesses.
This group includes our operations in Europe, Asia and Latin America and represents about 18% of total Company sales.
Sales for this group increased 47% on a daily basis consisting of 33 percentage points from Cromwell acquired on September 1, 2015 and 17 percentage points of growth from volume and price partially offset by a 3 percentage point decline from foreign exchange.
Sales growth in the other businesses was driven by the strong performance from these single channel online businesses in the United States and Japan which grew 34% on a daily basis.
Earlier in the quarter, we reported sales results for January and February and shared some information regarding performance in those months.
Now let's take a look at March.
There were 23 selling days in March of 2016, one more than in 2015.
Company daily sales declined 1% versus March of 2015.
Sales results in March included 4 percentage points from acquisitions and foreign exchange was essentially flat for the month.
Excluding acquisitions, organic daily sales declined 5% driven by a 3 percentage point decline in price, a 1 percentage point reduction from the timing of the Easter holiday, a 1 percentage point reduction in lower sales of seasonal products and a 1 percentage point reduction in lower sales of Ebola-related products partially offset by a 1 percentage point contribution from volume.
In the United States, daily sales in March declined 5%.
This decline was due to a 3 percentage point decline in price, a 1 percentage point reduction from the timing of the Easter holiday, a 1 percentage point reduction in lower sales of seasonal products and a 1 percentage point reduction in lower sales of Ebola-related products partially offset by a 1 percentage point contribution from increased sales to Zoro.
March customer end market performance in the United States was as follows.
Government was up in the mid-single digits, light manufacturing was flat, retail was down in the low single digits, commercial was down in the mid-single digits, heavy manufacturing and contractor were down in the high single digits and natural resources and reseller were down in the midteens.
Daily sales in Canada for March were down 20% and down 18% in local currency.
The 18% daily sales decline consisted of a 16 percentage point decline in volume, a 3 percentage point decline from the SAP implementation and a 1 percentage point decline from lower sales of seasonal products partially offset by a 2 percentage point benefit from price.
The volume decline was seen in all customer end markets.
On a geographic basis, sales performance in Canada was driven by softness in the province of Alberta which was down 24% in local currency in March.
All other provinces were down about 18%.
Daily sales in March for our other businesses increased 41%.
The daily sales growth consisted of 31 percentage points from Cromwell and 10 percentage points from volume and was primarily driven by Zoro US and MonotaRO.
Performance for the other businesses was driven by 28% daily sales growth for the single-channel online businesses.
Our businesses in Latin America and Fabory in Europe were affected by the timing of Easter, where extended holidays are more common.
Turning to April, daily sales growth to date has benefited from the timing of the Easter holiday.
We are expecting low single-digit sales growth for the full month.
Now I would like to turn the discussion over to <UNK> <UNK>.
