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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 fourth-quarter 2015 results.
This podcast is supplemented by our 2015 fourth-quarter earnings release issued today, January 26, 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 our 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 and are both available on our Investor Relations website.
The macroeconomic conditions faced by our industry in 2015 are well documented and largely understood.
What is less understood is that we took action by reducing costs and continue to invest more in the business.
Our full-year revenue was in line with our previous guidance and adjusted earnings per share results were above the midpoint of our guidance.
As mentioned in the press release, we also reiterated our 2016 sales guidance of negative 1% to 7% and earnings per share guidance of $10.80 to $13.00, which was first issued on November 12, 2015.
At the end of this podcast we will provide more color around our assumptions.
Now let's take a look at our performance.
For the full year, Company sales of $10 billion were flat with 2014.
Net earnings decreased 4% to $769 million and earnings per share increased 1% to $11.58.
The year contained restructuring/non-operating items that lowered reported earnings by $0.36 per share.
The year 2014 contained charges that lowered reported earnings by $0.81 per share.
To better understand our performance, the majority of the analysis and commentary for the remainder of this podcast excludes the effect of these items in 2015 and 2014 unless specifically noted.
Details regarding the items can be found in the earnings release posted on the Investor Relations website and in the exhibits at the end of this podcast.
Excluding these items from 2015 and 2014, Company operating earnings decreased 5% for the year while net earnings declined 8%.
Adjusted earnings per share were $11.94 for the year, representing a 3% decline versus $12.26 in 2014.
Earnings per share performance benefited from fewer shares outstanding as a result of 6.1 million shares repurchased during the year.
Now let's turn to the 2015 fourth quarter.
Company sales in the fourth quarter declined 1%.
Reported operating earnings decreased 6% and reported net earnings decreased 2%.
Reported earnings per share were $2.30, a 7% increase versus the 2014 quarter.
Overall, our quarterly results were above our guidance issued at our analyst meeting on November 12.
As a reminder, our guidance does not include restructuring or non-operating items.
Excluding the items from 2015 and 2014, adjusted operating earnings decreased 11% while net earnings decreased 19%.
Adjusted earnings per share were $2.49 for the quarter representing a decline of 11% versus the 2014 fourth quarter.
Results in 2015 benefited from a net $0.16 per share of non-repeating operating items in the fourth quarter, primarily related to the shift in timing of the implementation of SAP in Canada into 2016 and a one-time reduction in healthcare liabilities in the United States.
Let's now walk down the operating section of the income statement.
Adjusted gross margins were 40.5% compared to 42.5% in the 2014 fourth quarter due to lower price, unfavorable customer mix and lower gross profit margins from the Cromwell acquisition.
On an adjusted basis Company operating earnings for the quarter decreased 11%.
The earnings decline was driven by the 1% sales decrease and lower gross profit margins.
Adjusted operating expenses declined 3%, including $32 million in incremental growth-related spending.
Adjusted Company operating margins decreased 130 basis points to 11.4% for the quarter from 12.7% a year ago.
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, the month of December and January sales so far; 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.
As mentioned earlier, Company sales for the quarter decreased 1%.
We had 64 selling days in the quarter, the same as the previous year.
The 1% sales decline for the quarter consisted of a 2 percentage point decline from unfavorable foreign exchange, a 1% point decline from price, a 1 percentage point decline from lower sales of seasonal products, and a 1 percentage point decline from sales of Ebola-related safety products in 2014 that did not repeat, partially offset by 4 percentage points from the Cromwell acquisition.
Let's move on to sales by segment.
We report two segments -.
the United States and Canada.
Our remaining operations, located primarily in Europe, Asia and Latin America, are reported under a group titled Other Businesses and also include results for the single channel online model businesses in Japan, the United States and Europe.
Sales in the United States, which accounted for 74% of total Company revenue in the quarter, decreased 3%.
The 3% sales decline for the quarter was driven by 2 percentage points decline from volume, a 1 percentage point decline from price, a 1 percentage point decline from lower sales of seasonal products, and a 1 percentage point decline from sales of Ebola-related safety products in 2014 that did not repeat, partially offset by 1 percentage point from higher intercompany sales to Zoro and a 1 percentage point benefit from the timing of the Christmas holiday.
Let's review sales performance by customer end market in the United States.
Retail was up in the mid-single-digits; government was up in the low-single-digits; light manufacturing was flat; contractor and commercial were down in the mid-single-digits; heavy manufacturing was down in the high-single-digits; reseller was down in the low-double-digits; and natural resources was down in the low 20s.
Weak oil prices continue to affect our sales to natural resources and heavy manufacturing customers.
Based on our analysis of relevant SIC codes, oil represented about a 150 basis point drag on US sales in the quarter.
This compares to a 110 basis point drag for the year indicating sequential deceleration.
Now let's turn our attention to the Canadian segment.
Sales in Canada represented 8% of total Company revenues in the quarter.
For the quarter, sales in Canada decreased 27% in US dollars, 14% in local currency.
The 14% sales decrease consisted of a 17 percentage point decrease from volume and a 1 percentage point decrease from lower sales of seasonal products, partially offset by a 4 percentage point contribution from price.
Weakness in the oil and gas industries continued to affect sales to Canada's customers.
All end markets, except government and forestry, were down versus the prior year.
From a geographic standpoint, sales in Alberta were down about 30% in the quarter whereas sales in all other provinces in aggregate were down 4% versus the prior year.
Let's conclude our discussion of sales for the quarter by looking at the other businesses.
Again, this group includes our operations primarily in Europe, Asia and Latin America and currently represents about 18% of total Company sales.
Sales for this group increased 41% in the 2015 fourth-quarter versus the prior year.
This performance consisted of 33 percentage points from the acquisition of Cromwell and 18 percentage points of growth from volume and price, partially offset by a 10 percentage point decline from unfavorable foreign exchange.
Organic sales growth in the other businesses was primarily driven by MonotaRO in Japan and Zoro in the United States.
Earlier in the quarter, we reported sales results for October and November and shared some information regarding performance in those months.
Now let's take a look at December.
There were 22 selling days in December in both years.
Total Company sales were flat versus December 2014 and consisted of 4 percentage points from acquisitions and a 1 percentage point benefit from the favorable timing of the Christmas holiday offset by a 2 percentage point decline from unfavorable foreign exchange, a 1 percentage point decline from volume, a 1 percentage point decline from price, and a 1 percentage point decline from sales of Ebola-related safety products in 2014 that did not repeat.
In the United States, December sales decreased 2% driven by a 2 percentage point decline in volume, a 1 percentage point decline in price, a 1 percentage point decline from sales of seasonal products, and a 1 percentage point decline from lower sales of Ebola-related safety products that did not repeat, partially offset by 1 percentage point from higher intercompany sales to Zoro and a 2 percentage point benefit from the timing of the Christmas holiday.
December customer end market performance in the United States was as follows: retail was up in the mid-single-digits; light manufacturing and government were up in the low-single-digits; contractor, commercial and heavy manufacturing were down in the mid-single-digits; reseller was down the high-single-digits; and natural resources was down in the low 20s.
Daily sales in Canada for December decreased 30% in US dollars and were down 17% in local currency.
The 17% sales decrease consisted of an 18 percentage point decline from volume and a 1 percentage point decrease from sales of seasonal products, partially offset by a 2 percentage point benefit from price.
Similar to the quarter, all end markets, except government and forestry, were down versus prior-year.
From a geographic standpoint, sales in Alberta were down about 30% in December whereas sales in all other provinces in aggregate were down 8% versus the prior year.
Daily sales for the other businesses increased 41% in December consisting of 30 percentage points from acquisitions and 18 percentage points from volume and price, partially offset by a 7 percentage point decline from unfavorable foreign exchange.
The organic growth was driven by Zoro in the United States and MonotaRO in Japan.
Let's move on to January.
Please note that we benefited from New Year's Day falling on a Friday in 2016.
In 2015 the holiday was on a Thursday resulting in light sales on Friday, January 2.
Daily sales growth in the month of January to date is trending better than December's flat sales performance, even after adjusting for the holiday benefit.
Late January sales may be affected by the winter storm in the Northeast.
There were 35 branches closed on Friday, January 22 and at this point we do not have a clear picture as to the magnitude of lost sales.
Now I would like to turn the discussion over to <UNK> <UNK>.
