W.W. Grainger, Inc. Standard IR Presentation. As of March 1, 2018

Size: px

Start display at page:

Download "W.W. Grainger, Inc. Standard IR Presentation. As of March 1, 2018"

Marian Welch
5 years ago
Views:

1 W.W. Grainger, Inc. Standard IR Presentation As of March 1, 2018

2 Safe Harbor Statement And Non-GAAP Financial Measures Safe Harbor Statement All statements in this communication, other than those relating to historical facts, are forward-looking statements. These 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. These 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 our expectations 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 technologies or business strategies; the implementation, timing and results of our strategic pricing initiatives and other responses to market pressures; 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 cybersecurity matters; investigations, inquiries, audits and changes in laws and regulations; disruption of information technology or data security systems; general industry or market 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 weather conditions; loss of key members of management; our ability to operate, integrate and leverage acquired businesses; changes in credit ratings; 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. Forwardlooking statements are given only as of the date of this communication and we disclaim any obligation to update or revise any forwardlooking statement, whether as a result of new information, future events or otherwise, except as required by law. Non-GAAP Measures Additional information relating to certain non-gaap financial measures referred to in this communication is available in the appendix of this communication. 2

3 Who We Are Leading distributor of MRO products for business Founded in 1927; more than 90 years of service 2017 revenues of $10.4 billion More than 3 million active customers, average customer invoice >$300 ecommerce leadership Grainger is ranked 10th largest ecommerce retailer in North America by Internet Retailer First commerce-enabled website in the industry (1996) Online-only businesses for small customers (MonotaRO 2000; Zoro 2010) 69% of orders originated through digital channels in the U.S. (Grainger.com, KeepStock and EDI/ePro) Strong balance sheet and cash flow generation Note: Internet Retailer report dated April

Competitive Business Models Where We Compete High-Touch Multichannel Stocked assortment of high quality industrial MRO products High-touch model tailored to complex customer needs Strong technical

4 Competitive Business Models Where We Compete High-Touch Multichannel Stocked assortment of high quality industrial MRO products High-touch model tailored to complex customer needs Strong technical knowledge in categories Endless Assortment (Single Channel Online) Very broad assortment across all B2B categories Competitive prices and simplified customer experience Category Specialists Portfolio of category-specific products Deep technical and application knowledge Big Box Retailer Convenient and widespread store locations Caters to need-it-now purchases 4

5 High-Touch Multichannel Grainger s Portfolio And 2017 Performance Organic Growth 1 Adjusted 2 Revenue Revenue Volume OE% ROIC Imperative Large $6.2B 1% 4% U.S. 15.3% 40% Growth Medium $0.9B (1%) 9% Canada $0.8B 3% 3% (4.9%) (7%) Profitability International 3 $0.9B 7% 7% ~1% <10% Growth and Profitability Single Channel Online $1.3B 20% 20% ~10% ~50% 4 Growth TOTAL COMPANY 5 : $10.4B 3% 8% 11.1% 25% 1. Organic growth excludes acquisitions, divestitures and foreign exchange, which represented a 1% headwind to revenue in Please see slides 19 and 20 for non- GAAP reconciliation. 3. International includes Cromwell, Fabory, Mexico, China and Latin America. 4. ROIC shown is for MonotaRO, which serves as a proxy for the overall single channel business. 5. Total company also includes Specialty Brands, eliminations and unallocated expenses. Numbers may not sum due to rounding. 5

6 High-Touch Multichannel 2018 Strategic Imperatives Businesses U.S. Creating Unique Value Complete pricing actions, grow mid-size business Execute high-value sales and service solutions Build advantaged digital capability Canada Execute complete business model reset Improve the end-to-end customer experience Improve the cost structure International Drive profitable growth Single Channel Online Expand assortment Innovate around customer acquisition 6

U.S. Multichannel Value Proposition Advantaged MRO Solutions Broad assortment of high

experience Help customers manage inventory and reduce costs Consultative Sales And

Flawless Order to Cash Process Order origination to best suit customer needs High

7 U.S. Multichannel Value Proposition Advantaged MRO Solutions Broad assortment of high quality products Deep product expertise and customer knowledge Best in class digital experience Help customers manage inventory and reduce costs Consultative Sales And Services Model Solve most pressing customer problems Technical support and other services Flawless Order to Cash Process Order origination to best suit customer needs High proportion of orders stocked, shipped complete and delivered quickly No hassle invoicing and returns processes 7

8 Value Proposition Resonates With Medium As Well Competitively Advantaged Customer Offer In-stock, high quality products Grainger s usually got it. They have a huge inventory. If they don't have it [at one store] they usually have it across town, or they can have it delivered to you next day. Fair prices Sometimes the power tools might be a few more dollars, but Grainger is one of the few people that still warranty. Even a crescent wrench, if it breaks they honor the warranty on it. Consultative Sales And Services Model Technical Support I was looking for a boiler hot water pump and had very limited information about the old one. The Grainger rep was extremely helpful in finding the replacement pump and getting it to me quickly. Technical Support My experience with Grainger trying to find the right product has always been good. The quick access to the technical department and help finding parts is essential because we don't always have the time or the answers to our problems. Flawless Order To Cash Process Complete orders, delivered quickly Easy to place my order, billing and delivery addresses already set-up and basically next-day delivery! The people on the phone are friendly, efficient and helpful! Complete orders, delivered quickly Very little delay in receiving products. Orders are sent in a timely fashion and are accurate. 8

9 U.S. Segment Volume Growth Accelerating vs. Market 10% 5% 0% -5% Total U.S. MRO Market Volume Growth 4% 4% 1% -1% 7% 6-8% 6-8% E 2019E 3% 3% -1% -3% 2.5% 2-3% 2-3% Historically, volume has grown 1-2% faster than the market Removing pricing barrier has accelerated volume growth Projections conservative at 6% volume growth in 2018 and 2019 Note: As of 1/24/2018. Volume on $8.1 billion on U.S. segment as reported in quarterly earnings releases. U.S. segment volume excludes seasonal sales, the impact of weather, intercompany sales, holiday timing and the specialty business divestiture. 9

10 U.S. Volume Growth Exceeding Expectations U.S. Large: daily volume growth On $6.2 billion of revenue U.S. Medium: daily volume growth on $0.9 billion of revenue Q4'17 Q3'17 5% 8% Q4'17 Q3'17 18% 26% Q2'17 4% Q2'17 3% Q1'17 3% Q1'17-7% FY'16 1% FY'16-11% 0% 5% 10% -15% -5% 5% 15% 25% Majority of Large customer contract negotiations completed Pricing changes allowing for better customer mix After historical declines, pricing and marketing actions enable significant share growth Increasing penetration with existing customers and acquiring new customers Note: Total product COGS dollars (excludes freight, rebates and other adjustments) used as a proxy for volume. 10

Creating Digital Advantage For The Multichannel Model Leveraging new capabilities for an exceptional customer experience Gamut built as R&D; invested in highly curated product information and search

11 Creating Digital Advantage For The Multichannel Model Leveraging new capabilities for an exceptional customer experience Gamut built as R&D; invested in highly curated product information and search Building the best industrial distribution website by combining Gamut s capabilities with Grainger.com Will not be a separate website Not going to compete like endless assortment competitors, will curate data to provide relevant solutions 11

12 Canada Business Model Reset Improve unprofitable customer business Renegotiate poor contracts Cover large customers consistently Improve onsite service model Complete branch optimization Closed 60 branches in 2017, will close additional branches in 2018 Will keep branches in high-density locations at end-state Develop North America Centers of Excellence Align processes in the U.S. and Canada Reduce Canada in-country expense Improve order origination Optimize fulfillment cost and services Developed improved ecommerce capabilities off existing platform Consolidate contact centers Expanded product portfolio from 100K to 400K in-stock items Same-day shipping from 75% to 90%+ Increase utilization of Canada and U.S. DCs Improve consistency of transportation 12

13 Single Channel Online Model: Continued Growth And Profitability Just under $800M sales in 2017 (27% sales growth vs in local currency) Currently acquiring 500K customers a year Low cost model: ~13% OE Continuing to expand assortment including new industries/private label Just under $500M revenue in 2017 (~19% sales growth vs. 2016) Currently acquiring 900K customers a year Low cost model: continued operating earnings improvement Product offering based on Grainger base but expanding (1.7M SKUs) Continued customer acquisition engines Developing sticky relationships through both businesses Expect MonotaRO and Zoro combined operating margin of ~11% by 2019 and ROIC 1 of ~50% Note: Guidance as of 1/24/2018. Please see slides 19 and 20 for reconciliation. 1. ROIC shown is for MonotaRO, which serves as a proxy for the overall single channel business. 13

14 Expense Leverage and Productivity Improving U.S. Expense to COGS (%) Cost Takeout/Productivity 50% 40% 51% 50% 49% 47% 45% 43% 42% 41% 38% Expectations for 2018 and 2019 unchanged U.S.: $90 - $120 million 30% Canada: $50 - $70 million 20% All other: $10 - $20 million 10% 0% Continue to expect $150 $210 million of cost takeout through 2019, net of digital investments Note: Guidance as of 1/24/2018. Reference slides 19 and 20 for GAAP vs. non-gaap reconciliation. U.S. expense to COGS expectations for 2018 and 2019 exclude revenue recognition accounting standard for comparability purposes. 14

15 Appendix 15

16 Size (MRO potential in $ / year) U.S. Large and Medium Represents 2017 Multisite/ Contract Single-site/ Noncontract revenue U.S. Large: ~$6.2B in revenue and ~8% share of $75B market Large (>$60K) ~$4.3B ~$1.0B Largest business with healthy profitability U.S. Large Contract business ~$5.2B Medium ($10-60K) ~$0.7B ~$0.6B U.S. Large Noncontract business ~$1.0B Small (<$10K) ~$0.2B ~$0.3B U.S. Medium: ~$0.9B revenue and ~2% share of $50B market Modest-sized business with high profitability Note: Multichannel only. Does not include Zoro and Specialty Brands. All numbers are 2017 revenue. Numbers may not sum due to rounding. 16

17 Sources and Uses of Cash 2017A 2018E Low High Op. Cash Flow $1,057 $1,100 $1,180 LT Debt Asset Proceeds Sources $1,549 $1,130 $1,210 CapEx (gross) $237 $290 $330 Share Repurchases Dividends ST Debt & Other Uses $1,549 $1,130 $1, : Generated $1.1 billion in operating cash flow vs. $1.0 billion in 2016; 3% increase CapEx was $237 million vs. $284 million in 2016 Returned $910 million to shareholders through share repurchases and dividends 2018: Expect to generate strong operating cash flow, supplemented by cash benefit from tax reform. As a result: Increasing investments in digital (CapEx) Increasing share repurchases vs. November 2017 guide reflecting our confidence in the business Note: As of 1/24/2018. Financials are based on GAAP numbers. 17

18 Restructuring Costs and Benefits Cost Savings ($Millions) '17 '18E '17 '18E '19E U.S Canada Colombia Other Business Units Total Restructuring costs and savings averaging a 2-year payback Approximately 60% of 2017 and 40% of 2018E costs are non-cash Note: As of 1/24/

19 2016 and 2017 GAAP to Non-GAAP Reconciliations Three Months Ended December 31, Twelve Months Ended December 31, % % Operating earnings reported $ 239,939 $ 174, % $ 1,048,662 $ 1,119,497 (6 )% Restructuring (United States) 14,364 4,869 44,121 33,904 Branch gains (United States) (4,831) (1,693) (32,863) (18,236) Other (gains)/charges (United States) (1,487) 45,555 (4,510) 45,555 Restructuring (Canada) 12,778 (501) 39,287 14,998 Inventory reserve adjustment (Canada) 9,847 Restructuring (Other Businesses 13,720 55,020 Other charges (Other Businesses) 52,318 52,318 Restructuring (Unallocated expense) 10,593 10,593 8,947 Subtotal 45, , , ,333 Operating earnings adjusted $ 285,076 $ 274,777 4 % $ 1,160,310 $ 1,266,830 (8 )% Segment operating earnings adjusted Three Months Ended December 31, Twelve Months Ended December 31, % % United States 298, ,263 1,219,886 1,336,074 Canada (4,332) (10,657) (37,251) (40,517) Other Businesses 25,176 16, ,653 93,002 Unallocated expense (34,338) (31,489) (132,978) (121,729) Segment operating earnings adjusted $ 285,076 $ 274,777 4% $ 1,160,310 $ 1,266,830 (8 )% Company operating margin adjusted 10.8% 11.1% 11.1 % 12.5 % ROIC* for Company 24.6 % 25.8 % ROIC* for United States 40.3 % 42.6 % ROIC* for Canada (7.0)% (7.1 )% Note: The $45.1 million of restructuring and other (gains)/charges is composed of the following: United States: $1.5 million of cost of merchandise sold expense and $6.5 million of operating expense; Canada: $5.7 million of cost of merchandise sold expense and $7.1 million of operating expense; Other Businesses: $3.3 million of cost of merchandise sold expense and $10.4 million of operating expense; Unallocated expense: $10.6 million of operating expense. *Adjusted ROIC is calculated as defined in our Q press release, excluding the items adjusting operating earnings as noted above. 19

20 2016 and 2017 GAAP to Non-GAAP Reconciliations Three Months Ended December 31, Twelve Months Ended December 31, % % Net earnings reported $ 151,059 $ 60, % $ 585,730 $ 605,928 (3)% Restructuring (United States) 9,013 3,049 30,352 21,234 Branch gains (United States) (3,031) (1,060) (20,620) (11,421) Other (gains)/charges (United States) (933) 28,531 (2,830) 28,531 Restructuring (Canada) 9,441 (370) 30,390 11,085 Inventory reserve adjustment (Canada) 7,278 Restructuring (Other Businesses 11,580 55,324 Other charges (Other Businesses) 52,318 52,318 Restructuring (Unallocated expense) 6,647 6,647 5,603 U.S. tax legislation (3,250 ) (3,250) Discrete tax items (12,123 ) 3,784 (12,123) (9,378) Subtotal 17,344 86,252 83, ,250 Net earnings adjusted $ 168,403 $ 146, % $ 669,620 $ 711,178 (6)% Three Months Ended December 31, Twelve Months Ended December 31, % Diluted earnings per share reported $ 2.63 $ % $ $ % Pretax adjustments: Restructuring (United States) Branch gains (United States) (0.08) (0.03) (0.56) (0.30) Other (gains)/charges (United States) (0.03) 0.75 (0.08) 0.74 Restructuring (Canada) 0.22 (0.01) Inventory reserve adjustment (Canada) 0.16 Restructuring (Other Businesses) Other charges (Other Businesses) Restructuring (Unallocated expense) Total pretax adjustments Tax effect (1) (0.21 ) (0.30) (0.21 ) (0.55) U.S. tax legislation (2) (0.06 ) (0.06 ) Discrete tax items (0.20 ) 0.06 (0.20 ) (0.15) Total, net of tax Diluted earnings per share adjusted $ 2.94 $ % $ $ (1)% (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. (2) U.S. tax legislation reflects 2017 impact of the benefit of re-measurement of deferred taxes, partially offset by one-time deemed repatriation tax. 20

21 IR Contacts Laura D. Brown Senior Vice President, Communications & Investor Relations Irene Holman Senior Director, Investor Relations Michael P. Ferreter Senior Manager, Investor Relations

W.W. Grainger, Inc. Standard IR Presentation. As of July 18, 2018

W.W. Grainger, Inc. Standard IR Presentation As of July 18, 2018 Safe Harbor Statement And Non-GAAP Financial Measures Safe Harbor Statement All statements in this communication, other than those relating