Q3 2019 Earnings Call
Greetings and welcome to the W.W. Grainger third quarter 2019 earnings conference call.
At this time, a kiss country listen only mode.
Question answer session will follow up a formal presentation.
If anyone should require operator assistance or the conference. Please press star zero under telephone keypad. As a reminder, this conference is being recorded.
It is all my pleasure to introduce your host Irene Holeman, Vice President Investor Relations. Please go ahead.
Good morning, welcome to Granger its Q3 earnings call with me are good airframe, chairman and CEO and Oh, great Yeah.
As a reminder, some of our comments maybe forward looking they send our current or future about.
Actual results may differ materially as a result of various risks and uncertainties, including those detailed in our.
Filings.
In terms of any non-GAAP financial measure as mentioned on today's call with their corresponding GAAP measure or at the end of this slide presentation and in our Q3 press release, both of which are available on our IR website. This morning's call. We'll focus on adjusted result, and now I'll turn it over to the G.
Thanks, Irene and good morning, Thank you for joining us today I'm going to discuss our Q3 results. It's you're an update on the U.S. and endless assortment growth initiatives that we introduced earlier this year.
I will provide details on the quarter, we'll open it up for questions.
We have had solid result, so far this year as we manage through the uncertainty of the current environment.
Despite softening global demand, we have accelerated our sequential share gain in the U.S. business and continue to invest for growth at our analyst sort of business.
We've also been diligent in partnering with our suppliers to manage cost the driven expense leverage across our U.S. and Canadian businesses.
Year to date total company operating margin is up 30 basis points, we've driven incremental margin of 26%.
It's also maintained the guidance that we said on the Q4 Cold January for total company gross profit margin.
Operating margin and earnings per share.
I want to commend our team members for all the work that done to strike during this environment.
For my recent U.S. customer visits clear that the bad that slowed but it's also could that things are not falling off a cliff.
Great opportunities to continue to gain share.
Earlier this month I spent time with a large manufacturer in the southeast.
We have seen strong growth due to their ability to innovate.
Our team members to go solid relationships with their leadership in operation staff, and our delivering solutions the matter.
Customer. He is granger is providing exceptional service for a part of their operation.
We have leveraged our keep stock inventory management system to make it easy for this customer that what they need when they need it.
Only have a portion of this customer spend today.
Because of a reliable partnership in our ability to deliver build value, we're exploring ways to expand our offer.
This means finding ways for this customer to save more money.
By ensuring that they are used in the right products at the right cost and managing usage and inventory effectively.
When we do these things well we can't share.
I rarely does that a customer with the opportunity to create value and gain share is not significant.
We do this across our business through two models.
Sure High touch solutions model, we provide relevant products and services to customers to drive efficiencies and to save them money.
Sure and assortment model, we provide value through an expansive assortment that is easily accessed through a streamlined search experience.
And these challenging times, we continue to focus on what matters.
We're investing for growth in both business model.
Our strong balance sheet allows us to invest in good times in bad.
And we are rigorous in our expense management.
We've already cheap roughly 200 million in savings the last two years.
Our expectations for continued productivity living for.
With that let's take a closer look at our performance in the U.S. in Q3.
Similar to what we're seeing from economic indicators, we estimate the U.S. market growth decelerated from approximately 2% to 2.5% Q1 and approximately 1% in Q2, two about flat in Q3.
You are seeing softness across most end markets, including heavy manufacturing natural resources contractors and in pockets light manufacturing.
We have seen some of our customers, particularly heavy manufacturing and natural resources so production.
Health care market remains quite strong and we are seeing flat to modest growth in government at retail in markets.
You are segment share gain accelerated sequentially third quarter 250 basis points of outgrow versus the market.
The U.S. large business grew 2% and 10% or two year stack and U.S. midsize grew 5%, 23% on a two year stack.
Let me spend a few minutes, providing an update on the U.S. growth initiatives, which we introduced in May this year.
As previously communicated these initiatives fall into two buckets.
The first our improvements to our foundation that ensure that we stay competitive.
This includes improving the quality of our product and customer data embedding our keepstock offer enhancing the customer experience.
Second bucket of initiatives are incremental investments that contribute to our long term goal three to 400 basis points of growth above market.
Our initiatives are beginning to take hold as evidenced by 250 basis points of share gain in the quarter.
Our merchandising efforts are showing strong incremental revenue lift.
Driven by a comprehensive category review process.
About half a billion dollars of product revenue has been reports and diced and we're seeing good results.
We expect to get through about a billion dollars for our assortment by yearend.
We made incremental marketing investments in the third quarter in our return on these investments are steadily improved throughout the year.
Has exceeded our expectations.
We have made solid progress in improving the customer experience. They have increased the effectiveness or order of our order to cash processes to beginning this year.
Our customer feedback suggests that we provide the best experience in our space.
We have reenergized, our corporate account work and I've seen improvements in share getting with this group of customers.
Finally, we are on track to start receiving inbound shipments to our local DC in the fourth quarter.
We are encouraged by our ability to accelerate sequential share gain in the U.S. and we remain fully committed to 300 to 400 basis points outgrowth versus the market on an ongoing basis.
I also want to spend a few minutes on our growth initiatives at all U.S.
You heard us talk about expanding product assortment its oral.
Our goal is to add 10 million items over the next three to five years.
The third quarter, we added about 350000, skews, which brings us to 800000 excuse for the year.
He's product ads are driving incremental revenue growth on a per skewed basis that is similar to what we've seen historically eminent true.
Our investment in systems and people to help drive this growth are also going well.
We launched a new marketing campaign September and the results are promising although early.
We are optimistic about the trajectory, it's all going forward.
The bulk of our investments in this business will compete completed by the she ended this year, we expect strong growth and profitability moving forward.
Now the natural tendency would be to cut back on these type of investments during soft market.
But we are focused on long term growth of our business will continue to make prudent investments while driving productivity.
Now I'll turn it over to Tom will discuss the quarter's results in more detail.
Thanks Teachey.
Looking at our total company adjusted results for the quarter Daily sales were up 2.5%.
Volume grew 2.5% and both price and the impact of FX were flat to the prior year.
Two of our businesses AG I am Cromwell are not only facing challenging end markets, but are also in the middle of turnarounds.
Their results are adversely impacting the company's performance.
For perspective, the U.S. segment, and endless assortment businesses combined were up 4.5% in the quarter.
And 5% year to date versus the prior year.
Moving to gross profit.
Our total company gross profit margin declined 80 basis points versus the prior year.
The decline in gross profit margin was driven primarily by the timing of U.S. price adjustments during the year.
Which resulted in negative price cost spread in the U.S. and the third quarter.
Lower gross profit margin of our analyst assortment businesses also contributed to the decline.
Year to date, our total company gross profit margin is down 40 basis points versus the prior year.
For the fourth quarter, we expect the company's gross profit margin to be higher than the third quarter.
We drove operating earnings growth of 2% in the quarter.
Our operating margin, however declined 20 basis points versus the prior year due primarily to the investments, we're making to drive growth had zoro.
Excluding the investments in zoro, SGN, a leverage completely offset the gross profit margin decline in the quarter.
As expected.
DNA grew at half the rate of sale.
As an organization, we will continue to rigorously manage expenses.
While ensuring we're providing the absolute vast experience for our customers.
Year to date operating margin has expanded 30 basis points, and we've driven incremental margin of 26%.
We're also focused on generating strong cash flow.
While operating cash flow in the quarter decreased 8% driven primarily by unfavorable timing of supplier payments.
Operating cash flow was up 3.5% year to date and close to 100% of reported net income.
Year to date, we've returned $842 million to shareholders through $242 million and dividends and $600 million and share buybacks. We expect to continue to buy back shares in the fourth quarter.
Now, let's turn to our performance in the U.S., but.
The demand environment has slowed throughout the year and the market was flat in the third quarter.
Daily sales were up 2.5% comprised of.
Volume growth of 2.5%.
Price inflation.
Oh, 0.5% increase of intercompany sales Tesoro, and a 0.5% decline in specialty brands.
In the quarter, we grew 250 basis points faster than the market driven by strong execution of our you EPS growth initiative.
You are less gross profit margin declined 80 basis points in the quarter versus the prior year, driven primarily by product cost inflation outpacing price inflation, partially offset by favorability and I chain.
At the beginning of 2019.
I wanted to ensure that our pricing was sufficient to cover product cost increases related to tariffs and general inflation.
In retrospect, we were a little too aggressive.
To ensure that our pricing was market based we dial pricing back in the second quarter.
Well third quarter gross profit margin was a little below our expectations.
We estimate that gross profit margin will be higher in the fourth quarter and the third quarter.
And the results for the entire year will be consistent with the expectations set at the start of the year.
In an environment with uncertainty around tariffs and market demand quarterly noise as common place.
The year to date picture is often more useful in evaluating performance.
For perspective on a year to date basis, excluding the write down of remaining contract negotiations are price cost spread is favorable.
Further we continue to effectively managed product cost inflation related to both tariffs and general inflation.
In the quarter, both improved sequentially and we expect that trend to continue in the fourth quarter.
U.S. operating earnings increased 4% in the quarter U.S. operating margin was flat versus the prior year as lower gross profit margin was completely offset by SGN a leverage.
DNA was flat on sales growth of 4%.
In Canada Daily sales declined 14.5% on a constant currency basis.
Price inflation was 1% in the quarter and volume declined 15.5%.
Volume remains the main issue in Canada, well optimization of the cost structure is strong.
It's taking time for us to stabilize topline performance.
Operating margin was positive in the third quarter for the first time in 2019.
Driven by improvement to gross profit margin continued diligence on the SGN any line.
Gross profit margin improved 50 basis points versus the prior year, largely due to supply chain efficiencies offsetting negative price cost spread.
Moving to other businesses, which includes our endless assortment model and our international portfolio.
Daily sales were up 9% in the third quarter on a constant currency basis due to revenue growth from our endless assortment model.
Together, Monoprice ROE and Zoro daily sales grew 19.5% in the quarter.
Gross profit margin for the other businesses declined 130 basis points, driven by promotional activities that zoro and freight headwinds at both zoro in Minot trial.
Operating margin declined 220 basis points for the other businesses, primarily driven by long term growth investments and zoro U.S. and performance at crime law.
Yes, we've mentioned in the past the kronwall businesses facing operational challenges, while also experiencing a difficult economic climate.
The business is taking action to improve service and the customer experience to drive topline growth, while also improving the cost structure.
Page 14 covers our guidance for 2019.
At the total company level, we are reiterating all of our guidance metrics at the segment level, we expect the U.S. segment and other businesses to be within their guided ranges.
For AG I, we now expect to finish the year below the guided range.
Now I'll turn it back to DG for closing remarks.
Thanks, Tom our performance. So far this year has been solid even at a slower growth environment and with the added uncertainty around tariffs.
While AI and Cromwell continue to be challenged customer feedback is much better in both businesses.
We have done a lot of work ticket the cost structure and service right at age and Cromwell and are well positioned to grow the future I.
I was at Cromwell early this month and even with the economic challenges customers were pleased with our proved surface, we're exploring how to expand these relationships.
We are happy with the growth of our analysts assortment businesses and the progress we're seeing with our us growth initiatives.
We have different strong incremental margin year to date and are maintaining our total company guidance.
We are committed to delivering strong performance over the short term add long term.
Our performance expectations remain the falling.
We expect to our initiatives in the U.S. to drive three other to 400 basis points outgrowth versus the market on an ongoing basis.
We believe Canada is an attractive market from great for Granger, we will continue our work to drive profitable growth in that business.
We expect to accelerate growth with our lives assortment model through the strength of the Dutrow, Japan and the investments, we're making indoor use.
Overall, we expect to drive strong SJ leverage and operating margin improvement for the year, resulting in incremental margin of 20% to 25%.
Now, we'll open it up for questions.
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Your first question today is coming from David Manthey from Baird. Your line is allied.
Oh, Thank you good morning.
Oh, you mentioned on long term goal of growing yesterday at half the rate of sales growth, you've obviously done a great job it over the past several years and clearly that that equation is lot easier when you're growing 8% then when you're growing too, but you've actually done it in both environments.
What I'm wondering is as we go forward here. We're looking ahead to the next a year or so.
Do you have a specific plan in place that old that'll keep that expense leverage going or at some point do we just see natural.
Low single digit inflation returned to the cost stack in any case.
Hi, Thanks, Thanks, Dave I would say that we are constantly working on improving our expenses and our cost structure.
We have.
Built in an expectation that the functions in the business will cover things like merits.
Going forward.
And we're working through plans for for next year right now as you might guess.
But we feel pretty pretty confident that we can continue could cost productivity throughout the business and we'll work hard to make sure that we continue to deliver the performance we've been delivering.
Okay. Thanks, and then DG.
When you said that you expect to returned to strong profitability in the endless assortment.
Business or something along those lines improved profitability I'm. Just wondering if you can help us define that historically when you look at segment contribution margins following periods of investment you've gotten as high as maybe the mid or higher team.
Is that what we should be thinking about for contribution margin in the other business segment going forward.
So I would say that if you if you look at the the online businesses, which are part of the other other segment our expectation as we will return zoro to profitability and we'll we'll begin the migration over the next several years up too.
Very strong profitability was given a trail and I think no trophy and I'll give you assess are we hope to be able to get with the door business.
So that's that's our objective and it will take several years to get there as we come out of these investments, but we're pretty confident we can continue to grow profit.
Thank you. Our next question today is coming from Ryan Merkel from William Blair. Your line is now live.
Hey, Thanks couple of questions. So first I just want to clarify why gross margins are college improved in the fourth quarter versus the third quarter I apologize if I missed it.
Yes, gross margins typically improves sequentially in Q3 versus Q4.
This year.
Q4 versus Q3, they typically will improve.
And this this quarter is going to be no different going into Q4, we are seeing general inflation and tariff inflation going down and that's that's the main driver for the.
Gross profit going up in Q4.
Got it Okay, and then you mentioned a price adjustment in the second quarter can you just tell us how much did you lower prices maybe on average and was it broad based across all the S.K. use or was it more targeted.
It was more targeted.
And obviously, we're working on this on a continuous basis.
As we said in the prepared remarks coming after Q1, we thought we overshot a little debt. So we went back and really scrub. Some skews we raised some skews we lowered overall, though we lowered.
Got it Okay I'll pass it on thanks.
One other one other one other comment related to the first question on gross margin. We also expect some favorability on supply chain to help us out.
Related to Q4, we see softening in the supply chain area of the transportation area. We expect that to also be a factor in Q4.
Thanks to our next question is coming from Christopher Glynn from Oppenheimer. Your line is not alive.
Hey, thanks.
Good afternoon out there.
So.
A lot of emphasis on the 300 to 400 basis points of.
Long term sustainable out growth.
Wanted to narrow that down into medium give little more detail on traction on your initiatives in prospect to to kind of inflect that growth higher I think last quarter, you talked about things like assortment sales coverage and.
Digital experience, so wondering how you're seeing those kind of.
Discrete drivers kind of ramp on the ground level.
Yeah. Thanks, Chris we continue to expect our mid size customer growth and share gains to be higher than the overall U.S. share gain we continue to see that.
We certainly given given the way, we cover and interact with customers things like merchandising and marketing have an outsized it back they impact all of our customers that they have an outsized impact on the midsize customers and that has continued to play out.
Our expectation is that we will continue to grow significantly faster in the next several years with midsize customers them with with the whole so that the and the initiatives or are playing out pretty much as expected at this point.
Okay and then.
With Canada, there just wanted to I think you talked a little bit more about sales stabilization in prior quarters, just wondering where's the cross section between the customer Reengagement, you've talked about with stabilize service levels versus.
Kind of softening macro up above.
Yes, I'd say that when we have a number of our sales leaders in.
Interact with them frequently and I've been talking to them up and hearing from customer feedback.
We are now having conversations and getting permission to grow with our customers and that it's been several years frankly since that's in the case so.
We are right at the feels like we're right at the precipice now being able to start climbing again and grow based on the work we've done and it's been a long haul, but but we feel like rather on the right conversations now so where a lot more confident now that we've been in several years.
Okay. Thank you.
Thank you. My next question today is coming from Deane Dray from RBC capital markets. Your line is now live well. Thank you. Good morning, everyone, Hey, I know you're not in.
The giving of 2020 guidance, yet, but just can you talk qualitatively, what you're expecting the U.S. MRO market to look like one of the other big industrial distributors talked about a flattish expectations for the first half how do you think the operating environment for MRO will be and then really.
Added to that what caused you to step up into that 300 to 400 basis points of outgrowth and what might the timeframe be for that so two part question. Thanks. Good. Thanks, Thanks to yet so I think we don't have any any crystal ball is different than others are saying, we are planning for a wide range of.
Potential market growth outcomes for next year and building plans around a wide range I think.
Flattish is not a bad place to start probably and anybody's guess, but thats that would not be.
Certainly our a wrong estimate at this point, but we're planning for a fairly wide range. We actually are we have a set of initiatives that we've talked about that we believe are starting to build for getting that so that 300 400 basis points. If you look at the quarter.
On a volume basis, we were significantly higher than 300 basis points of growth actually so.
We are starting to get confident that that we have the right initiatives in place to grow 300, 400 basis points in that things, we've been talking about with merchandising marketing, adding sellers corporate account growth.
Reenergizing things like our stock program. So we feel I forgot the right initiatives and we're starting to get some of that traction right now.
Terrific and just as a follow up.
Can you is there any update on gamut looks like that website is in transition you talked a bit about how that might be happening and then maybe some update on the improvement of the search capability and the roll out there appreciate it. Thank you yeah. So again it is no longer a a consumer.
Facing where a customer facing website all those.
All those learnings has been built into the Granger processes, we're building a new product information system that will be lives.
In the fourth quarter.
We've actually when we talk about Remerchandising half a billion dollars. So far this year a lot of the insights from gamma are actually those remerchandising. So if you look at the categories that we got there you see a lot of lessons. There. So we've effectively built what we've learned from gamma into integrated Dot com, we're getting continue to get improve feedback from customers and that will only get better and better as we can to.
We'll now more categories and improve the product information. So we're pretty excited about the path. We are on in terms of our surgeons grants right now.
Thank you and next question is coming from Robert Barry from Buckingham Research. Your line is not a lot.
Hey, everyone. Good morning.
Right.
Follow up on a Ryan's question I think Tom you mentioned seeing inflation going down was that just to comment on freight or that broader.
Comments broader I mean sequentially. If you look at what we've experienced in Q3 versus Q2, we saw both tariff related inflation and in general inflation go down.
We expect that to continue in Q4 as well.
Okay. So do you expect to be price cost positive in Fourq you.
Didnt Didnt say that will come back to what we set for the entire year, we expect to be.
Price cost neutral, excluding our pricing write downs that that we've done.
Got it just seems a little counterintuitive, because the tariff headwind seem to be.
To be growing.
I'm not.
Actually if you look at the tariffs how we've experienced throughout the year they've been fairly constant and now that we're starting to.
Lap some of the tariffs, where we're seeing improvement there. The other thing is you have to reconcile between stated tariffs and what we're actually able to negotiate in terms of realize tariff and we've got two buckets. We work on one is our own imported parts, which come from large.
Fleet from China, which are impacted directly and the other lines, our national brands, which we work with our supplier partners. So you know stated versus actually realized is is a factor as well.
So just lastly, so does that mean in that context, maybe seeing price at zero is less than the concern to you.
Given you've been able to negotiate some of this deflation.
Well I think what I would say is where we're at in terms of our share growth.
Where we're at in terms of our share growth objectives, and our share growth initiative.
Seeing flat pricing for the quarter doesn't get us overly exercise as BJ mentioned from a volume basis, we grew share quite a bit to and at this point, where where we're trying to get traction on our share gain initiative, you know that doesn't concern us that one quarter, where price flat if you look at.
The entire year, where were price cost neutral at when you adjust for the reset from the strategic write down and we're happy with that it's one of our objective was at the beginning of the air.
Thank you. My next question today is coming from Josh Pokrzywinski from Morgan Stanley . Your line is not a lot.
Hi, good morning, guys.
Morning.
Just want to follow up you know given that we're we're now past kind of fully past the price reset just any observation with some of those customers.
What percentage of kind of converted to being you know kind of.
No more core customers versus those were maybe transactional during the process. So imagine you got better a better grasp on that today, then maybe you did six for six or 12 months ago.
How satisfied are you with with that and yeah, I guess that literally down just first question.
So Josh let me I will I will answer the question interpret it just so I can tell me if I'm not answering correctly.
We tend to look at with our with our large customers for sure. We had a lot of relationships that were not transactional relationship before we still have a lot of those and we've expanded some of those I think the biggest shipped as them with mid sized customers, where we now have a whole lot more midsize customers are buying frequently.
Based on the price reset and the price reset was largely to make sure we were growing across the entire customer base.
Incessantly and so we have liked the results we see with its as customers the civil one way to go to acquire and.
And turn those to make many of those customers into regular purchasing customers, but we have made great progress with midsize customers.
Got it yeah that was in that was a mid size customer question.
Definitely want to make sure yet.
Right, yes, large wouldn't make as much sense and then I guess on the on the price cost dynamic from here.
Is there anything that happens is a function of the calendar in terms of customers kind of reevaluating to start a year, where the progression kind of post for Q in flex or de flex one way or another.
From a cost perspective theres probably.
Equal measures deflation inflation, but probably a bit more deflation on the inputs, but just trying to understand how that conversation evolves over time on the pricing front and if there's anything that it changes what the calendar fourth.
Well, we have a we have a long history of.
Working with our customers to a lot of our contract customers to lock in prices at the beginning of year. So we got to your process that we are are going through now to make sure. We've got the right competitive prices and.
That process always happens so there's always sort of beginning in two years sort of reset that happens that you see that in our results historically, Matt that with the same this year.
Thank you. Our next question today is coming from John inch from Gordon Haskett. Your line is not alive.
Hi, good morning, Caroline dialing in for John So I just wanted to clarify on that Threeq you gross margins dynamic it sounded like you know given you said price inflation has sequentially come down.
Essentially all of that gross margin degradation is coming from product pricing.
I guess part of it or maybe you can come from that that 5% of large accounts that still needs to get.
Price adjusted that you sat down over the quarter and then is the investment that pricing degradation coming from more broad based pricing adjustments.
Yes, it's it's largely done we'll see a little bit in Q4, and then we won't have any and 2020.
Yeah. It just sounds like you know I got you know given the magnitude of that of the pricing and gross margin decreased more of that has to do is broad based pricing adjustment, maybe just follow up on that point.
I guess you guys have adjusted pricing since the start of the year I guess a couple of times.
As you go through this exercise on are you seeing sequentially, yeah, similar well I guess that.
Ideal volume response that you would help for Oh, we as you go through like these pricing again, sorry are you starting to see throughout the year I can benefit more diminishing return.
No I think we're seeing good pricing response again I'll I'll go back to we see a we see a flat.
MRO market in the third quarter.
Included in that flat market is a little over 1% in price offset by a little bit over 1% in volume deterioration.
We were up 2.5%.
So that puts us well above 350 bips.
Theres also some some weather issues related to the Hurricanes last year that we didn't put in our prepared remarks, then some government lapping differences.
So yeah. If you if you look at that we're very happy with our volume response.
I would I would just add that if you think about.
Some of the some of the pricing dynamic we Tom talked about this we have we talked about being price cost neutral before the reset for the year, we're effectively where we where we expect to be in aggregate and.
We are careful.
Okay pricing changes all the time, but we're very careful not to disrupt customers with.
Large customers, particularly are changing prices around so we are a little bit more carefully how many times of change with large customers, but overall, we've seen the exact response, we expected this year.
Thank you. Our next question today is coming from Adam.
One from.
Research Company your line is that life.
Hey, good morning, guys.
Good morning.
Had a few questions on on zoro.
I guess, which we'd expect that incremental investment spend.
To wrap up or we fully lapping that as we head into the first quarter and should expect.
Profitability to recover there.
Early in the years, there's going to take a little bit more do 9 million yeah. Yeah. So we expect data we expect profitability this too.
Recover some in the first quarter.
We did start investing pretty heavily in the first quarter of this year.
And it'll it'll just grow from profitability will grow from there. So we will get some some improvement in the first quarters are okay.
Okay and then.
The the 800000 skews the.
In added so far this year and as we add some more going forward I'm just wondering if you could comment about.
The gross margin profile of the business is changing.
How you look at the the categories that you're adding in is that more of a build out of the existing one or are there new product categories that are getting you into higher or lower margin categories. Yeah I.
I think that we are first of all right and a whole bunch of categories that we haven't had or so there's a there's a mix of that and new categories and expanding the operating just in categories.
In general we are creating a fairly stable value proposition for zoro, and Zora will become less relied relied on the grand your supply chain moving forward and so most of those products will be drop ship. So for the financials. The GP is lower when you have drop shipped items.
So as the expense.
But if it so you'll see that impact the GP slightly over time.
And so we expect most of those items that were adding can talk about 10 million over the next three to five years, we expect most of those items to be.
Third party shipped were not going to be talking this doesn't granger.
Hi, thank.
A question today is coming from Chris Dankert from Longbow Research Your line is that right.
Hi, Thanks for taking my question.
You got the given some really great color on gross margin I guess kind of moving down to S. You need typically we see a bit of of a step up into the fourth quarter here, but your reiteration of guidance suggests maybe you can hold that flatten or the fourth quarter is that right would be thinking about us gionee and just maybe some of you can help from the puts and takes that or are in that line.
Yeah, I think you're thinking about it to the right way a year to date, we're on a total company level, where were 70 bips favorable.
For SGN, a we expect that.
Percentage to increase for the entire year, Oh, we do have a favorable laugh related to variable compensation. In addition to just a number of other cost productivity ideas and implementation that'll hit in Q4.
Got it got thank you and then thinking about some of the roll back of the investment in the other businesses don't run and Monotaro.
Do you guys had called out rolling back the vast majority of that in 2020, that's still the plan.
Yeah, that's that's still the plan curves that that is.
If you think about a number of the investments that.
System investments so we're going live with the New project remains for example.
We get through those this year in those do not repeat next year. So we have most most of the investments.
Behind us we have added.
People analytics talent marketing talent that will remain obviously, but a lot. The investments are kind of one timers that they're going to be gone.
And as you saw in the charts, we're really happy with the sales growth of both zoro and Monotaro Monotaro on a.
Constant currency local currency basis was up over 23% and zoro was up big double digits. So.
Very happy with that.
Thank you. Our next question today is coming from Justin Bergner from GTAT Research Your line is allies.
Good morning, DJ Good morning, Tom.
Just quickly on the Zoro did I hear you say earlier in the call that Zoro is currently running.
Profitable below breakeven.
No there.
They are actually made money in the corner.
Just not as much as they will make on any ongoing run rate basis.
Okay does any of the investment price investment or is this all mainly on the SGN a side it's both.
There are promotional spending which were undertaking when we're adding new skews and going into new verticals.
Okay to on a dollar basis most of it as expense sure as opposed to energy prices, though.
Okay. Great. My other question was just around the I guess price action you took.
That affected price cost in the third quarter was that price action taken in the second quarter, such that you kind of expected. The results that you ended up just reporting or some of that taken in the third quarter and was that all sort of.
To correct for some of the pricing you took them earlier part of the year with some of that more in response to current market conditions, let's taken in the second quarter.
Thank you next question today is coming from Nigel Coe from Wolfe Research Your line is allies.
Yes, thanks, good morning.
[laughter] come back the gross margin sequential guidance you gave spend certainly you know when you go back in history that have a profound.
Seasonal uplift in full Q.
Keep in mind, what drives that it's a mix.
Impact because normally revenues a fight down I'm just curious what drives that and then second thought that question is.
You know with a task the great then rolled in from May onwards, and then full.
CYMBA I think you talked about 10% U.S.
Sales that's great.
So I'm curious why we're not inflationary pressure has come from past, perhaps offset by other deflationary impact maybe just address book.
Okay, well, let me let me take the first one and I might have to get you to repeat the second one way or was it was breaking up on our phone here. There are many levers that we can pull in terms of in terms of gross margin for Q4.
Why it historically goes up.
You know traditionally I think what we've seen is we've seen cost inflation work its way work its way down throughout the year and we have better opportunities in terms of.
Related to pricing terms in terms of vendor rebates customer support those types of things, which our quarter end settlements and we count those as cost obviously.
Our pricing environment is fairly static throughout the year SDG mentioned with the big pricing happening throughout the year. So the main driver in Q4 is really our vendor volume rebates and our customer rebate settlements that we have in Q4, and if I. If I can get you to repeat the second.
Question. Please.
Yeah, that's pretty just about the the impact of the time. So you know the step up from 10 to 25 offense on the list retiring the.
Activity May and then look for which I think September .
And I think he previously closed the 10% U.S. sales grew 10% for so I'm just wondering why we not facing some inflationary pressure.
Going into Q4 that would need to be offset with price.
Well, we've got part one part two which arguably our a lower amount of our Cogs, which are you know.
Lapping in Q4, so we'll see we'll see less of an impact their Q3 here right is is moving from you know tend to 25% or did move from 10% to 25% and May again, I will take you back to the actual stated in foot tariff number versus the realize.
We are experiencing much less than the then the stated tariff number on an actual basis. So it's hard to just look at what stated and.
Look at the actual result, you really have to focus on the actual realized results and our teams doing a very good job of working with our supplier partners to mitigate those increases.
Okay I'll leave it that thank very much.
Thank you. Our next question today is coming from Patrick Baumann from Jpmorgan. Your line is now live well how did you add Tom. Thanks, taking my question just on the the we Hum Zoro business. If you could put a finer point on.
You said, it's making money to make money. This year is it kinda like a mid single digit type operating margin I know me know trends in the low double digits, just want to have a better sense of what the runways. There over the next several years what the bases this year.
We're not going to go into specific a breakout of zoro, let's leave it at its making a small amount of money this year.
Okay Fair enough and then how should we think about the Louisville facility coming online in the fourth quarter here and then into next year, both from I guess.
What are your expectations for it I guess from a market.
Our growth or cost perspective, and I know you mentioned supply chain favorability that you expect in the fourth quarter I don't know if that's part of it or is that something else just curious any color on that.
I think I think I would answer that two ways one is long term.
The lose the facility.
Divides capacity and helpful capacity in a couple ways. The first thing it does this allows us stock.
Probably 200000 more items in the network because it's it's a very good backup for Chicago, Greenville, New Jersey, and even down to some degree. So it allows us to stock more items and have more breadth, which provides better customer experience AD and typically that does drive that's drive growth.
The other thing it does effects to the world ports. So it gives you overnight they are ready for sale.
Tail items slow moving items in the network to get to customers, who need them and Thats a better service them goal.
For your customers.
We are working through exactly how it to bring the building up we're starting to receive in the fourth quarter.
I will talk more about that in together the fourth quarter in terms of what we're using the building for exactly next year and how we're bringing that building up is huge.
And it's going to take a couple of years to get to full capacity for sure that we're going to leverage that building to provide better service to customers next year.
And improve our cost structure as well so we'll talk about that.
Thank you. Our next question is coming from Michael Mcginn from Wells Fargo. Your line is not alive.
Thanks, Bob real time, if I could switch gears through more of a long term.
On the mental question regarding the I must assortment model.
Having visited your New Jersey DC there was a.
Distinct concerted effort on what shows up in a red box versus what shows up in a blue box I'm. Just wondering long term what kind of thresholds are you putting on the third party market and some maintain branding are they going to get national account freight pricing how does that feed into your supplier rebates discussions longer term. If you could just answer those quick.
Russians regret.
So are we will have as we build out the analysts assortment. We left partners that provides listings on branding whether or not it today boxer label is probably up for discussion at this point still but the idea is we'll make sure we retained as our branding.
Zora, we'll have more ownership for its own.
Its own face.
It will still leverage freight contracts that we have a granger.
Leverage some something that granger, but in general there will be more independent the value proposition, we independent and the business with regard to better.
And the growth in that business that feed into the general Granger supplier rebate conversation or is that.
Something separate.
For stuff that we start jointly it definitely well stuff that we don't hold on.
Thank you we reached end of our question answer session I want to turn the floor back over to did you Mcpherson for any further closing comments.
Terrific. Thanks, Thanks for joining us this morning, I'll just reiterate what what we feel are really important.
About our expectations moving forward in our U.S. business, we feel that scale really really matters and gaining share is incredibly important.
And so our expectation is that we're going to grow revenue.
300, 400 basis points fashion in the market, we feel like we have a great opportunity to do that with a relatively stable gross profit and continuing leverage on the SJ line going forward in Canada, we have improved customer experience, we're re engaging customers in a positive way if we get volume back into the business, which is our entire focus right now we're going to begin to flow.
Just to drive profitable growth.
We're excited about the able to sort of them all the investments, we're making even more excited about the growth path there and we feel really really good about a lot initiatives with cabin and customer experience will provide so appreciate the time today.
And look forward to talking you soon thanks.
Thank you that does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.