Q4 2019 Earnings Call
Greetings welcome.
Welcome to the W.W. Grainger fourth quarter 2019 earnings conference call.
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Ill now turn the conference over to our host.
Irene home and Vice President Investor Relations. Thank you you may begin.
Good morning, welcome to Granger fourth quarter full year 2019 earnings call Whitney or Dietrich Fair thing, Chairman and CEO and Oh, great. After <unk> CFO as a reminder, some of our comments today maybe forward <unk>.
Actual results may differ materially as a result, various risks and uncertainties, including those detailed in our after the filing reconciliations of any non-GAAP financial measure its with their course funding gap that sure are found in the tables at the end of life presentation in our Q4 press release.
Which are available on our IR website.
This morning's call, we'll focus on their jumped at Bristol fourth quarter, and full year, 2019, which exclude restructuring and other items that are outlined in our earnings press release.
Now I'll turn it over to Detroit.
Thanks, Irene good morning, Thank you for joining us on today's call will talk about EUR 2019 performance and key accomplishments and discuss our growth priorities for 2020 [noise].
I will then cover our financial performance for a quarter in a year or detail as well as our 2020 guidance.
Late last year, we introduced our team members to the Granger edge, our new strategic framework that defines who we are.
Why we exist how will work together to achieve our objectives.
Granger, our purpose is to keep the world working.
Whether that means helping a hospital focused on patient care.
You factoring plant focus on building great products were school focus on teaching the work we do in the background helps keep facilities running so our customers can focus on what they do best that's a purpose to we're all very proud of as an organization.
The framework also outlines instead of principles to define the behaviors, we expect from our team members working with each other.
Our customers that are supplier partners.
We are holding ourselves accountable for these principles I believe they will help us execute our strategy and create ship value for shareholders.
These are not just worked on a page we are committed to making these principles come to life and everything that we do.
The Granger at provides a foundational framework for our strategy as we work to consistently serve our customers and gain share we gained share through two distinct business models that allow us to leverage our scale and supply chain to support customers.
Different needs.
Our high touch solutions model serves customers that have complex needs.
Looking for more tailored solutions.
Through this model, we developed powerful customer solutions.
Liver, a great customer experience and develop deep customer relationships.
It's all stars for what we call advantaged MRF solutions that means being able to get a customer the exact product they need to solve a problem quickly.
That means understanding more about our products and customers than anyone in order to help them solve problems and to create value for our customers.
It takes the form of intuitive digital solutions segment specific solutions and value added services [noise].
We then leverage these solutions to our child itself and services teams to build deep customer relationships based on an exceptional customer experience.
Our Granger, U.S., Canada, and Mexico operations as well as our crumbling favorite businesses within this model.
And our analyst assortment model, we provide less complex customers with an expansive product assortment and easy to use website.
This business is based on acquiring customers leveraging our simple to fishing customer experience to develop and maintained strong customer relationships.
Oh, no true when it's all businesses fit within the small.
When we execute against these two models, we consistently gained share we grow profitably we delivered strong shareholder value.
That's our commitment.
Flipping to slide five and before I jump into 2019 highlights I wanted to touch briefly on work we've done over the last few years strikes in the business into position Granger for success.
This work has ensured that booked our high touch solutions model and our M. assortment model at the capabilities to win in the marketplace.
Most of you are familiar with the pricing reset of our U.S. business back in 2017.
This change has allowed us to grow with customer groups, we've been losing share with for years, most notably midsize customers beyond the pricing actions, we have made important news.
We have verticalized ourselves course.
Customers today demand more expertise from our interactions. This change enabled our sales teams to develop domain knowledge and deepening customer relationships.
We have added to inside sales group focused on high value midsize customers.
We have centralized our call centers to improve service and scale and help manage cost.
We have restructured our keep stock inventory management program, and we now begun expanding capabilities for our customers.
We have added capacity chart U.S. supply chain.
We've made significant improvements to granger dot com to make search easier for our customers.
And we've done all this while realizing significant leverage on our cost structure.
These changes fed to set the stage for what we accomplished in 2019 will accomplish moving forward.
Outside of the U.S. business, we have reset the foundation for our Canadian operations for what we believe will become it consistently profitable and growing business.
We have shed non core international businesses over the last few years and are now focusing our efforts on places, where we can create a meaningful profitable and competitively advantaged position.
Our attention and focus moving forward will be on a high touch solutions model, primarily in North America as well as our growing EPS assortment model.
We continue to evaluate portfolio our portfolio to ensure our time energy and investment, especially where we can at the most value for the long term.
Our execution on these efforts over the last few years, just laid a strong foundation for profitable growth for the near decade.
Moving to slide six as you've heard from our competitors suppliers and customers are market was certainly challenging at 2019 with market growth declining as to your progressed in the face of these challenges the Granger team delivered solid results for the year, mainly in mind, what the expectations, we outlined back in January 29 team.
To be clear, we are thrilled with the absolute performance in the year, but it was sold on a comparable basis.
For the total company.
We drove 3% daily sales growth across the company on a constant currency basis.
From a profitability perspective, we expanded total company operating margin by 10 basis points in 2019, driven by continued success are leveraging Irish DNA. The team did a nice job managing spending 29 team and we achieved our goal to minimize SG. They grew up less than half the rate of ourselves from.
We expect to continue driving leverage as we prudently manage cost while also growing the business.
We generated over 1 billion of cash and 20 Nineteena returned roughly the same amount to shareholders in the form a share repurchases and dividends.
Well the absolute numbers, where do you sense in many ways 20, not too much stronger on the execution trucks that we believe sets us up well going forward.
And the U.S., we outgrew the MRO market by 150 to 200 basis points to 2019 at her outperformance to the market gained momentum throughout the year.
We exited the fourth quarter growing about 300 basis points faster than the market. This performance is driven by are ongoing investments in growth initiatives, which support our strategy.
We remerchandise 1.2 billion a products in 2019 more than double anytime in our history and we are on track to complete another 1.6 billion and 2020.
These category reviews, along with marketing activities are driving incremental revenue.
We've been testing new strategies and are happy with rebook results thus far.
Return on AD spend steadily increased over the course of the year.
We saw nice improvements in the focus of our sales and service.
Particularly around embedding granger at our customers through Keepstock and value added services.
We re energize, our large corporate account efforts and one from significant contracts on the second half.
Hi touch offers unmatched in the market. We believe we will continue to gain share with these important strategic customers.
And our endless assortment model, we grew revenue, 19% in 2019, driven by strong growth at both no trial and Sorl.
We invested to enhance our Sorel operating 2019, including the addition of roughly 1.5 billion skews city assortment pushing the total SKU count to about 3.5 billion products.
We made significant enhancements disorders technology capabilities, including the launch of a new product information system at a customer analytics platform, allowing zohr to be less reliant on grangers infrastructure.
We also improved our marketing capabilities, and Saar, which should help us gainshare profitably moving forward.
And our Granger, Canada business, we saw revenue stabilize and customer feedback improved significantly dropped 2019.
We expect to return to growth in the business in the back half 2020 at our topic. The platform, we haven't Canada will prove to be sustainable and profitable in the future.
Even when our results were poor we made progress specifically, our crumble business in the UK had a very challenging financial year <unk>.
For context, adjusted total company operating margin in 2019 would've been 12.7% without problem or 60 basis point improvement.
Further we took a noncash impairment charge in the fourth quarter to write off substantially all of the intangible assets, including trade names customer lists.
<unk> said the business made great strides in service and our customers now talking about private car multi moving forward.
We also took action in the fourth quarter to take 10 million pounds of administration costs out of the business.
This team has great clarity and understands the urgency required to approve the performance of the business going forward.
Well 29 team are certainly challenging we are proud the work we completed to position us for success moving forward.
Turning to 2020, we plan to continue investing support our strategy. Our expectation is that we will consistently outgrow the market, including a target of 300 to 400 basis points outperformance in our core high touch business in the U.S.
Historically brought approximately 150 basis points faster than the market our actions and investments over the last several years through by the confidence we can grow to more accelerated rate.
And 2020, we are focused on several initiatives initiatives to support that growth.
We will continue to work the work we began in 2019 to re merchandise assortment to ensure we have to write products to serve the needs of our customers for 2020. This includes Remerchandising 1.6 billion, a product, including selective skew additions to enhance our assortment.
We expect to continue to learn and improve upon the way we execute our marketing activities. We learned a lot over the last couple of years, including analytics focused evaluations around our investments in search and display radio catalog and direct marketing.
We expect improve share gain from both incremental marketing investments and for more effective marketing and 2020.
We remain focused on bolstering our expertise in digital and technology solutions in order to serve a more sophisticated and tech enabled customer base.
We recently went live with the first version of our new product information system and it made great improvements with our customer information.
Most support our merchandising and marketing efforts.
We will invest to enhance our customer experience and strengthen our world class customer service backbone through network capacity and utilization investments.
With our Louisville do you see coming online soon were adequate we're focused investments a DC capacity, what's significant service benefits without as much capital outlays receipt in the recent past.
We're also planning to selectively at sellers to be more relevant in certain segments and geographies and we will equip our sales organization with the right tool set to ensure they can serve our customers most effectively.
We have developed improve processes with large multi site customers and continued to be aggressive in helping these customers consolidate with granger.
We will continue to embed our solutions with a more complex customer store inventory management offerings.
Finally remain remain committed to the ongoing turnaround efforts in Canada, and with our Cromwell business in the UK.
In Canada, the business was slightly profitable 2019, and as Tom will explain we expect to roughly breakeven again in 2020.
This business is now structure to run as an extension of our core U.S. operations. This will help us make the needed strides to return the business to meaningful profitability over the course over the next couple of years by demonstrating a consistent uptick in revenue and margins.
For Cromwell I mentioned, our struggles in 2019. This is a business that is that a crossroads right now we need to start seeing progress over the next 12 to 18 months to assess whether the business can run profitably.
We've made great improvements in service, which are expected to translate into revenue and profitability. Our team will be evaluating this closely and 2020.
Successful execution of these initiatives will position us to consistently and profitably outperformed the market in 2020 and beyond.
Now, let's talk about or at least assortment business first and foremost we're pleased to have announced earlier. This morning that was sized Suzuki. The current CEO of minnow true well now leads the combined endless assortment business across Granger.
I'm personally very excited about this the site was part of the founding team up I know trail and has been instrumental in the tremendously profitable growth that this business. That's we first launched 20 years ago.
He has also played a critical role in the launch of Zoro in 2011.
Under besides leadership, we expect to continued strong growth and profitability of our most assortment businesses.
And the U.S., we plan to accelerate source adoption of the no trail playbook in order to capture growth and implement best practices. Specifically, we plan to continue to rapidly expands our assortment beyond the 130 billion dollar industrial MRO market. This will allow us to tap into markets and customers that arc served through other greater channels. Our goal is to have 10 million skews.
So our portfolio in the next three to five years utilizing third party suppliers with direct fulfillment capabilities.
This is worked well from an ultra which has 20 million skews and we're confident worked for zoro as well.
We're also continuing to develop and improve our marketing and customer segmentation tools Zoro. We've made most of these investments are 2019 and expect to start to see the results here in 2012.
First our UK, we will continue to leverage the Cromwell supply chain and execute our strategy to grow the business and drive profitability. These efforts include expanding assortment enhancing web site functionality and washing effective marketing and customer acquisition campaigns to create a vibrant marketplace.
So our UK business continues to grow very quickly and the economics of this business looks to be quite attractive.
Expect this business to be profitable in 2021.
From a natural the science will Ts team will continue to execute their successful growth strategy.
Putting additions to the assortment of network enhancements to improve reliability and speed. This business is produced impressive and profitable growth you read your route and we expect that to continue.
And let's just from a business has been a great asset for Granger and we see the opportunity for tremendous growth.
Moving forward.
With that I'll turn it over to Tom for detail on our 2019 performance and 2020 guidance.
Thanks DG.
I'll start with a recap of our 2019 total company. Adjusted results then move forward to the fourth quarter results by segment.
Overall, we're pleased with our 2019 performance despite a challenging environment.
Sales were up 3% on a constant currency basis.
Driven by 2.5% from volume and price favorability, 0.5%.
FX had a negative 0.5% impact.
It should be noted that our core you lots and endless assortment business.
Bind grew at 5% in the full year.
Consistent with our guide our gross profit margin was down 50 basis points versus the prior year.
The decline was primarily driven by our lower margin enlist assortment business, which is growing at a faster rate than the rest of the company.
Contributing to the decline.
Both.
Natural and Zoro had lower gross margin.
Well not show faced freight headwinds in Japan, and Soros, lower gross margin was driven by unfavorable product mix and promotional activities.
Elsewhere slightly lower gross profit margins in the U.S. were offset by higher gross margins in Canada, driven by supply chain favorability.
Despite meaningful investments in advertising technology, and zoro, we drilled SGN a leverage driven by continued cost management actions.
Yes, DNA as a percentage of sales improved 60 basis points year over year as our SGN a spend remained flat to 2018.
As a result total company operating margins for the year increased 10 basis points with a 20 basis points improvement in the U.S. incremental margins for the total company was 17%.
Aided by 22% U.S. incremental margin.
We generated operating cash flow of over a billion dollars, which we used to invest in the business and return capital to shareholders.
Turning to north of $1 billion through dividends and share repurchases.
We did this while maintaining a debt to adjusted EBITDA ratio of 1.4 times.
Operating cash flow was 116% of net earnings.
Our return on invested capital was 29.3% or 80 basis points favorable to the prior year.
All in considering the choppy market, we're pleased with the results.
Looking at the quarter daily sales increased 3%, including 3.5% from volume, partially offset by 0.5% unfavorable price.
Gross profit margins for the quarter was down 50 basis points due to business unit mix as well as mix shift headwinds within our large customer group in the U.S.
These impacts were partially offset by favorable supply chain improvements in Canada.
SGN, a cost increased 3%, but slightly less than sales growth driven by marketing and technology spend in the U.S. segment and investments to support Soros growth.
We could have dialed back spend in the quarter to achieve better short term profitability outcome.
But we are focused on driving sustainable value over the long term and continued investment in the business supports this effort.
Operating margin declined 40 basis points in the quarter as that's DNA leverage was more than offset by the decline in gross profit margin versus the prior year.
Earnings per share decreased 2% in the quarter due to a higher tax rate as we lap the prior year benefit from our clean energy investments.
Looking at our performance in the U.S.
I'll start with sales for our large and mid size customers.
The U.S. tomorrow market inline with macroeconomic indicators declined throughout the year.
We estimate that the U.S. MRO market was flat to down 1% in the fourth quarter and was up <unk>, 0.5% to 1% for the full year.
In the fourth quarter, our U.S. large customer business grew 3% or 350 basis points faster than the market.
Outperformance to the market for large customers accelerated sequentially as our growth initiatives began to take hold.
Our U.S. mid size customer business grew 5% or approximately 550 basis points faster than the market.
It's important to note that our growth with these two customer groups remained stable despite slower market conditions in the quarter.
Overall U.S. segment daily sales grew two and a half percentage in the quarter or about 300 basis points faster than the market.
Sales growth in the quarter included 3% from volume, partially offset by unfavorable price of 1%.
Intercompany sales provided a 0.5% positive impact in the quarter.
As noted in our last call balancing market based pricing with cost inflation and share gain led to a choppy result.
Dropping price result throughout the year.
Having said that we finished the full year with favorable price of 0.5%.
While gross profit margin was up 50 basis points sequentially.
We were down 100 basis points year over year, driven by a few factors, including the growth of intercompany sales at lower margins the lapping the prior year supplier rebates.
And a mix shift within our large customer subgroup.
We've gotten more aggressive in helping a large multi site customers consolidate spend with granger.
This includes pursuing new customers, where we want to see a significant contracts in the second half of 2019, as well as deepening and broadening relationships with our current customers.
This large customer growth can create a drag on gross margins in the short to medium term, while we demonstrate our value proposition and expand share of wallet with these customers.
However, this is absolutely the right strategy to drive long term profitable growth.
As we add an expand customer relationships, we're gaining share and more deeply embedding granger into what our customers do each and every day.
Given the Lumpiness of our pricing actions in 2019, we think looking at gross margin on the full year as more meaningful.
In this regard our full year margins were down 30 basis points, reflecting the remaining.
Impact is contract renegotiations and large customer mix headwinds.
Ultimately, we remain confident in our ability to pass along inflationary cost increases.
SGN a costs were flat on 2% sales growth.
It was favorable 60 basis points to the prior year.
Operating margin declined 40 basis points in the quarter.
As a decline in gross profit margin was only partially offset by strong SGN a leverage.
Looking at op margin for the full year, you'll have segment operating margin was 15.8%.
Which is in line with the guidance we set in January of last year and represents an expansion of 20 basis points.
Moving on to other businesses.
Daily sales increased 9.5%.
Including 7.5% from volume.
And 2% from favorable FX.
Growth was driven by continued expansion of our analyst assortment business.
Which is up a combined 18% between zoro and whatnot trial.
Gross profit margin declined 10 basis points in the quarter, driven by negative mix, resulting from faster growth in endless assortment.
Operating margin declined 140 basis points, driven primarily by investments in zoro and performance at crime law.
Cromwell generated an operating loss of $35 million for the full year.
Further while not reflected in our adjusted results, we took an impairment charge in the quarter to write off substantially.
All of the remaining intangible assets in our Cromwell business.
Turning to slide 16.
Daily sales decreased 11.5%, including 10% related to volume decline and 1.5% related to unfavorable price.
Price was driven by just constant mix as we begin to win back large customer business.
As we finished the year daily sales stabilized.
And we're beginning to see volume growth from new and existing customers.
Gross profit margin increased 595 basis points over the prior year, primarily driven by supply chain efficiencies.
While a sizable portion of this benefit is nonrecurring we expect some benefit will continue moving forward.
SGN $8 were 10% lower than prior year, but the rate was unfavorable 50 basis points due to volume.
Operating margin increased 545 basis points over the prior year driven by the increase in gross margin.
Now, let's take a look at 2020 guidance.
Consistent with last year, we will provide guidance at the beginning of the year and only plan to make updates if we expect results to fall materially outside the guided range.
With that we expect to deliver another year of solid growth for the company in 2020, as we execute upon our growth priorities and continue to support our customers.
For the total company, we expect topline growth of 3.5% to 6.5%.
Driven by outperformance so the market in the U.S. and continued expansion of our enlist assortment business.
In the U.S., we expect the MRO market will remain consistent with where we exited 2019.
Hovering around flat to slightly negative.
Even with the static market, we remain confident that our industry know, how deep customer relationships and scale, coupled with our growth priorities position us to continue to capture share.
For 2020, we expect to outgrow the broader Emerald market.
Approximately 300 basis points.
This is a step toward our stated long term target to consistently achieve 300 to 400 basis points about growth each and every year.
We expect to continue growing our endless assortment business at around 20% in 2020.
And some are not sure team delivers consistently strong results and as we rapidly add skews and leverage our 2019 investments that zoro.
From a profitability perspective total company gross profit margin is expected to be down roughly 110 to 50 basis points in 2020.
This is driven by business unit mix with the higher growth of our lower margin endless assortment business.
As well as mix headwinds within our us large multi site customer sub group as we focus on consolidating MRO spend for large corporate customers.
As it relates to price our intention is to remain market competitive while growing share an offsetting cost inflation.
Having said that price is difficult to predict given the muted an uncertain economic environment.
We will stay nimble.
As it relates to tear us our guidance assumes the status quo environment any changes will be evaluated if and when they occur.
Total company operating margins are expected to remain consistent at the midpoint as we anticipate significant SGN a leverage as we grow the topline while remaining prudent on cost.
These topline in profitability targets as well as continued execution of our share repurchase program are expected to produce earnings per share.
$17.75 to $19 in 25 cents.
Or 3% to 11% growth.
From a quarterly timing perspective, we do anticipate that both top and bottom line performance will improve in the back half of the year as our growth priorities take hold and we lap tougher comps at the GP level in the first half.
Recall that we increased prices in Q1, 2019, which were subsequently style back in the second and third quarters. In addition, the full impact of tariff cost increases.
We're not realized until later in 2019.
Continuing with guidance on slide 20.
Adam segment level, we expect operating profit margins in each of our business units to remain relatively stable.
In the U.S. operating margin is expected to be between 15.6% to 16% with a midpoint in line with 2019 performer.
As discussed gross profit margins in the U.S. are facing headwinds primarily related to our pursuit of large customer contract to help grow share and deepen relationships in this choppy market environment.
We expect these GP headwinds will be offset by continued SGN a leverage.
For other businesses, we expect 4% to 6% operating margin.
After a year of significant investments in our analyst assortment model and lower than expected results at Cromwell.
We expect our actions in 2019 to produce improved 2020 results.
As we have discussed throughout 2019.
We expect operating margin at Zoro will trend favorably in 2020 and returned to mid single digit profitability by 2021.
In Canada, we expect to roughly breakeven again in 2020 as revenue growth built sequentially in response to our improved service level and profitability begins to reflect.
Our cost base reset.
As noted earlier, we will lap some nonrecurring supply chain efficiencies in the fourth quarter, which will be a headwind to operating margins in the new year.
From a cash flow perspective, we expect operating cash flow to be between 1.1 and $1.2 billion.
We planned capital expenditures of about $250 million.
The large majority of investment this year will center around our U.S segment and lets assortment business in order to continue our growth in these areas.
We expect the balance of our cash to be used to fund our quarterly dividend and continue executing against our share repurchase authorization.
2020, we're expecting between $600 million to $700 million.
Of repurchases.
Which continues to reflect our confidence to successfully execute our strategy and growth priorities with that I will turn it back to DG for closing remarks.
Thanks, Tom as I look forward to 2020 and beyond I'm excited about the opportunities that we have in front of us and I want to thank the granger team for their hard work and dedication.
We are well positioned to continue to gain share in the U.S.
We continue to drive 20% growth profitably in the I'm assortment model and to improve the rest of our portfolio.
I am confident our ability to drive long term value for all stakeholders.
And I'm confident that we're going to continue to to extend our lead in the interest industry.
So with that I will open it up for questions.
Thank you.
At this time, we will be conducting our question and answer session.
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My first question comes from Ryan Merkel with William Blair. Please state your question.
Hey, Thanks, So first off I'm, a little surprised by the 2020 gross margin guide down about 80 basis points at the midpoint I had thought that after the price reset you were thinking at gross margins would start to stabilize so I'm trying to figure out for 2020 is is the big change the focus on a large accounts or whats really changing.
Well, Ryan there's really two things happening I mean, one it's just it's just the alger above our endless assortment.
Business unit getting much larger and growing at 20% and the gross profit profile that that business has so that's a very big portion of it which is which is getting bigger obviously and then one of our key growth initiatives is going after the large customers.
And.
Maybe just to unpack that with a little example, right now we've been heavily focused on location by location basis. As we stated as part of our growth initiatives, we're working more with the C suite to try to get a broader.
Broader.
Range of of locations in terms of.
Going after a bigger piece of the company's pie and with that initially you'll have to do some sort of write down usually to gross margin as it relates to product mix as it relates to your offer but then over time, there's plenty of levers to increase that gross margin, whether it be with product substitution standardization.
And reducing overall by so we're confident overtime that we will improve the gross margin with those customers, but for for 2020 were being prudent and putting that in the guide.
Okay that makes sense I guess for my follow up sort of related I'm thinking about the long term growth algorithm and so maybe you can help us should we be assuming that gross margins are down sort of 50 60 basis points structurally because this mix, but then you will offset that with SGN nay. So we should think about EBIT growth.
Equaling sales growth and then if you do better than mid single digits, you, probably do EBIT growth a little bit better is that about right.
So you're right I guess this disease, yeah, yeah. So I in the U.S. business, let's let's start there our assumption is that we gainshare three to 400 basis points faster than market. So mark rose, 2% through cycle, we'd be at 5% to 6%.
At that so it would you see this coming year is a projection of market down half a percent at that you see operating margins flat for the U.S. business year over year, So two and half percent growth fight operating margins at 5% through cycle, we'd expect to get a little more leverage than the slight pressure on GP over time and see some expanding margins in the U.S.
So I.
I think I think it's a good this is a good sort of guide on the economics of the business at two two and a half 3% you're probably flat on operating margin to us if you get more growth that you're probably positive.
Thank you.
Our next question comes from David Manthey with Baird. Please state your question.
Hi, good morning, everyone.
First question when I look at slide five you clearly made.
Many meaningful upgrades here and I'm trying to figure out how many of these were defensive versus offensive in nature.
Essentially how will we measure the success of all these changes over the next three to five years. It looks like maybe a little bit of sales outgrowth, but are there other metrics you'll be tracking to see the success of these initiatives.
Well I think I mean, these are just to be clear Debbie these initiatives on the left hand side on the U.S. are mostly rearview mirror initiatives in the sense that centralizing the call centers has gotten us improve service and lower costs. So and we expect to continue to get lower cost. So that's one that you'll see in the SGN a line.
If I, if I looked at our or to cash process and customer feedback in the U.S. right. Now. It is it is at an all time high it got better this year significantly relative to the competition. So some of these moves have been around continue to improve service and you see that in supply chain capacity.
Verticalizing the Salesforce, we think you're going to see in terms of part contributing to that 340 basis point growth.
Faster than the market and so it's a mix a lot of these are our have been done already when we go forward, we're going to start talking about some of the initiatives that are on page seven re merchandising assortment I mentioned, we re merchandise 1.2 billion. This last year, that's far more than we've ever done in a single year, we'll do 1.6 billion. This year, we see that directly lead.
To sales growth and we measure that very tightly marketing both the effectiveness of marketing and increased marketing budget, we measure that very very tightly we know how much that contributes to growth.
The large customer initiatives that that Tom talked about we know how much that's leading to growth and what impact that has so.
We are tracking we are tracking everything we wanted to put page five together to say there's been a lot of change in the business and we feel like we're in a good position to really drive the growth initiatives, we're talking about.
Okay, Yeah that makes sense.
We want then and you partially answered this in your answer to the last question.
Over the last couple of years, you clearly grow nationally at a rate lower than sales growth or even gross profit dollar growth.
And your guidance seems to imply more of the same inline with your targets.
As a distributor there is obviously inherent inflation in some of the areas hundred cost stack.
You're talking about the the other major areas of expenses that you're keeping flat or reducing in order to keep SG. They in check so well in this lackluster environment I'm just looking for the big two or three buckets that you think are really the drivers of that performance. Yeah. So so if you look at the cost structure and I'll focus on the U.S. again, you know there.
There's some big buckets of cost where our expectation is that we will get productivity on a consistent basis. So in our distribution centers. We continue to automate we continue to get process improvements to drive.
Dollars cost per line down and our contact centers.
We continue to get productivity, we continue your productivity and ourselves first force through revenue per seller increases.
Our expectation is that the cost increases that you talk about will be covered by productivity in those areas and we basically have developed day process at an expectation that a philosophy that we will continue to drive productivity during each of those areas, mostly to continuous improvement that basically offset those cost increase.
Alright appreciate it thanks DG. Thanks.
Thank you are in next question comes from Deane Dray with RBC capital markets. Please state your question.
Thank you good morning, everyone.
Right.
Hey, I just yeah up from one to say I appreciate your level of clarity and contacts in describing.
Some of the changes here on gross margin that's really helpful.
And just to clarify in Tom's answer when you talk about the mix shift to large customers that you will sacrifice over the short medium term the gross margin, but once you build to share with these customers longer term you, you're you're better position for profitable growth.
What's the timeframe on this I know you say longer term, but you know are we talking multiple years I don't think you mean, it takes that long because if you're moving to standardization. Okay. So just sharing with us more of the timing of this because it doesn't make sense I just.
The short term long term.
Seems a little bag, yeah, no well first of all you've got to remember the we've got a we've got a ton of customers. So this initiative is in various stages of of development by individual customers. So it sounds like you snap the chalk line and you start everything at one time so.
When we're talking about short to medium term, we're certainly talking about lot of it will happen within 2021 time frame its really building the trust embedding with the different large customers. So we can rich and mix. So we can have products. The substitution. So we can.
Have standardization those types of things. So I guess you know we would look at this is a transition year from 2024. This initiative Dan do you I guess I would add that.
When we look at large customers, we track what we call economic earnings, which is it more sort of holistic view of the profitability of customers and our goal is to make sure that we drive growth and profitable growth through through that metric as opposed to just gross profit. So at times, we will take gross profit it to the short term.
For improving the cost structure elsewhere to provide the ability to consolidate customers and then provide value for those customers I think another thing important parts to note is these are really large multi cell site customers. So you know this is really hitting home runs versus hitting singles and doubles. So this is.
Active business ticket to get to and you know just launching off Dgs comments you know we can we can lever our SGN a at about 2.5% growth. So we can afford to take the time to develop these very important customers.
Great and then just on a follow up could you put this negative price in context, because what we're hearing elsewhere around the industrial distributors that not only are there. Some of it is delays in getting supplier price increases through but there is heightened competition with them.
The distributors how much of that does that play and the negative price that we're saying.
I think the important thing when you talk about you know prices to look at it on the full year basis, I mean, as we said in our prepared remarks, our pricing was very lumpy you'll recall from previous calls we were quite aggressive in Q1, and then we dialed that back in Q2 in Q3.
We.
We made a conscious decision not to raise price in the back half of the years as to not be disruptive to our customers. When you look at it on an entire basis of the full year.
Our price what our price cost was roughly neutral so and we're happy with that.
Thank you. Our next question comes from Christopher Glynn with Oppenheimer. Please state your question.
Thanks, Good morning, and just kind of following up on.
Dean's question is there any defensive component.
No you pricing with the large customers or is that really all.
Emanating from your.
Tactical execution by customer.
Just for share independent of market dynamics.
I guess, there's always some tactical but I would say the majority of the latter you know some of its product Merck mix within a given customers some of its customer specific next.
I guess I guess, Chris I mean, I think maybe your question that underneath the question is.
Has that the competitive environment heightened with large customers I think.
It's always been competitive ads, we will always be in a situation, where we have to be.
Effective in navigating that competitive environment. It doesn't feel like it's changed dramatically, but certainly its competitive.
Okay and then.
Also I think you.
About how it kind of phases in you noted by customer do you do suggest that this would be a 2020 2021 process and then you might open up some gross margin headroom after 2021.
It's difficult it's difficult enough to predict 2020, I'm to try to predict 2021, ideally 2021, we would we would get back to a you know a a more a lesser decline in gross margin on a year over year basis, I would say I would say Chris that we.
We have a lot of.
A lot of confidence in the value proposition that we have our services exceptional our customers want to do business with US overtime, we think that we should be in a position too.
Get price as much as as anybody.
To be able to continue to have very strong operating margins with our customers. So we're confident in what we're doing.
You know in a short term with with traded with with the environment. It's been it's been a little bit lumpy. It clearly, but we're pretty confident in the long term ability to to improve or.
Yes, I appreciate the offense component of it thank you.
Our next question comes from Patrick Bowman with JP Morgan. Please state your question.
Oh, Thanks, Good morning, D.J. good morning, Tom.
Maybe just started off on the.
You know midsize versus large customers just wondering.
Q next year or I guess this year into 2020, if you'd expect midsize customers to still outpace larger or does that slip.
With.
So you share gains initiatives share gain initiate you've been talking about for large and then somewhat related to that.
You describe U.S. outgrowth in the quarter as 300 basis points and then you said large was 315 midsize was 550. So I'm just wondering what dragged down the total segment.
Sure I'd take the first part of the question first yes, definitely we would expect medium customers to grow faster than than large I guess the way. We look at it is you know large at at about 300 dips faster than the market.
Midsize about 500, bips faster than the market I'm on the low and as it relates to the chart that shows large and mid size.
There's a service revenue component that that is included in the those charts for large and medium not to get to technical on you, but but that is a very important part of our business that is really embedding what the customer on the U.S. segment that is reflected.
On a net basis, meaning we adjust cost out so that's the difference between the two numbers, where you're always going to have large and medium be higher than the U.S. segment.
Okay I can follow up on that after just one more thing you just you could talk about the path forward at Cromwell and what's what's embedded in your other businesses guidance. There in terms of losses from 2020, and then on the same topic for other businesses. The magnitude of zero investments made in 2019 and when do you still expect most of that spending the fall.
Off in 2020.
Yes, So let me let me, let me focus on crop, which I think that others are on Cromwell, We expect continued improvement and the businesses and we see an ice pack crawl, while we would expect this year to cut the losses roughly in half.
For this year that that's our expectation.
And you know I would say, there's a couple of things going on at Crown. While one is certainly the market has not been great and a portion of it has there related to that a lot of it has been.
Subsurface issues, we had that we have completely worked through.
We are hearing much better things from the marketplace. Our net promoter score is gone from not very good to quite good actually.
And the team is pretty excited about or do we have a new team over there we're comfortable with the actions there taking.
Crawl, while it is interesting if you remember why we bought Cromwell It was as a platform for the online business and because we thought it was good business sort of UK is actually doing quite well and we would expect it to be profitable 2021, so really by the end of the year, we should have a view as to whether or not both of those businesses can be successful and profitable and that's.
That's when we'll really sort of evaluate what we think we need to do.
But as I mentioned the on the.
The prepared remarks.
We have taken a bunch of cost out of that business. We have seen great service improvement, we have one or two contracts with customers recently that gives us some confidence and things are coming back.
It's still a is still see climb to get better.
But the investment in zoro.
Most a lot of those investments start to come off this year, we made significant investments in the fourth quarter. Some systems investments that that had a few glitches but through them.
We expect improvement this year and then significant improvement again in 2021 with that business and as I mentioned, we're excited emphasizes.
Lead that business he's got he's been through this at the same point with Metro add really feel like he's going to help that business accelerate performance going forward.
Thanks, a lot there is no. There's no reason, we can't see the margin profile longer term for zoro be consistent with Monotaro.
Thank you. Our next question comes from Adam Allman, with Cleveland Research Company. Please state your question.
Hi, good morning.
Hey, Tom I guess could you expand a little bit more about your your comments earlier about the cadence of earnings for the year I'm just wondering the.
Fourth quarter cost for zoro were higher than expected. It does not carry into the first quarter here Denzer ironed out and then are those that are moving pieces, we should keep in mind like.
The customer show other investment spending for little Bill I'm, just trying to get a sense.
So we'd be bracing for.
Larger earnings declines in the first quarter and into the second and then recovered in the second half of the year.
Well, if you're talking specifically about you know SGN Algo I'll go back to Dgs answer on on Zoro <unk>.
2019 was an investment year for zoro, where we spend heavily in SGN a related to adding people technology and an advertising.
That will be reduced significantly.
Beginning in beginning in Q1, so that will be a material impact on the way I would think about SGN. A is the way. We've we've talked about it we you plan on growing SGN a at half the rate of sales.
We'll continue with the productivity that BG talked about in a in a previous answer.
As it relates to gross profit we see.
No different than our normal seasonality in a week said, we expect Q1 to be greater greater gross margin than Q4. This year and then we expected to decline throughout the year with Q4 being a relative uptick to Q3 does it does.
Second at your question.
Yeah, Yeah, though.
And then and then secondly could you expand a little bit more about where you guys are seeing in the near term from.
Customer spending and general environment perspective, it looked like most of the end market.
The sales growth and margin was relatively similar.
The last quarter, I guess did anything stand out too.
As notable and then as we think about the investments that are being made into the sales force and Verticalization efforts.
Last year are there any vertical markets that we should look.
[music].
Since the accelerating growth next year as evidence of pay off from those investments.
Yeah, Adam so so what I would say is that.
We are critical to see a very wide swath of the economy with our customers.
We have not seen much much change over the past eight months really I would say we continue to see.
Market that is slow growth, but not trailing off in anything worse at this point.
And.
The customer and market results that we've seen the last two quarters.
Our expectation is that there won't be dissimilar start the year and that they're likely to get a little better as the year goes along that will be our expectation.
At this point not much better a little bit better is you're going along so so I don't we don't see anything all that unusual and our end markets right now we haven't happened over the last couple of.
Okay. Thanks.
Question comes from.
Chris Dankert with Longbow Research. Please state your question.
Just one question for me. Thanks, so much for the update on large customer approach kind of swinging for the fences on volume there I guess could you get a brief update on kind of medium customer strategy. There's still some concern about as being more price competitive piece of the business. Just how are you balancing digital versus high touch and once we go to market look.
I couldn't be in customer in 2020 here.
Yeah. So you know midsize customers are actually less price sensitive and we continue to see much higher margins with with midsize customers.
We're trying to build build the growth so that can become a more meaningful portion of portfolio. We continue to see the ability under the Granger Brad to acquire new customers, we continue to see growth with our existing customers through our inside sales team and through fairly simple pricing actions, our service model really things to mid size customer.
As we can you get very loyal customers and to the funnel you know were digital first in the sense that most of our mid size customer acquisition comes through digital first touch and then we do a lot of worked to understand who the customer is what the profile as and move them through the cycle. It in some cases to get them to coverage that makes sense for them that has proven.
Be fairly successfully as Tom said, we expect to begin to go faster with midsize customers at higher gross profit then that we will report.
Yeah, I guess, just one sort of follow up on that I mean, the four to 500 basis points of above market in medium customer anything that helps kind of Oscar arms around what informs that are why that's kinda sustainable longer term.
Well I think I think the.
You know that the most obvious is is we lost a lot of that business. If you remember we were kind of 1.6 billion in that business went down to 800 something million and that were up.
Billion again.
There's a lot of customers that we continue to Reengage and you know a lot of are a lot of our marketing efforts are proving to be very successful with these customers and once we get customers back and they realize that we're not that you know that were reasonably priced very high service solution, they are coming back and forth.
Granger again.
Yes, they push the color guys.
Thank you.
Our next question comes from John inch with Gordon Haskett. Please state your question.
Hi, good morning.
Good question.
Did you I think in the past few years, you had mentioned that given after the price we said.
Pricing pressure from large accounts has kind of diminished because your price is there more competitive.
I don't like that is maybe changing a little bit into 2020 I wasn't obviously there is that defense very often components, but the whole things down a little reminiscent of what happened before you do the pricing resets. So my question is can you compare behave customers' behavior at todays prices.
How the with me usually go and then compare your ability to respond to that.
Two years ago before their pricing.
Yeah. So I mean, I don't think I don't think that situations that at all analogous back that we were losing share dramatically with higher margin customers, we're not doing that now.
A large customer business. Even back then was very competitive most of it was on custom pricing contracts that is still the same today the large customer pricing the up the advantage we got to the price change was that some of the tail spend was.
Easier to to get large customers sign up for because they weren't buying that frequently that prices that made sense that if that is still the case, we have similar pricing discussions with our customers now they are still competitive they were competitive back them, they're still competitive.
Okay.
Maybe looking at it.
A different angle mid size, obviously has been focused in the past few years and has been very successfully for you guys. I guess the shift to a large account then I guess you factored that kind of deemphasizing sofitel little bad a is it just a function of you know you have been.
Very successful went down once you could do with those accounts so.
It's hard to do more to further accelerate our growth in that market.
I mean, how you think <unk> I would say I would say we are not deemphasizing midsize customers at all we still think they will grow faster than large we are we are.
Making sure that we are competitive with our large customers and that's important obviously given the size of that customer group for us that as a bigger lever on growth at this point.
And so we need to make sure that we are growing with both but we are not de emphasizing anything we still think there's a long runway ahead from its as customer.
Thank you are next question comes from Robert Barry with Buckingham Research. Please state your question.
Hey, everyone. Good morning.
Morning, Robert your from the East Coast.
Yeah, just a few follow ups actually up looks like prices assume neutral in the guide is that right.
Yeah.
Basically we're looking at price cost to be relatively neutral as we said in the prepared remarks, we've got the three variables that we're trying to balance share growth market competitiveness in terms of pricing as well as passing on inflationary cost and you know similar to this year.
Going to balance those those three and we think we'll end up somewhere flattish from a price cost perspective.
Got it and I think when you first did the price reset the goal was to narrow what had become a very large premiums market, but still maintain some modest premium to go to market as the premium provider into price that way is that still true or it almost sounds like kind of alluding to the earlier question that maybe you're getting a little more aggressive.
We're happy to air actually on the side of under versus over pricing in the market. We still we still have a premium with our list prices, we will continue to do that.
It's a modest premium and we'll continue to have that and then.
I think they.
The comment earlier was when you're going after large contracts on a portion of the volume even get pretty aggressive and we've always done that.
I have to contain.
Yes, I think I think got it think you're making too much about price as it relates to large customers versus just a normal business dynamic where you're going from individual locations to a much bigger piece of a total company. That's just theres going to be part of as BJ says that you're going to have a certain part of the offer.
That's going to be priced aggressively to get your foot in the door.
Got it and just lastly, Tom on the gross margin edens through the year I understand in absolute terms higher Q1 and then down through the year, but have you alluded earlier to the year over year decline in gross margin being larger Q1 and then moderating as the year progressed or did I Miss here that.
No no you heard it correctly the the front half of the year, it's definitely going going to be a larger year over year declined in the back half and that shift is you know lapping consideration, where you know again, we were heavy on price at the beginning of the year in 19, you know.
The cost didn't kick in until the back half of the year. So yes, that's the correct way to model.
Thank you.
Our next question comes from Hamzah Mazari with Jefferies. Please state your question.
Hi. This is married up quite a lot you filling in for Hamzah. I know you guys are already touched on the zoro business and then the roll off of the investments and just curious I guess as margins building that business.
Do you think that you'll you'll breakout zoro and monotaro as a separate segment.
Some could argue that your multiple doesn't really represent a that business at all given where other online marketplace assets trade at.
But what I would say is that with with Messiah now running. This we think we have a couple of years are really hard work to make sure that we are performing on a path like the metro business has been in the U.S. and in the UK. That's that's our entire attention. We are fully aware of the question.
Habit, but right now we're really focused on making sure we get the business to be successful and as it relates to reportable segments. Obviously, we'll follow all FCC regulations in terms of Ah you know doing that.
Got you, Okay, and then just one quick follow up.
I think your working capital has been a cash flow drag in 2018, and 2019 I just want to know what your assumptions were for 2020 and and maybe just a little color on the reason for the headwinds. It is it mostly the enlist assortment portion.
No no you know you rightly pointed out that it has been it has been a little bit of a drag and 18 and 19, you know I wouldn't be disappointed if it didn't become more of a tailwind in in 2020.
Great. Thanks, so much.
Thank you.
Our next question comes from Michael Mcginn with Wells Fargo. Please state your question.
Thanks, if I could leaning in on the zoro on Monotaro discussion as your model continues to shift more towards a reseller base what does the business look like today in terms of sourcing.
And along those lines, what kind of ballpark service. We are you targeting relative to similar BDC E. Commerce peers is it something somewhere like Alibaba in Europe around mid single digits or.
Hi, or something like Amazon is charging.
I'm, sorry could you could you or I'm not sure I fully under understand the question. So nothing really let me just tell you what we're doing and maybe that will help you help help answer it we're not we're not creating a marketplace all Ali Baba all Amazon, we actually will have supplier relationships that we had.
At.
Some of them direct shipped to customers are all that's what we've done in minutes ROE and so the GPS tend to be slightly less there, but not dramatically less when you do that because we don't have pick pack and ship, but it's not like it's a D and that's all we're getting so I think it's a different different mall, you're describing and it's definitely a win win for the suppliers.
Is that our drop shipping and certainly for us.
Okay asked a different way is no joke <unk> or Monotaro currently getting a service fee from zoro.
And does that go up overtime as the business expands okay. That's it that's a that's a different that there are questions. Sorry, yes, yes. There is a variable service fee that zoro does pay to Manav TRO and it's based on their profitability.
Sorry, it's based on zeros profitability, yes.
Okay, and what it what does that currently and what do you expect that to trend to as you build to 10 million skews, yeah, not not gonna go into those types of details that'll get bigger [laughter] as their successful it will get bigger because based on problem.
All right, but very small it's a very small portion.
Thank you.
Our next question comes from Justin Bergner with Gabelli and company. Please state your question.
Good morning, DG good morning, Tom.
Right.
Two quick ones here, most have been answered with respect to the Canadian gross margin improvement is that sustainable or was there anything sort of one time that benefited the fourth quarter.
Yeah.
As we said in her prepared remarks, some of that was when data it related to supply chain efficiencies. You know I guess, if I were to score at roughly I'd say half of that will continue half of it will fall off.
Okay. That's helpful. And then the retail customer segment improved dramatically in the quarter I guess to mid teens growth just curious if that sort of idiosyncratic or if there's initiatives. There are some underlying backdrop favorable that just to be clear retail for us typically does not mean retail stores.
That means warehouses attached to retail and as you as you would guess that has continued to be a growing business in the U.S. is more stuff shows up at your door. So.
That's what's driving that growth that as a growing thing.
Okay. Thanks, so much.
Thank you. Thank you.
Alright, Thanks, I appreciate everybody being on the call you know I would I would just reiterate we are really confident in our path. We feel good about share gain and profitability in the U.S., we feel really good about the online model it side of that Messiah lead that and drive drive strong growth and profitability, there and we will get.
We will get Canada crotwell right.
But generally I would say, we're very excited about about where we're going and I. Appreciate you calling thanks.
Thank you.
Concludes today's conference all parties may disconnect have a great thing.