Q1 2020 Earnings Call
Greetings and welcome to the W.W. Grainger first quarter 2020 earnings conference call.
At this time all participants on the listen only mode. A question answer session will fulfil the presentation.
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As a reminder, this conference is being recorded it is now my pleasure to introduce your host Ms. are we at home and Vice President of Investor Relations.
Thank you ma'am you may begin.
Good morning, welcome to Granger, its first quarter 2020 earnings call with me are D.J., Macpherson, Chairman and CEO, and Tom Oh, Great SVP and CFO.
As a reminder, some of our comments today, maybe forward looking actual results may differ materially as a result to various risks and uncertainties, including those detailed in our after the filing reconciliations of any non-GAAP financial measure its with their corresponding GAAP measures are found in the tables at the end up there.
Slide presentation and in our Q1 press release.
Which are available on our IR website. This morning's call we'll focus on adjusted results for the first quarter 2020, which exclude restructuring and other items that are outlined in our press release now I'll turn it over to DG.
Thanks, Irene good morning, and thank you for joining us today.
Begin with an overview of our actions and experiences in response to the cobot 19 pandemic as well as an overview of the quarter.
And Tom will get into more specifics about our financial response to the pandemic as well as detailed information on our Q1 results.
Before we start I want to thank our 25000 team members across the globe, who continue to live our principles and are working hard to achieve our purpose.
The world working.
We're in the central business supporting hospitals governments first responders food manufacturers distribution companies and many others that are fighting this bite on the front lines.
These are incredibly stressful time for all.
From our team members, who are on site with our customers, helping them work through day to day challenges that doesn't shrink orders are picked packed and shipped properly I'm proud to work, we're doing to keep our team members customers and community safe.
I'm also thankful for our suppliers just takes partners efforts help us provide much needed products to our customers in this desperate time that need.
To make this come to life I thought it would sure photo RBC from one of our leaders that are branch located in Brooklyn, New York.
This particular branch in its cross broke partner in mass, but they're both situated in between a number of hospitals that are the epicenter of the pandemic site.
Each day the teams at both locations dutifully come to work and the American flag and roll up their sleeves and their words. They do this to keep America right.
It's the spirit that inspires me makes me truly proud to lead this company and gives all of US open our ability to get through this crisis.
Turning to slide five let me provide you with some color on the actions we haven't continue to take in response to the pandemic.
The biggest concern right now is our collective health and wellbeing.
As a business. This is our absolute number one priority.
When we look back on this crisis. It is how we will all be judged.
Health as a primary focus we have established three priorities during this challenge.
First we must continue to service our customers wall.
These are the customers that have so much to do a supporting the health care system and other critical industries in the U.S. It other countries in which we operate.
Second we must support team members by providing a safe environment, there's much job continuity as possible. During this period, everyone. It scared and we're trying to provide team members stability and safety.
And third we must ensure that we remain in a strong financial position in order to execute on our first two priorities and remain positioned to thrive when we moved beyond this pandemic.
We have and will continue to ground or decision, making process. The three these three objectives in mind.
Starting with the first Granger has been designated in the central business for all our locations around the globe.
Allowing us to continue to serve our customers and live out our purpose.
In many cases, we are working side by side with hospitals state and local governments.
Critical manufacturing businesses to ensure that they can keep doing their critical work.
This has been a challenging period.
The virus has created significant supply demand imbalances for P and other products, creating substantial challenges for our customers.
We have had to make some tough choices about prioritization.
And the challenge will continue into the new near future.
But our team is working very hard to find solutions to help our customers.
In some cases this has met being creative product solutions in the short term.
We continue to be a valued partner to all our customers, even as we prioritized to health care system.
We started planning and responded to the pandemic in late January.
Established an emergency preparedness task force shortly thereafter.
The early days, our focus was on product supply.
We executed large pre buys of non pandemic product leveraging our extra capacity Louisville to ensure we could supplier customers through this period.
Our service levels of non pandemic supplies continue to be strong.
As it became clear that the pandemic would have a significant impact on all developed markets. We develop business continuity plans following guidance from the CDC Public Health Agency in Canada, The World Health organization in federal and state governments.
In many cases, we're going beyond that guidance, including temperature screening of all individuals prior to entering Granger facilities.
We have taken a number of preventative steps to protect our team members and customers, including minimizing exposure affected team members to other team members and customers augmenting the clean procedures at our facilities.
Introducing mandatory curbside service at all our branches, providing personal protective equipment for team members working onsite with customers and mandating work from home for all our team members, who are able including our phone service and technical support agents.
We were able to pivot quickly to work from home for team members able to do that and we're not missed a beat.
In addition, we moved our national sales meeting to a virtual meeting after canceling the conference in Florida.
We appreciate the flexibility our team members have demonstrated as we implement these solutions.
Throughout this I continue to receive many letters and calls a thanks from customers.
Inspire but how the grade your team is taking care of our customers and each other during this challenging time.
I have also received many calls from customers, who need solutions that we and no one else could fulfill right now.
Stressing the system is extremely high as you might imagine.
Supply chain front, our world class supply chain has remained resilient as I mentioned, we've had minimal disruptions to date or non pandemic related items.
We continue to maintain high levels of inventory and are leveraging our strong relationships with our suppliers and transportation partners to secure products and ensure we meet our same day ship complete delivery promise as regularly as possible.
Like others around the globe, we continue to see shortages and Stockouts a critical pandemic related items.
Putting in 95 mass sanitizers and other P.
We're working diligently with our suppliers alongside our government and healthcare customers to secure as much product as possible as well as trying to identify and source suitable alternatives to.
To give you a sensor the magnitude of the problem. Several weeks time received orders for the same quantity of safety mass that we've usually received over several years and in some cases even decades.
This is truly unprecedented challenge and getting America back to work is essential.
Let me share you that Granger is holding true to our values.
We will continue to work with customers and supplier partners to find the best solutions on all pandemic products, we are honoring our contracts and you're not raise prices unless necessary to recover our increased costs.
Moving to our second priority, we're committed to making decisions with team members best interest in mind.
Rangers a sound business with a longstanding belief in the new data stable workforces or customers and keep the world working.
When we emerged from the pandemic, we wanted to ensure that we are well positioned with an experienced team to accelerate growth through the recovery.
Well, we don't yet know the full financial impact of Cobot 19.
We have contingency plans in place for any eventuality.
In the short term, we have furloughed, a small portion of our workforce and reduced hours for others.
In both cases in both cases with the enhanced.
Chairs Act, we're focused on keeping our team members is close to whole as possible.
Beyond this we have delayed merit increases for salaried employees. They have instituted short term pay cuts for executives.
Our incentive plans will just based on market conditions.
Our goal is to keep our team members employed over the long haul treated fairly and working during this time.
Our third priority, which Tom will cover in details around maintaining our financial strength in short, we're well positioned with with an exceptionally strong balance sheet and a robust liquidity position.
We're prepared for a multitude of scenarios and have already implemented changes focused on cash flow in the near term.
Our strong financial position should enable us to withstand even though it's challenging economic and market environments, while lottery continued investment through the cycle.
Stepping back east three objectives due to actually create some tension.
You can imagine given the size of our workforce, we have had cases, a cobot 19 within our facilities.
In each case team member safety is our top priority.
Means we have had to ship volumes across our network as we temporary temporarily closed buildings the deep clean the facility at the quarantine any expose team members.
We're also paying D.C. branching keeps dr., you mean birkner membership premium recognizing their great working commitment during this challenging time.
As a result, we are running at higher unit cost the normal in our de seasoned elsewhere to ensure we serve our customers to our high standards and help get America and the world back on its feet.
Lastly, before we move on given the uncertainty around the depth and duration of this pandemic and the related economic response, we are spending guidance for 2020.
As you might imagine with customers that are completely closed you have customers who are operating under a reduced volumes. We have customers operating normally we have customers who are running 24 seven with all these moving pieces it doesn't make sense to forecast in this environment.
Well, we can't guarantee the future, we weathered storms and our long history before.
He started planning for the recovery whenever it may come.
This will require us all to think differently as we and our customers or change by this pandemic. There's a lot to learn I believe much opportunity ahead.
As we move forward, we will continue to evaluate all actions to ensure we are meeting our priorities to serve our customers support our team members and ensure we remain in a strong financial place.
Turning to our quarterly results, we delivered strong topline growth in the quarter, while navigating through this period of uncertainty.
We achieved daily sales growth of 5.7% underpinned by traction on a growth priorities and tightened sales a pandemic related items.
And the U.S. segment, we outgrew the MRO market by approximately 700 basis points, excluding estimate a pandemic related sales, which is inherently messy calculation. We were in line with our goal of 300 to 400 basis points. It outgrowth first the market. So we had a strong topline outcome.
Operating margins were pressured by factors, including the timing of certain SGN investments and then accumulated mix impacts business, you didnt mix impacts as well as the timing of year over year pricing and cost actions, Tom will cover the details in a bit.
We produce strong cash flow in the first quarter, including 244 million of operating cash flow and 194 million of free cash flow.
And finally, we continue to make progress on a 2020 priorities are remerchandising efforts continued in the quarter as we worked further improve product in search information.
We continue to improve the efficacy of our marketing initiatives.
Our endless assortment business grew 17% underpinned by resilient performance No trail and SKU additions zoro.
Besides the Suky, our new leader of the embassy sovereign portfolio and his team are implementing them inotera playback across oral and are closely looking at a number of areas for improvement, most notably around discounting strategy and other opportunities to improve profitability.
Our turnaround efforts in both Canada, and Cromwell performed in line with our expectations despite turbulent market conditions.
While we have curtailed nonessential spending in certain areas, we will continue to invest where it matters most.
Most importantly, we continue to improve the user experience in our core businesses with customer feedback coming in extremely strong.
As we look forward, we will focus on what we can control and make decisions based on facts.
The business is well positioned to sustain through this pandemic and I'm confident we will come out stronger on the other side.
With that I will turn it over to Tom.
Thanks DG.
As Dean mentioned, we've established three broad priorities that are serving as the backbone as we work through this unprecedented challenge.
Our third decision, making tenet.
Is to ensure we remain on a strong financial footing.
In this regard we've taken several actions to bolster an already strong financial position.
From a balance sheet perspective in the quarter, we increased the size of our revolver.
The $1.25 billion and executed a large scale refinancing.
Combined these initiatives increased our available liquidity by roughly $625 million in eliminated all material near term maturities.
At the end of March we proactively taps $1 billion at the 1.25 billion revolving credit facility.
As noted by our strong balance sheet and operating cash flow results. This was done solely out of an abundance of caution.
In this low rate environment, it's an inexpensive insurance policy.
Further with the refinancing we consolidated the majority of our foreign currency denominated debt, which pushed out any material maturities until 2025.
Our revolver does not contain any financial covenants and we continue to have strong eight category ratings from both S&P and Moody's. All then we exited the quarter with over $1.7 billion and available liquidity, including $1.5 billion in cash.
And only a 1.2 times net debt leverage ratio.
When it became clear that we might be facing a serious economic downturn, we proactively began implementing initiatives that conserved cash and optimize profitability.
To be clear the initiative strike a balance between short term cost and cash savings and ensuring we come out of the gates strong when the crisis on this.
Example of these baseline initiatives include.
Temporarily furloughing team members to align with reduced volumes.
Short term pay cuts for executives.
Delaying merit increases for our salaried workforce in North America.
Reducing outside professional service spend scaling back advertising spend.
Eliminating non essential travel and delaying hiring decisions.
We expect these baseline initiatives and the lapping of certain Q1 items will create.
$40 million to $55 million of sequential cost savings in the second quarter of 2020.
Even one accounting for an increased level of cost to support our pandemic response.
We've also identified several additional initiatives that can be implemented depending on volume levels, we're staying nimble and monitoring sales trends cash position and working capital closely.
Additionally, we are deferring certain discretionary capital expenditures and now expect our full year 2020, capex spend between 150 and $175 million. This is down from our previous expectation of $250 million.
Yes.
With respect to working capital, we're working closely with our customers and suppliers to maintain our strong relationships, while ensuring a manageable cash conversion cycle.
To date, we haven't seen a material change in delinquencies or bad debt.
Further we remain committed to returning excess capital to our shareholders. However to preserve financial flexibility, we have caused our share repurchase program.
Yes for the dividend, we remain committed to the program and do not currently foreseen, where we would reduce or suspend its payment we understand the importance of achieving our 49th consecutive year of dividend increases.
While it's difficult in this environment to forecast the future.
From a cash perspective, we have modeled multiple scenarios that reflect varying depth and duration cases of volume loss.
Given what we are able to see now.
We're confident that we will have adequate liquidity to support our business operations through this pandemic.
We have a strong reputation of managing well through difficult times and we expect this crisis will be no different.
He's done what we know today, we're confident that we will emerge from this pandemic as a trusted partner to our customers and suppliers and are well suited for the recovery.
As we turn to our detailed quarterly results and think about the financial impact that told that 19 pandemic has had on our business.
It's very challenging to specifically quantify.
There are numerous moving pieces, including sales of pandemic related skews determining substitute products impact of customer capacity cuts are closures and identification of customer Prebuying. All of these combined makes it challenging to pinpoint the specific impact of the pandemic.
On our financials.
Therefore, as they go through our financial results I will share estimated directional commentary on the impact.
As noted on slide nine so the total company daily sales were up 5.5% in the quarter, 5.7% on a constant currency basis.
This was driven by around a 7% increase in volume offset by an approximately 2% headwind from price.
Roughly half of the price headwind is due to product and customer mix with the other half related to lapping of the 2019 price increase.
But the total company, we estimate that pandemic related products sales represented roughly half of our sales growth.
Additionally for perspective, it should be noted our core U.S. and analysts assortment businesses combined grew at 7.3% on a daily basis during the quarter.
Gross profit margins for the total company was down 180 basis points versus the prior year quarter.
This decline is driven by customer and product mix headwinds in our U.S. segment largely related to sales of pandemic related items.
As well as business unit mix from higher growth in our lower margin endless assortment business.
Gross margin rates are much more stable when we look sequentially.
We get we gained 20 basis points of best GMI leverage with cost up $47 million versus prior year. Since we continue to make investments to support our strategic priorities.
As previously communicated we generally expect SGN ace and to grow at approximately half the sales rate.
For the quarter our S. DNA growth was higher than this annual target by approximately $20 million.
This $20 million is driven by additional headcount there was added in the back half of 2019 incremental marketing investments, which will be reduced going forward.
In heightened spend to support our pandemic response efforts.
Additionally, we were impacted by nonrecurring and timing items, including an extra payroll day and onetime costs for certain legal matters.
He's impacts more than offset lower travel and variable compensation costs as well as favorable depreciation and amortization in the current year period.
Excluding these nonrecurring an unusual items, we were directionally in line with our plan from a cost perspective, which assumed elevated SGN a cost in the first quarter.
We generated operating cash flow of $244 million, which we used to invest in the business and return capital to shareholders.
During the quarter, we used $178 million on share repurchases and dividends.
And had total capital expenditures of $50 million.
Even in our current difficult economic times, we continue to invest prudently and our business all while maintaining a healthy 1.2 times net debt leverage ratio.
Operating cash flow was 106% of net adjusted earnings and return on invested capital was over 29%.
Overall U.S. segments daily sales grew 5.7% in the quarter or about 700 basis points faster than the broader MRO market.
Sales growth in the quarter included approximately 8% volume growth, partially offset by unfavorable price of around 2%.
Roughly half of the price headwind is due to customer and product mix with the other half related to the lapping of 2019 price increase.
In the U.S. segment, we estimate that pandemic related product sales represented roughly half of our sales growth.
Gross margin was 230 basis points unfavorable to the prior year.
Variance was driven largely by two primary factors about half is related to lapping of 2019 pricing and cost actions.
And the other half is related to unfavorable product and customer mix.
Yes, we mentioned on the fourth quarter 2019 earnings call. We expected our Q1 2020 number to face difficult comparisons to the prior year period, as we aggressively raised prices to combat expected tariffs inflation increases in the first quarter of 2000.
In in 19.
We acknowledge that we overshot the mark and rolled back prices throughout 2019.
Additionally.
Tariff cost related increases didn't actually take effect until later in 2019, and that's created a second half.
Headwind in Q1 2020.
Looking sequentially, we did see positive price inflation in this quarter compared to Q4 2019 going forward. We expect this tough year over year comparison will lessen in the back half of 2020.
The remaining portion of the year over year gross margin decline resulted from customer and product mix headwinds, which were exacerbated by sales of lower margin pandemic related items to larger low margin customers.
We expect these mix related headwinds to continue during the pen pandemic as we sell increased levels of safety and cleaning products to our large healthcare government and critical manufacturing customers.
This effect will be come even more pronounced in the second quarter as we expect the more dramatic mix impact that we saw its in the March to continue through Q2.
In the quarter, we also had unfavorable mix related to our multi site customer growth strategy.
As we discussed on the Q4 call this impact will be temporary.
And we'll continue throughout fiscal year 2020.
So I mean SGN a perspective, we gained 30 basis points of leverage with cost increasing $30 million in the quarter.
This level of increase was caused by many of the factors I outlined earlier, including incremental headcount added in the second quarter of 2019.
As well as marketing investments cost to support our pandemic response.
And then extra payroll day.
Operating margin was strong at 15%, but declined 200 basis points in the quarter.
On the declining gross profit margin, which was offset by slight increase in SGN a leverage experienced in the quarter.
Turning specifically to the U.S. tomorrow market.
While extremely difficult to predict in this environment, we estimate the U.S. tomorrow market decline between one and one in a half percent in the first quarter.
Granger was able to capture approximately 700 basis points about growth in the quarter well above our objective to consistently grow 300 to 400 basis points above market aided by sales of pandemic related items.
Even when excluding the pandemic sales contribution we were still.
Well within our targeted range, demonstrating consistent traction of our growth initiatives.
Moving onto the other businesses.
Daily sales increased 8.5% or 8.8% on a constant currency basis.
Growth was driven by continued expansion of our enlist assortment business.
Which was up a combined 17% on a daily basis between both zoro and Monotaro.
Both businesses continued to grow rapidly and benefited from an uptick in pandemic related sales.
Be it.
A much smaller impact than we saw with our U.S. business.
Gross profit margin declined 60 basis points in the quarter.
Driven by business unit mix and the faster growing endless assortment businesses.
As well as deeper discounting.
In a higher mix of drop ship activity had zoro U.S.
We continue to achieve SGN a leverage in the first quarter, resulting in operating margin increase of 80 basis points.
This stems largely from decreased expenses at Kronwall.
And leverage and unless this or.
Kronwall performed on plan in Q1 and was able to have assets losses from the first quarter of 2019.
These results were largely before the pandemic shutdown activity across Europe.
We took an impairment charge on our savory business, reflecting continued gross profit.
In a flat to declining EBITDA against the backdrop of industrial sector declines across Europe.
This was further amplified by the long term implications of the cobot 19 pandemic among other factors.
Turning to slide 13.
The only sales decreased 6.1% or 5% on a constant currency basis.
Comprised of roughly 4% decline in volume and price headwind.
Which includes customer mix of approximately 1%.
Foreign exchange created a 110 basis point headwind.
Overall operating margins were up 110 basis points as gross profit margin was roughly flat to the prior year period and SGN a was favorable 110 basis points as cost management drove significant leverage.
Looking forward. In addition to the pandemic Granger, Canada is also combating extremely low oil prices given its more concentrated natural resource customer base, which will drive further henwood headwinds into the second quarter.
Before I turn it back to DG I want to provide you with some insights into what we're seeing through the first few weeks of April.
From a sales perspective as of April 21st we are seeing year over year declines of approximately 10% on a constant currency total company basis, the dramatic differences by end market.
Out of categories and customer sites.
Not surprisingly, our health care essential manufacturing and pockets of government are growing significantly faster year over year, and we're seeing rapid declines elsewhere in areas, such as hospitality and heavy manufacturing.
On the product side safety and cleaning supplies are significantly up year over year, what's most other categories down some dramatically.
To be clear.
This is what we're seeing through the first 15 business stays at the month and not meant to be construed as guidance for the quarter.
As in Q1, these customer and product mix items will continue to impact our GP margins.
Further Q2 will be impacted by the change in format of our national sales meeting, which will create a year over year headwind to gross profit margin of approximately 40 to 50 basis points for the U.S. segment in the second quarter.
For the year, the national meeting impact will be a drag on gross profit margin, but will be roughly flat for the year on an operating margin basis, given travel and event related cost savings.
With that I will turn it back to DG for some final thoughts.
Thanks, Tom.
We have a strong business and balance sheet as well with access to capital and we're taking proactive steps to eat the company healthy and our workforce stable, while continuing to serve our customers well.
We take being an essential business very seriously and we're committed to living our purpose and being that critical partner for our customers throughout this pandemic and beyond.
While this crisis it certainly different from end that we've experienced I'm confident the granger will come away from the stronger than before.
Additionally, this industry for years.
Now we will open it up.
Thank you before we open for questions.
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My first question today is coming from Ryan Merkel of William Blair. Please go ahead.
Hey, good morning, everyone hope everyone as well.
Morning.
Good morning, right. So first off you know thanks for the color on April, but I guess high level.
I realized that visibility is low and that you pull guidance, but anything you can help us with in terms of the outlook, maybe thoughts and a range of industry decline this year or maybe comment on if 2019 is it good framework and your mind for 2020 or if there's major differences.
Well I think it you know it's as Tom said, it's forecasting right now is very difficult I think we can say, what we're seeing and as I mentioned, we have some customers that are mostly shutdown, we do do a lot of work with.
Airlines, which obviously artist busy.
Cruise lines as you might guess.
Yeah as you get into some of the sub industries as you very big differences, obviously, there's a bunch customers that are very very busy.
I think one thing I would say is that the world is not shutdown necessarily and you can see it and our daily volumes, we've been very consistent.
The last few weeks and you know we've been very fairly resilient.
But it does take on different numbers by by different sub segments.
I think the question for US is how long it is going to take to get back and.
Depending on who you talk to whether its epidemiologist street economist that could be relatively shorter really long and so they're just uncertainty around that so so right I would I would not even try to forecast that we feel like we're taking the right actions to make sure that we maintain profitability throughout any scenario.
And you know, we're comping our ability to gain share one thing that we didn't talk about that that's kind of interesting as we are seeing a very healthy flow new customers given the pandemic requests that we feel like we're going to come out of this with a nice customer file increase as well, but right now it's really difficult to forecast.
Beyond sort of this month next month and just how fast.
It's going to determinant.
Yeah, that's fair not at all right and then second you know I was hoping asking it was going to offset the decline in gross margins core a little bit better I know you talked about a little bit, but just you know pinpoint for us what exactly happened. It seems to me like you're not making much profit on these pandemic sales so maybe talk about.
That and then.
Most of this a timing issue with the price cost and higher SNA and then you know these trends should start to get a little bit better in Twoq, you just help us with that yeah. Yeah. So let me, let me take but I mean, so theres a gross profit NSG. They just asked you take about your question and I'll turn it over to Tom in a minute from a gross profit perspective.
Pandemic items, we made a decision which is we're going to help the health care infrastructure and help government customers that decision means in a scare supply world. We're basically providing product you contract customers in those products generally lower margin to be so that does have an impact on on gross profit in a fairly significant one in the quarter.
It's the right thing to do it absolutely the right thing to do that's going to relieve overtime, a little bit because there's going to be more more product and there's going to be more customers hopefully would open up and that we can serves on the gross profit side that that says, but certainly with an impact which we'll see in the second quarter, but to take over time that won't really give some SGN as a little bit simpler over half of rushing to increase was based.
If we onetime or unusual items.
And we feel like growing asked you about half the rate of sales growth is very comfortable place for us to be going forward given people other than the one timers I'll turn it over to Tom to provide a few details on that.
Yeah. So let me add let me add just a little bit more color, Brian. So let let's first of all start with with gross profit margin as we said in our prepared remarks, we went heavy on pricing in Q1 of fiscal year 19, and then we rolled that back throughout the.
Here, so to your point that pricing compare will get better through throughout the year also from a cost perspective. If you just look at how the tariffs behave on a year over year basis, but the two big tariffs for us our part three and part for a and in from a year over year impact.
For part three in fiscal year 19 that tariff was 10% in Q1, it's 25% in Q1. This year. If we look at for a there was no tariff and there's 15 or 7.5%. So that is the the tariffs impact.
That we saw in Q1 that also will get better throughout the year as we fully realize the lapping of our tear us. It will also get better from the realization of our non Terra cost increases, let me move to SGN, a and unpack it a little bit better than we did in the prepared.
Remarks, we were up 47 million on a total company basis, which as you know 6.4% increase if you do look at the onetime items and that includes onetime legal matters. The extra payroll day. We also had some some benefits issue where we were.
Lapping prior year adjustments and some some other onetime costs you know DG set over 50, it was actually closer to 60% of of the 47 million. So if you adjust that out we really grew 2.7% which gets into about half.
Of the sales growth the increase of the a the 2.7% is on items, where we have said that we're investing related to advertising technology and adding headcount in the back half now now having having said that we noted in the prepared remarks.
That we're scaling back on advertising, we're taking a stronger look on costs in terms of taking 40 to 55 million out sequentially versus versus Q1, and then the final thing I'll say is I want to be clear that we did also have additional costs to to serve the pandemic in terms.
Over time pandemic pay cleaning supplies and those types of those types of items, but the big story in SGN. A is the one time as well as the investment costs, which we will roll back in in the second quarter.
Sorry for the long winded answer, but it was a it was a broad question. Thank you.
Thank you. Our next question is coming from.
Baird. Please go ahead.
Hi, good morning, everyone.
Hey, Granger, usually give us growth ranges across customer end markets on a monthly basis and just given the circumstances is there any chance you get general growth rates for March across the end markets on slide 17.
Well, we'll get back we'll get back John that it might be.
It might be more valuable to give you ranges on on April frankly than March [laughter], yes, okay, well sure.
Back to you on that and decide whether or not we're gonna do any any of that.
I would say it's.
If you thought it would not be all that surprising as I mentioned before there's certain segments sub segments that are down tremendously and and almost 90%, 70% and there are certain that are up significantly and they would be exactly the ones. You. Thanks, I don't think you'd be surprised by any of it but we'll talk about whether or not we're going to provide that as we go through the dynamic.
I appreciate it.
Second you saw really nice growth and endless assortment, which was also an area of recent investment did did you say that half of the 17% growth rate was co bid related.
Yes, yes, I talked a lot.
Yeah, that's the U.S., that's that's to the World Yes no.
Let me let me just let me just.
Give a little bit a caveat to that.
If you do it on a product basis that's true.
But even even customers that are heavy covert product buyers spent less on other things as the month went on and so it's a bit of a rough estimate so I don't want to over index on that we feel like a you know.
We want to you want to be very careful about saying how much was covance, but certainly from a product perspective, that's true.
Thank you. Our next question is coming from Nigel Coe of Wolfe Research. Please go ahead.
Thanks, guys. Good morning, really appreciate the detail.
[noise].
Just wanted to pick up on yesterday and I hope he bought a lot of good detail on the everybody, but as we go into Twoq.
Sales continued trend down 10 defense, I mean, who knows but.
We expect.
That ticket defense sales growth.
The whole.
Gives you a Tom Oh does the do the impact so some of these sequential improvements in costs such as the.
The you mentioned 40 $50 million a sequential declines in cost does that mean that SGN they could be down a bit more than that just wondering how you should think question a going forward for the rest of the.
Bob you want to take though.
Sure Yeah. It's a great question, Nigel I think it depends Nigel on how much we see the the volume going down quite frankly, if volume is going to stay where it sat in terms of 10%, we're probably not going to pull the more draconian levers in terms of of cost reduction.
You know it's a good goes deeper than that then we've got a number of initiatives in the playbook ready to pull it.
If you look at the high side of the range. We gave Nigel you know that 55 million sequentially would translate to year over year, almost 3% reduction we'd also get some volumes variable cost reduction. In addition to that so I think it's going to be a meaningful less DNA.
Reduction for for Q2, but you know we're watching this on a daily basis, and you know trying to really thread the needle in terms of which levers we pull related to the volume reduction.
Got it no that's helpful and that's certainly needle that's what we're trying to do so I understand that and then just on the Knicks factor you getting spent low tens of a mix, but you know the that the bump point of mix pressure you saw in one Q. We all get if you will understand what's driving that what would that we will need be because obviously the national accounts outgrowth normally.
We are facing some mix pressure as well with that let me be where does that reside at numerous other than the price bucket or the volume bucket and then how does the mix. How do you think mix will trends and again I hate to be social Tim It but do you think nics precedence accelerates into Twoq, you all remain pretty steady.
Yeah, I mean, it you're talking specifically Nigel about gross profit or you're talking about sales rather now talking here about well I guess, both I mean mix mix impact, mainly because gross margin, but but some whatever but better and so.
Yeah, if if if you look at it from a revenue perspective, we've actually got.
Some customer mix component, which is in volume, but the majority of it it's going to fall into price.
You know we mentioned in our prepared remarks, the multi site customers, but that was a much smaller part of the mix component. The primary I'm part. It was are lower margin healthcare and government customers that was the big driver of the of the customer mix.
Yeah, I would I'd just add to that Niger that we very recently like the last few days, we started to get inquiries from midsize customers thinking about restarting they've been on fairly hard shut down so that has been a negative mix depending on how fast those big kind of size customers come back.
The mix issues could be alleviated a bit we would expect though for the next certainly for April yeah weekend, and probably for a lot of maybe we would expect some of those makes pressures and then hopefully as everybody gets back to work we would see those.
Thank you. Our next question is coming from Christopher Glynn Oppenheimer. Please proceed with your question.
Thank you good morning.
If we look good so endos indoors, Oreo and monetize I'm curious about Pos billion of a net benefit this year with the you know online effect actually benefiting from distancing or otherwise if this may be a divergent experience.
The covered recession for the endless assortment versus the U.S. segment.
So guidelines I could take that one so Japan has not had yet a hard shut down like somebody on the market. We've seen certainly we've seen you all my model there do very very well.
In in Zoro in the U.S. Zoro has done quite well as well and in particular from a new customer acquisition as a new customers look for different solutions that are digital we're seeing a very strong new customer pipeline coming in because or are we also see.
A lot of back drilling onto the Granger online as well from the greater and greater Dot com. So there is certainly a shift to digital when we think we're well positioned for for that ship book would be on the former model, but also with Granger Dot com, which is an exceptional solution for.
Industrial businesses. So so we feel like we're well positioned for that shift.
Okay and.
On the U.S. segment, you know half of the.
Both was non pandemic and the absolute gross gotten better is the benchmark slow down certainly the spread curious if you think more that is for the due to the price for share dynamics on the large contracts enacted last year or if it's more broadly the granger.
System and market penetration tail.
On on the heels of the 2017 resets.
I think I think it's I think it's everything that we're doing I think it's the growth initiatives. We've talked about we're getting good results out of merchandising nice results in more more efficient marketing. We've added some some focus to keep stock. So we're providing more inventory management solutions for customers I think very little of it is actually the price dynamic and more of its the action.
As it were taken to drive.
Yeah, I guess I guess, the one thing that I would add that might be helpful. Color is when you look at our share gain we said it was 700 Deps outgrowth in Q1, if you look at it in March it was significantly higher than that.
Most of double share gain in terms of March which would lead you to to potentially conclude that when times get really tough good things that we're doing that customers are coming to us and allowing us to take share.
Thank you. Our next question is coming from Adam Goldman of Cleveland Research. Please proceed with your question.
Hi, guys. Good morning hope the whole team is healthy.
So a question on the gross margin discussion for the second quarter I understand there are a lot of moving pieces and thanks for the the detail on the National sales meeting for the had one there but anyway that we could frame.
So how much further down we should be bracing for the gross margin to slip in the second quarter <unk>, we've talked about a couple of 100 basis points. If that's mix headwind, we're seeing in April persists.
Yeah.
Yes, sure, it's really hard to predict at them because we have good guys happening in terms of you know to compare of the price inflation going down.
Chile in the second quarter, we've also got better lapping in terms of inflation now on non tariff inflation and tariffs inflation. So those are those are really good things just so hard to predict the pandemic of how much of an offset and it really comes back.
Back to Dgs point is when are the the other non pandemic business is really going to start to come back to two works. So we've got to we've got a big chunk of Tailwinds. It's just we don't know how big that the the headwind would be I'm not trying to be a base of its it's just hard to call the ball.
No.
Okay, Gotcha, and then just sort of a different topic anyway to frame how much of your customer base is closed right now and then secondly, you know theres, probably some customers that are restricting access for bending or or what have you any any broad sense of hum how much your salesforce is limited right now.
Thanks.
Yes. So so we have a number of customers that we cannot get into to refill vending ourselves, but we flip most of them to customer managed inventory and most of those customers have people working.
You know I would say, it's very difficult to say, how many are really closed.
But certainly it's you know a portion of the business is really close as I said you know if we looked into four groups. The ones that are really busy right. Now you kind of say 10, 40, 40, 10, meaning 10% or really busy 40 or.
That's impacted a central businesses 40, or non essential, but they're really they're working on some some sort of reduce schedule 10.
Roughly or what we would call disrupted and so those are businesses that have a significant disruption right now that are doing a whole lot. They may not be fully close but for Pat all intents and purposes there.
Thank you. Our next question is coming from tray of RBC capital markets. Please go ahead.
Thank you good morning, everyone first questions for Tom and it's the outlook on free cash flow for the year just in terms of the playbook for industrial distributors typically you'd be selling down in been from inventory with lower demand that typically gives you a boost on free cash.
Well conversion, maybe you're also pulling back some some capex, but just kind of give us the dynamics there from a free cash flow perspective.
Yeah. Good morning, Dean Yeah, we feel really good about our free cash flow you know if you look at our cash conversion cycle.
Despite you know us working with customers to be constructive in terms of of payment terms. We were actually you know better by four days versus the prior year quarter. So we feel that we're managing working capital really well as it relates to.
You know de stocking of inventory frankly, that's not the playbook. We're running you know we're positioned for the future here when the recovery starts to happen and you know those customers start coming back we want to make sure that we're able to provide the benefits.
To them, we feel that we're uniquely positioned with our our balance sheet and our liquidity to be able to really come out of the gate strong when when the market takes off.
That's.
Helpful, ending but that answer because that's what I'd like to ask DG about and not asking about the timing of the recovery because no one really knows at this stage, but did you suggested there be ways that Granger would come out stronger you've added customers.
But up also be interested in what you think changes about the business in terms of your customer base their inventory levels that will carry I mean, it used to be just in time now it's more some buffer inventory just in case, maybe you have to do more cleaning of your DC is just the dynamics of of what changes.
The other side, both from customer behavior, or maybe adding more customers and maybe some incremental costs as I've just standard business.
Going forward. Thanks.
Yes, Thanks Deane.
I.
So you can't predict what's going to happen might my assumption is that for a while we're going to be in a situation, where we have to be careful around the virus on some level, even if even if businesses are backed work and so over the short to midterm I think there's going to be a lot of questions around do we have the REIT stock cleaning supplies and you can make sure we can actually work and so.
We're already starting to customer talking with customers about how to come back to work and how can we help them think about how to come back to work and so that's going to be a big big topic, you know whether or not we turn to more buffer inventories or not.
Is debatable, we've had we've had shocks in the past and it hasn't change behavior. This one feels like it could so I'm I'm guessing that we're going to be in a position, where we're helping customers think more about inventories docs.
And than we have in the past for certain products I still think that.
US managing inventory and keeping inventory levels down is going to be an important topic for most customers.
Going forward.
Certainly there is going to be some industries that are very very different and there's going to be some that are new and and I were gonna have to navigate through that we've already started talking about that sort of our own business you know I think.
We're all going out to be more careful we're thinking differently about our buildings are configured.
Most of our distribution centers has been designed to bring people into Lunchrooms. For example for camaraderie right now that doesn't make as much sense and so we're talking about well how do we view how do we have multiple lunch spots. There just all kinds of details that that.
Through that are going to change and you know I think it's it's we're just going to have the same priorities keep our key member safe server customers well.
Do it responsibly and that's going to be the focus and we have a team a pandemic team that's working on all those operational issues right now and how to get back to work and how we operate in the future.
Thank you. Our next question is coming from John its Gordon Haskett. Please go ahead.
Thanks, very much good morning, everyone.
Yeah, I'm wondering given the new Fabry write downs, if you could update us on your strategic thoughts on retaining or divesting either cranwell or fabry, how how are you thinking about that framework, a particularly against the against what's happening in the economy.
Yeah, I mean, we're always evaluating the portfolio and looking at.
Whether or not we should be investing or or not and businesses. Now. It now is no different we continue to look at all of our businesses.
And we can't comment obviously on specific actions that we that we plan to take but certainly we are we're looking at businesses. Those two businesses are our port wants to look at.
One thing I would point out is it just kind of interesting Cranwell and Canada both.
Before the pandemic in the quarter actually were on expectations, which was good to see so we actually were getting a little bit attraction with both of those businesses, which was which was great and then of course, the world changed and for crawl well you know we're excited to see if we can continue on on a strong path.
And Canada as well so <unk> I would say we continue to look at does the portfolio.
Consistently.
Yeah. So that's fine I appreciate the answer I had thought perhaps you had put them on kind of a timeline. If memory serves you know oh, you're going to sort of wait for the trend of profit or whatever.
Just as a follow up I I'm wondering if you could also comment on zoro, obviously, it's done really well in theory. It could take a lot of virtual share coming out of this I'm just wondering like how you're thinking about pandemic in the context of possibly.
Maybe monetizing that business down the road.
Maybe along with you know just like the one whats the assortment as it is the does this in theory pushed that out or does it pull it forward or or is it not really have much of any impact, but I don't it's going to having you know, obviously, who knows but in terms of how long. This last but I think that it doesn't have a lot of impact to our timing So sciences, if he's running.
But no drugs in the field Sinatra, we now is in charge of zoro in both the UK and U.S.
They are working very hard to improve the profitability growth rates of both of those businesses were seeing we're seeing good traction.
At some point back that question may become more.
More near term, but right now, they're really focus on improving the business and working together to make sure. We do that so that's right now.
Oh, Thank you very much extra.
Thank you. My next question is coming from Patrick Feldman of JP Morgan. Please go ahead.
Well. Thanks. Good morning did you can learn Tom Thanks, taking my questions.
Patrick just.
Hi, it's just the first one with maybe a within the.
10% decline April date.
Just curious if you can provide a range of growth you're seeing the safety and cleaning supplies or whatever you consider to be pandemic related and then how long. It tell you see on that demand. If you look at the backlog of request for those products and then would also be health along those lines to understand like what percentage of your business is pandemic related products or would you consider could be that.
Yeah. So we haven't we haven't released those numbers pandemic related items or car I would say way up silly numbers in the backlog is even feel here than that to need to be Frank. So I mentioned it on the call I mean should on the prepared remarks, we literally took orders for decades worth of product in a few days.
In some cases and so.
We continue to get product and we continue to prioritize we've had to change our processes for those items.
And and depends how much I guess you feel the length of time that we had increased sales a pandemic items depends in large part on whether or not you believe the backlog is real in many cases it is real depending on what happens some of that might not happen, but but certainly we have a big backlog as products and continue to well continue to sell those you know pen.
That make it is a minority of the of the total product, but it's a it's not a lot of small minority. It's it's a significant portion of what we're selling normally.
Cleaning and safety and are big products for a big product categories for us in general.
Okay, and then just a follow up would be on margins in the first quarter you had lower margins. Despite higher sales for all the reasons you discussed just wondering if you could give any color on on what kind of range, we should be thinking about for decremental margin to sales are down say, 10% I think last downturn incrementals were only like 20%, but this one seems a little bit there.
So just curious how you think about that.
Yeah.
Tom you want take that one sure sure decremental margins you don't interesting calculation, especially in the pandemic just because there are assumptions are so related to.
Volume deterioration in gross margin you referenced Oh wait O. Nine you know, there's a little bit of a nuance. There I don't think it's apples to oranges. As you said, we had we had big pricing impact back in a way to know nine which you know when data the decremental Mark.
And if you're looking at you know, 10% down with a with a range of of I guess, a reasonable gross margin you know I could I could see it decremental margin being 45% 45 to maybe 50% down and that's why.
Largely driven by if it's only 10% down we're probably not going to do those draconian cost initiatives on the other hand, if we start to gets for a more severe downturn with a longer duration.
Then we would go to our cost initiative playbook that we've got ready and pull more of the SGN a cost initiatives in there I could see the decremental margin being 35% to 40%. So it's really highly sensitive on what you're assuming hopefully that's helpful to give you.
<unk> range.
Thank you our next question.
Current with Longbow Research. Please go ahead.
Hi, good morning, everyone.
Paul just if I missed it did you stick out what national account growth was in the quarter. Just any update you can give on kind of B C suite executives sales growth initiatives I assume you've had a lot more touch points. Then that's the virus, but maybe less access or just any comments on that national accounts growth plan.
Yeah, I think we've seen we've seen solid growth, we have had a number of wins.
I think any first quarter number is going to be inflated due to the pandemic because all the all of our.
Health care. This is basically a on corporate accounts.
But we continue to see good good traction with our corporate accounts and coming out of this we think we're going to be in a position to get growth up and share gain up with those businesses National accounts I would say, there's no real change in terms of the strategy.
We have had have had a number of wins and we feel very confident about the path.
Got it got anything to sneak one last one in here circling back to zoro really quickly on the side has been onboard for up to three months now, but just any color on so the biggest investment opportunities are optimization. He may have highlighted just does anything change there any just high level thoughts on where we go on strike.
Regionally there yeah, I think I think it's a there's there's some significant changes I think the team is thinking hard about.
Discounting strategy.
When to run in targeted discounts first big promotions.
My guess is we will move to more targeted discounts lower discount rates.
For acquisition spending a lot of time thinking about which customers were attracting and getting the attractive business customers and what what actually it takes to windows and get those to be consistent purchasers and so I think the team is really working hard on those things in the site is certainly helping them thing to think through a whole range of issues around how to grow but how to grow.
With.
Thank you. Our next question is coming from.
I'm sorry of Jefferies. Please go ahead.
Good morning. Thank you hope you all its safe and healthy <unk>.
My first question is just on on medium customers. What are you hearing there I know you referenced most of that my shutdown bark any any update on strategy to gain share there and whether in a downturn. A you know York mentioned you historically you again chair.
I'd also apply on the medium customer base or is that sort of different portions large customers.
I think it really applies for midsize customers I think that so certainly we've seen.
More impacted midsize customers more of those customers have been closed but that said we continued to continue to see nice returns from our marketing activity with midsize customers and our inventory position and our ability to provide strong service typically works very very well in this situation and we would expect is customer.
Just come back on that we will be able to acquire more which we've been doing and also increased volumes pretty significantly. So we're pretty excited about that path as I mentioned, we're starting to get inquiries from midsize customers about can you help us that or do you into a new midsize customers can you help us get back up and running and that's really exciting to see into.
Capitalized.
Okay, Great and my follow up question is on Sorel and.
And you may or may have touched on that so swap all those guys if its repetition, but but how dependent is that supply chain creative from parent company Jude up your W and and and any thoughts on re segmenting dark for four more visibility is it sort of a deferred tax platform.
The then then sort of the parent business any thoughts as to you know independence of that business today versus years ago, and then sort of I know it's buried in other businesses, but any thoughts on resegmentation. Thank you.
Yes so.
Let me answer both of those the first one a lot of the investments we've made in the last year have gotten.
Is or a lot more independents and so.
Well, they still rely on greater supply chain in many cases, they are becoming less and must be line as they have other partners that provide a delivery service for for them to their customers and so a lot of what we're doing is making that this is more independent and operating it more similar to what.
No TRO does which is to leverage multiple third parties for low volume items to really drive drive to growth.
In terms of segments, we will follow a as he see guidelines and we will think true segments. During this year and we'll get back to by the end of year, if it's going to be any difference.
Thank you. Our next question is coming from Michael Mccann of Wells Fargo. Please go ahead with your question.
Thanks I appreciate the time I can go back to the margin discussion real quick the $40 million to $55 million of SGN a savings identified is that.
Fixed numbers that include also some flux down as a percentage of sales.
It includes it includes some amount of flex down, but not not fully all of the flex down. So you know we would expect that we would get additional volume variable over and above the 40 to 55.
Okay. So.
So.
Assuming the the 40 to 55, they continued about a 728 days plus you're saying additional percentage of sales savings so that would.
Put us somewhere and I think my back of the envelope map and 8% operating margin, which was 200 basis points below the or nine trough is that's a way to think about this spring.
This downturn as it stands without the additional actions phase two.
Well I think the way to think about SGN, a let's let's just take the 55 million SGN a reduction at the at the high and if you compare that what we did in Q2 for SGN a that would be you know rough.
Really a 20 million reduction or about 3%.
I'm now depending on where volume tracks to you're going to get some additional volume bear variables. So you know I would look at it as.
You know you're going to get three plus percent in terms of in terms of SGN a reduction versus versus the prior year.
Okay, and then just quickly on the PPNR <unk> you mentioned barge sales blanket purchase orders have you collected the PUC deposits for those or are those cancel or how do you see those progressing throughout the year.
Well it depends I mean for for most orders in the backlog, we would not have deposits collected for large for large special orders. We would we often have deposits collected but in terms of the backlog, we don't typically get payment until we actually ship and bill.
Thank you our final question today will be coming from Justin Bergner.
Research. Please go ahead Sir.
Oh, Hi, DG in time and thanks for fitting me in a good work on everything the companies doing.
I guess, what hasn't been covered which stood out was the retail sales up mid twenties or are you seeing sort of an acceleration there. Besides a kobin 19 demand.
How large is a percentage or businesses that.
Again, our the margins there.
Diluted.
When you normalize for sort of cobot 19 product or the mix similar mix accretive.
Well, so retail for us typically is.
Certainly distribution centers that sort of retail and so we have very large customers that are that are ecommerce players typically that would fall in there.
That is slightly mix dilutive you know as a customer group certainly, but the but it's a it's also very important customer group and so what we're talking about there's trps typically serving the industrial side of retail as opposed to retail stores and most right now what we seen is almost all ecommerce traffic.
Probably realize is way up and so our business two distribution centers.
Better serving that ecommerce traffic as well.
Got it I'm. Good work there and then just a follow up question is on the SGN a cost being higher in the acquired at some of that flow through a corporate unallocated cost because that's the up materially year on year in quarter, a quarter or were there any other dynamics there in the corporate cost pocket.
No I would I it was about.
Half of that was flowing through the corporate the corporate unallocated and if you adjust for that we're very comparable to last year in the corporate unallocated and in terms of looking at it on a full year basis, we should not be material materially different than me.
A corporate unallocated. So it's a good question Justin half of that corporate unallocated.
Thank you.
At the end of our question and answer session I would like to turn the floor back over to DJ for closing comments.
Great well thanks for thanks for joining us today I really hope all of you are are safe and healthy just want to reiterate that we are.
Doing everything we can't help and helping health crisis first is the most important things that we can I'll get back to work.
We've taken a lot of action to ensure that we can continue to operate serve our customers very well. During this time keep our team members safe and make sure we're in strong financial position.
We view this as a certainly a short term threat, but we view it as long term opportunity. We think we're going to come out of the stronger we think we're gonna game customers. We think we're going to find all kinds of new opportunities coming out of this and we're already starting to work those.
Already have some some get get to work plans already in place. So we're really excited about the future. Thank you for spending the time with us and really appreciate that and please be safe and well talk you soon thank you.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect. Your lines are log off the webcast at this time and have a wonderful day.
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