Q2 2020 W W Grainger Inc Earnings Call
I'm all sorts of irony listen only mode. Every question and answer session well filed a formal presentation and then you want you to acquire.
And a conference please sorry zero on your telephone Keypad. Other reminder, the conference. It's being recorded it is now my pleasure and you get your health Irene Woman Vice President Investor Relations. Thank you you need again.
The morning, welcome to Pranger second corner, 20th 20th earnings call with me today or D. J Mcpherson Chairman N C E O N. Tom O K S. P. P N C F O.
As a reminder of some of our comments today may include poured looking statements actual results may differ materially as a result, embarrassed wrestling uncertainties, including those details in our S. C filings reconciliations with any non gap financial advisors and their corresponding gap measures are found and that's.
Tables at the end of this slide presentation and are cute to press release, both of which are available on our I our website.
<unk> call will focus on the just the results for the second quarter of 2020, which X glued restructuring and the other items that are outlined in our earnings press release now I'll turn it over to D. G.
Thanks, Irene good morning, and thank you for joining yesterday.
Let's say that this quarter was different and challenging would be an understatement.
Hi, I'm very proud of power leadership and team members have stepped up to the challenge, where they're dealing with the pandemic or where social injustice issues. Our team has been fantastic throughout this I'm certain time.
Let me start off by providing you with an update on a pandemic response and a brief overview of the quarter before turning over to Tom to dive into the details.
Just starting with an update on the pandemic. The grade your team continues to work tirelessly to keep the woodworking during this challenging time.
As I outlawed Atlanta on our first quarter call Granger, just in the central business and our customers counter that's to keep their business up and running.
Our pandemic responses wrapped in three broad priorities first serve our customers well through this challenging time.
Second support the needs and safety of our team members and third sure we remain in a strong financial position.
Provide a quick update on each point.
To start businesses remained open every day to serve our customers.
Visit one of our D. C is the last week and leave implemented several measures to protect the safety of team members and to ensure that continuity of our operations.
We also recently reopen their branch over rooms to add to the curbside pick up service, we had been operating throughout the pandemic.
Ah keeps dark team members continue to serve the vast majority of our customers. The exception would be some disrupted businesses, where we've had to flip to alternate solutions throughout our team is focused on customer a team member safety, including New protocol temperature checks space covering mandates and social distancing Guy had much. This is certainly made operating more difficult.
But we believe we have done very well with these changes.
On the customer frog business reopening related activity continue to vary greatly based on industry and geography.
To health care government, another essential businesses remains strong throughout the quarter.
What else to 90 sensual and disrupted businesses bottomed in April and they've rebounded may and again in June although they still remained depressed compared to pre told the dumbest I'll talk about the pattern of revenue in a minute.
[noise] supply chain is operated wall throughout the pandemic, although we have seen some lumpiness cause we work to match apply with tremendous demand for some pandemic related items.
For most product categories things it improved but for some categories global shortages will make supply a challenge throughout the balance of the year. Our team is working tirelessly to ensure supply for customers as the pandemic ebbs and flows.
As we mentioned before supporting the needs of our team members of critical important, especially during this period of uncertainty our team members of <unk> essential to serving our customers and team member health and safety remains a priority.
We've been fortunate to absorb depend emmick.
Without major lay out some currently have less than three per cent of a workforce for stolen for them.
More team members, who are returned to work in the next few weeks have an experienced a cohesive team will help us accelerate grove through the recovery.
In addition, we remain vigilant around safety our team members give us great marks for making safety a priority as they support our customers.
We have maintained it tight focus on a financial position dropped this period.
Q1 call I discussed your priority to preserve cash, including differing action on certain capital projects pausing or share repurchase program and drawing on a revolving credit facility. We continue to focus on cash preservation and every do snotty central SG&A spend way over 75 million sequentially in a corner more than exceeds or 40 to 55 million.
Target sat on the previous call.
He's actions helped us to finish the corner with approximately 1.9 billion.
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Since the business perform ball in the corner, we had begun to evaluate paying part of the revolver and our assessing a potential dividend increase depending on the shape of the pandemic, we will see some sequential cost increases related to things like advertising some travel and the reinstitute should've married increases, but we remain committed the managing expenses very closely giving me on certain path.
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Clear weird managing Cos, well, but also investing for the future success of the business, we continue to focusing balance long-term healthy the company alongside or short term operational needs.
Turning to a quarterly results of the business remained resilient. Despite this unprecedented period.
Daily sales finished down 1.8 per cent on a constant currency basis, and a quarter underpinned by heightened C. L. A pandemic related items that yearly offset a mid team decline it non pandemic relate itself.
With the M. R. R. A mark it down 14th to 50 per cent of the quarter. We gave a lot of sure feel by pay debit related sales somebody did your customers and improving non pandemic sales at the corner progression.
Gross margins were pressured primarily do the pandemic impacts, which combo detailed a bit.
Meaningful portion of this marching pressures temporary in nature, but we don't know who's how long, but <unk> <unk>.
Despite great SG&A performance, we have taken action keep team members and customer state that I've added some short term cause obviously, where I'm touring expense to ensure we create say fork spaces and interact.
But also do anything like expedited shipping and allocating proud of Pilau marching health care and government customers to state. The obvious we had been focused on helping customers in communities as much as possible, which sometimes means we have added cost.
We produce 230 million of all pretty cash flow and wanted to 89 million a free cash flow that's a solid resolved in this environment.
Balance in the short term with harvest and strategic initiatives has been key.
Continue to make progress on our keep priorities.
We were on plan to review merchandise and incremental 1.6 billion of our assortment this year.
[noise] to support further acceleration of these activities, we plan to watch or a new product information management system over the next month.
We have made great strides in analytics in marketing capabilities, including upgrading internal talent.
More of the marketing activities, a new customer information tools have enabled us to better match marketing themselves activities with your customers.
We launched a new visual search application that is based on machine learning, we're getting ready abuse the solution.
We are seeing continued traction without keeps talking to other embedded customer solutions, you know the customers who have at least one embedded solution, including keeps talk N E. D. I a pro account for roughly 60 per cent of a revenue. So this is an important customer segment here, we have upgraded our systems and processes to accelerate new installations and improve service an existing solutions.
With our M must've sort of a model and the notes real continued to invest in technology and capacity to feel their growth. While we started to see the benefits of last year's investments Zorro in the U S. And lastly, we further refine their international high touch footprint with a completed the best what's your favorite and we announced in agreement to the best graduate China. This helps us simple fire footprint and so.
<unk> our efforts on our court markets.
Looking at five six I thought it would be important this quarter to show the underlying trends with pandemic of non pandemic products based on our current categorization excuse.
Over the last several weeks I've been participating in virtual market visits with customer. So originally scheduled to be at person.
Chocolate dozens of customers in several different industries to get a sense for how things are progressing.
It's important to note that even for customers as strong revenue performance, there's been a disruption in normal activities. For example are hospital system has been heroic in dealing with the pandemic and saving lives in there <unk> demick product demand has been enormous but many of the normal facilities maintenance projects had to put on hold do this time to focus on <unk>.
Which means that even hospitals had lower pinon pandemic sales through the last four months.
There's a backlog at work that we'll need to be done in the future, but for now customers and all industries are focusing on keeping people safe and recovery.
And the U S. We started to see increase pandemic sounds in February and they really picked up in March what we quickly moved in stock inventory. This trend continued would pandemic related field up around 70 per cent.
And the second quarter and while the environment roommates fluid. It's just continued at an accelerated great did you lie.
The heightened demand came from a multitude of customers across numerous industries with most of that gonna make products going to health care.
Government into central businesses.
Through most of March non pandemic sales were pretty stable.
[noise] to stay at home orders, we saw non <unk> fall off significantly late March the day, I've gotten better each mustard <unk> out in April.
We've seen further improvement in July the good news that we've seen a steady improvement in non pandemic revenue across all customer types, it's still below pre pandemic levels, but it has improved while we don't know how this will progress would you feel good about our duty to help customers why did the storm regardless of how to Penn debit keep all so with that I will turn it over the time to take us through the quote.
<unk> results in detail.
Thanks D G starting with our total company resolved as noted on slide a daily sales were down of 1.8 per cent on a constant currency basis.
This decline was primarily driven by volume decreases reflecting lower sales of non pandemic products.
As well as significant headwinds from unfavorable product mix do the heightened sales a pandemic related products.
It should be noted that are endless assortment business through approximately 16 per cent in the corner.
Showing tremendous resiliency, despite the challenging market conditions.
Combined the U S segment, and endless assortment business, representing the majority of our revenue Blue daily sales about one per cent and the quarter and roughly 4% year to date.
Gross margin for the total company was down 290 basis points versus the prior year corridor. This decline continues to be driven mostly by pandemic related impacts, particularly noticeable and are you at segments.
As well as continued business unit next impact as we experienced faster growth and are lower margin enlist assortment business.
We gained 100 basis points of SG&A leverage with a total year over year cause decrease a $43 million.
This leverage stem from proven cost reductions across all business units, partially offset by increased pandemic related caught.
Keep our people and facility safe.
Sequentially total S. G N a spend decreased over $75 million exceeding are previously communicated goal of 40 million to $55 million.
Great resolved as we were able to deliver better than expected savings in many areas of the business.
We generated operating cash flow of $232 million.
Which we used to invest in the business <unk>.
Return capital to shareholders and maintain a robust financial position.
During the quarter, we pay dividends of $86 million to shareholders.
Had total capital expenditures of $43 million.
And significantly invested in inventory to ensure we can satisfy our customers needs going forward.
Upgrading cash flow was 114 per cent of net adjusted earnings and return Uninvested capital was over 28 per cent year to date.
As expected are liquidity has remain strong and we are evaluating increasing our dividend and beginning to repay a revolver draw.
I wouldn't know are calculated decremental margins are a bit skewed given the modest level of sales decline.
While the detrimental margin calculation is useful it has limitations with relatively small sales declines for example.
If our sales would've declined 10 per cent in the corridor with the same gross margin N S. G N a spending.
Our business results would in fact be worse, but our decremental margins would have improved from down 111 per cent to down 50 per cent.
Overall U S segment daily sales decreased 2.4% in the corridor as compared to a decline of an estimated 14th% to 15% for the broader MRO market.
The decline was primarily driven by volume decreases including unfavorable product mix from heightened levels, a pandemic related Salle as.
As well as decreased volume of non pandemic products.
In the U S segment, we estimate that pandemic related product sales were up over 70 per cent in the corner.
Speaking in may but elevated throughout the corner.
Non pandemic products were down in the mid teens, but sauce sequential improvements from April lows.
Gross margin was 310 basis points unfavorable to the prior year.
Variance was driven primarily by three factors.
Ken Demick related headwinds.
Tara field cost inflation.
And the impact of our rescheduled national sales meeting.
First.
It's difficult to pinpoint we estimate that pandemic related headwinds accounted for approximately 60 per cent of.
The gross margin decline in the corner.
These headwinds are multifaceted and include product mix impacts as well as we continued to sell significantly increased levels of lower margins safety and cleaning products skewed more toward larger health care and government customers.
Additionally.
As we work to support our customers during this challenging time.
We felt further marscher margin pressure as we source high demand products from non traditional suppliers.
This included increased great and handling cost to insure expedient delivery of these much needed and critical supplies.
These dramatic but temporary pandemic related impacts are not expected to continue once we returned to more normal course operation.
The remaining gross margin decline was primarily driven by the lapping of year over a year cost inflation, which was largely driven by tariffs that went into effect in 2019.
Finally, our national sales meeting represents a roughly 30 basis points headwind related to the Reformatting and re timing of the meeting.
From an S. G N. A perspective, we gained 60 basis points of leverage with cost decreasing approximately $25 million year over year.
Kris was driven primarily by lower travel expenses as well as reductions in marketing labor related Cos professional services in general frugality.
These decreases more than offset temporary 10 demick pay increases for hourly branch in D. C team members and enhanced safety measures and our facilities.
Operating margin remains strong at 14.7 per cent, but declined 250 basis points in the corridor.
<unk> lower gross profit margins.
There were only slightly offset by the achieved S. G N a leverage.
Return Uninvested capital was a very healthy 38%.
Looking at the U S MRO market.
While extremely difficult to predict in this environment, we estimate the U S. M. R O market declined between 14, and 15 per cent and the second quarter.
Ranger was able to capture roughly 1200 basis points of outgrowth in the corridor 70 per cent increase compared to the first quarter sure increase.
It should be noted that despite the pandemic year to date daily sales are up with 1.6%.
We have gained over 900 basis points of sure.
Moving on to the other businesses.
Daily sales and our other businesses increased 2.7 per cent or 2.5%.
Constant currency basis.
The endless assortment business grew add grilled combined at 16 per cent year over a year driven by strong customer acquisition at Monotropy and low single digit growth at Zorro.
<unk> continues to perform at an impressive right. Despite the Japanese recession can admit.
The pandemic backdrop.
Sales at Zorro accelerated throughout the corridor with June up near 10 per cent and July growing at an even faster rate.
The international high touched businesses.
I've been severely impacted by pandemic related shut downs.
With each geography experiencing meaningful year-over-year declines.
Gross profit margin declined 140 basis points and the quarter driven primarily by declining margins at February and Monotropy.
I'm not sure I was resolved is driven in part by frayed increases.
From the acquisition of new B to see customers.
We achieved significant S. G N a leverage and the second quarter.
Resulting in operating margin expansion of 65 basis points.
E S. G N a favor ability stems largely from decreased expenses across our international high touch businesses, most notably at crotwell.
And expanded leverage an endless assortment.
It is notable that despite some gross margin headwinds at Monotropy. The analyst assortment business grew operating margin and the second quarter.
It is encouraging to see the 2019 investments in Zorro paying off.
Further despite significant topline challenges in 2020 trauma has meaningfully reduced it's operating last year to date.
On June 30th we completed the sale of the favorite business. The full operating results of this business are included in our second quarter resolved.
Given the immateriality of the business.
We will not be recasting are prior year financials to reflect this transaction.
So we will face revenue headwinds.
Well, we'll have a modest T O N to operating margin rate comparisons over the next four quarters starting in the third quarter, we will provide organic daily revenue comparisons to strip out the topline impact of the divestiture.
Turning to slide 12.
In Canada Daily sales decreased 21, 7% or 19 per cent and constant currency.
The decline is comprised of roughly 17.5 per cent and volume and price headwinds, including customer mix of approximately 1.5%.
Volume's at the Granger, Canada business continued to be impacted by the economics slow down and lower oil prices stemming from the pan down there.
Gross profit margin at Granger, Canada declined 145 basis points year over year, driven by the combination of aggressive pricing actions aimed added reinvigorating our customer base.
[noise] demick related mix impacts and lower vendor rebate.
These impacts where partially offset by lower for a cost.
Our cost management actions drove S. G N a savings of $12 million year over year, resulting in 60 basis points of leverage.
Operating margin was unfavourable 85 basis points versus prior year.
Before I turn it back to D G.
Given the unpredictability of the virus.
It remains nearly impossible to predict how customers, how our customers will be impacted.
But wanted to give you a sense for how July is unfolding and what it might mean for the third quarter.
So I'm a sales perspective trends in early July are showing sales up mid single digits on an organic total company basis.
Which strips out sales from our favorite business.
July to date trends she'll continued momentum with non pandemic sales gaining steam from April lows and with pandemic related sales remaining at elevated levels.
Sure there.
Every business unit is showing improved performance in July when compared to June results.
The situation clearly remains volatile.
N as we saw on Q1 these month to date metrics may not be good predictors.
Of our full quarter resolved.
As we move into the second half of 2020, we anticipate gross margins will remain depressed as we expect pandemic related impacts will continue.
Well, we don't know how the situation will evolve as the year goes on.
Given what we know now we anticipate improvement from the 290 basis point year over year headwind, we saw and cute too.
But to what extent will be largely dependent on the pandemic related actions of our customers.
With respect to SG&A as business unit activity ramps up we expect to see some natural increases and spend related to marketing and travel.
And we also reinstituted our annual married increase which was pushed from April to July.
With this we anticipate total company S. G N a cost to range from $715 million to $730 million and the third quarter <unk>.
Importantly, we remain focused on longterm growth.
And will continue to invest in people process and technology to insure we remain the industry leader.
With that I'll turn it back to D. G for some final thoughts.
Thanks, Tom.
Before we wrap up the call and go to questions I want to touch on an important topic. The recent events of hatred and racism standards blunt reminders of the injustice in our world and particularly for the African American community.
<unk> one of our core principles has to do the right thing.
Right. Thank you you're seems fundamental respect each other embrace our differences in stand up for what is right.
Mainly meaning silent is not an option collectively we need to be better.
Company, we know the diversity inclusion and acceptance of our differences makes a stronger this is central to our grandeur edge principles and file to our commitment to keep the woodworking.
We have been encouraging our team members to a real conversations with each other about their background that identity, including the tough topics of race gender H and sexual orientation. So that we can better know and understand each other.
You know these conversations alone or not sufficient to solve the problem and we need to collectively take action to ensure that economic opportunities are more plentiful for all well we have work to do we are committed to improving our talent recruiting processes to root out bias and we're committed to promoting diverse hired and opportunities. This includes getting clear metrics and visibility insuring.
What will pay and helping team members address unconscious bias I'll also continue directed arm of our charitable efforts to promote the educational advancement of those without privilege or access.
I Wanna, Thank our team and our customers for for for performing so well through the pandemic.
We are pleased with how we performed we would make admitted to gaming chair profitably delivering strong results moving forward now with that I'll open it up for questions.
Thank you, we all know they've been ducking, a question and answer session.
That's fine we ask that you. Please let me get yourself to one question and one follow up.
You would like to ask the question.
One on your telephone keypad, Hey, confirmation, telling you wanted to pay your line as in the question too.
Sorry to if you'd like to really a question for me. Thank you [laughter] secret appointment and they'd be necessary to pick up your account that before passing the Sarkies. One moment. Please let me pull from your question.
Oh first question kind of July at David Nancy What's third. Please proceed with your question.
Alright. Thank you good morning, everyone.
First off thanks for slides six that's very helpful to give us a picture of what's going on under the surface here.
But my question is <unk> could you give us an update on your efforts in high touch what initiatives are you driving on most right now to accelerate accelerate growth in that core business.
Sure. Thanks, Thanks, David I think.
They are the same things we've talked about in terms of being critical and they they really follow the two groups. One is improving are offer our product assortment of product information our customer information.
So we were rolling out a new product information management system. We are three merchandising a bunch of the assortment to make the experienced better for our customers. We continue to invest in digital technology for our website. So that's kind of kind of the the first set of things. We're doing [noise]. We've also increased our our our marketing effectiveness and <unk>.
Improved or digital marketing, which both.
Which really it's all customers within like the grandeur model the high touch model and that has been very effective and we've reinvigorated are keeps talking and on site solutions for customers.
Traction going into the fourth quarter of last year and in the beginning of this year some of that slow down, but we still have new installs, we still we still have.
Changed some installs for customers to help serve them. During this time and really be added almost every large complex customer has either a digital solution that works with them or we opened it up the manage inventory and so we're pushing on those basics I'm on site service to make sure we do that right and all that is misleading strong sure game.
Within the U S business.
Okay. Thanks for that and second on the the Zorro U S growth initiatives that you you laid out last year is it correct to think that the costs are behind you know and you're just in the the harvesting stage and I you know obviously a great time are you on those.
As we look to the future will those kind of investments be less chunky I had or will you periodically step those spending initiatives ups and then followed by a period of of harvesting. The benefits. Yeah. We we would expect them to be less chunky and the reason is a lot of the invest.
[noise] between made over the last 15 months or so mostly in 2019, we're really about a fairly significant strategic change to expand the be assortment in the millions of products. We passed a 4.4 million products available to customers online was or recently.
We've got a great pipeline that required did you think very very differently that we've done historically and so those investments are behind us and I would expect them to be less chunky. We have for the next three to five years, we will continue to expand margins would that business as we grow given given will repositioned herself right now.
That's great D. J. Thank you. Thanks I appreciate it.
Thank you. Our next question comes on the line of Ryan Merkle with William Blair. Please proceed with your question.
Hey, Thanks, good morning, everyone.
Alright.
So first off pandemic row is holding up.
Really well in July decided I realize I says hard to answer but what is your outlook for pandemic sales going forward is there any visibility there.
Well so it's a great question Bryan Yeah, Yeah, there there is well visibility in the traditional sense I'm not sure, but but certainly if you look at our customer base their our customers know who have planned, particularly P. P E into their process like they've never done it before so.
Chocolate customers won't customer told me they used to 700 per day or a P. P item, how they're gonna use 40000 per day as an example, so.
Given given the awareness of the of the virus, we would expect elevated levels and pandemic product for the foreseeable future will it be as much as we've had probably not although you know as as we suitcases rise.
My guess is there'll be you know pretty significant elevated levels of pandemic product.
Moving forward, but I do think this is force people to change the way they think about.
Personal protection and think about somebody's products and and keeping team member safe. So we <unk>, we expect to see elevated product levels for at least the next few year and a half and it'd probably be on.
Okay. That's helpful.
And the second question on non pandemic sale. So I guess, two part question or the share games. There a strong it looks like maybe not maybe clarify that and then how did margins perform and non 10th and exhales year over year any surprises there.
Yeah first you know and I I can turn it over to Tomah margins, we're not surprising force there and they perform clearly.
Better better than the pandemic sales because a lot of the pandemic sells a very large orders to to large contract customers.
So the margins where of course, certainly better with non pandemic I you know I would say that it's challenging you know our market assumption of down 14 15 in the U S would assume that non pandemic sales were down quite a bit more than that until we do believe again significant sure and non pandemic product as well.
Getting that level of detail.
Looking at that our models almost impossible to do and so I would say don't really know we think we gained sure throughout all product categories.
Whether we gained more or less year, what's on pandemic is really really hard to do my guess is it's less but still very strong.
Okay perfect. Thanks pass it on.
Thank you. Our next question comes on the line of John ends with Gordon have get please proceed with your question.
Oh, Thank you good morning, everybody.
Hey, just as a thought.
Your concern for social issues, there's laudable you guys might want to even think of expanding your presence submit Chicago area, maybe even this outside of Chicago, just as a thought yep.
No. It's it's spelled like why not.
Alright. So my question is D. G on Canada, Canada's results have been pretty bad for awhile, but you know some respect the down 19% or whatever core they held up the profits pretty well how did they do that exactly like why what they're not more detrimental right cause that just because.
It's been bad for so long that it's been able to sort of you know move and adjust the costs and would you expect that kind of performance going forward in terms of Canada's cost preservation.
Answer is yes, we expect it going forward you know I I think that the thing that's probably.
Not not easy to understand is you know I I spent some time with our customers recently in Canada and.
Our service has improved dramatically there over the last couple of years and coming off of the essay P installation and some other things we had a real challenging period, there with service and so I think a lot of this is just customers coming to realize that will providing strong service building better relationships.
And and we've taken the cost actions, we have so we feel like that business is poised to to do much much better you know obviously, they're gonna be faced with some to market challenges, but we feel like their position to do better and we've taken a lot of cost out, but we also continue to invest in pockets for growth and we.
Feel like from a share perspective, we can gain chair and getting to your profitably given our current position.
Well I was gonna ask you about Canada strategically it has been I appreciate the investment posture like is there a way to maybe even step that up over time I I I guess the question that so at some point after what's been like three years or whatever a pretty tough results there.
[noise] number one you you're not able to actually sell the business because I think years ago, you guys implemented initiatives to integrate it more with the U S. So selling it would actually be challenging you'd have to untangle. It. So if you can't really do that is the plan to just get it profitable over time to a certain threshold and it's sorta set so the cash cow or you really think it can sort of do what.
Of the you know some of what you've been able to accomplish in the U S. In terms of share games can't can't do that in Canada, perhaps by shifting away from oil and gas more to other pockets of their economy or or whatever okay. Yeah. Yes. We believe we can do that and actually we're starting to see that so we government health care manufacturing, we're starting to get some subtraction there.
And you know as as that happens we believe it can be a growth engine.
Obviously, you're gonna be very very focused on profitability, but we do think there's gonna be nice growth coming out, particularly eastern part of Canada, and we've already started to see some of that underneath the numbers and so we feel like and you're right. It is running we're running it more like.
The U S.
And that's helped our cost position, but the team up there is very focused on.
On profitable growth I think we've got a really strong leadership team up there in the sales organization now and we're pretty excited about about the path in the ability to grow consistently.
And grow properly.
So it sounds like 2021 could actually be a significant inflection here without putting words in your mouth does that does that.
Is that reasonable as a thought process.
It's a it's a reasonable assumption I think pandemic aside how it evolved but yeah. We feel like we felt like this year was going to be.
Significant improvement we started to see that in the first couple of months and then even though that of course the world stop so we feel like well while position when things do come back for the poor it can be an infection.
Alright, thanks, so much appreciate it.
Thank you. Our next question comes on the line of Christopher Glen with Oppenheimer. Please proceed with your question.
Yep.
Good morning, if you just want to go stick with can go for a second and I think I saw grassy pricing there.
Wondering what enabled that was that.
Kind of ketchup on now that service levels are more enabling or is there.
A lack of elasticity.
No I'm most most of that is is what.
What we saw in the U S with pandemic, so large sales a pandemic items to to government customer some health care customers.
That that is the majority of of the aggressive pricing would've been to serve the pandemic.
Okay and on on the sure again, I think Tom mentioned 900 basis points. It just curious again, another crap trying to filter that with the pandemic demand it doesn't seem like it'd be.
Sticking pay per share game that you have.
The way you normally a cruise sure so.
Wondering about how your viewing retention of that.
Well the way the way I'm doing it personally is we.
What the World is a little unusual right now right. So.
To say that you gained from 1200 basis went to share when you were down 2%. It seems like a strange thing to say.
We think it's accurate analytically.
But it's a little it's a little messy right because we we it's hard it's hard to tell what's going on underneath that we feel like we are gaining sure we feel like where do you on the right things.
And we feel like our normal sure gains will be able to retain there maybe some of that it's hard to retain of course it depending on.
That makes sales, but but certainly we feel good about it but we don't we're not taking a literally if that's your question.
Yeah I appreciate that's awesome. Thank you.
Thank you. Our next question comes with my line of Adam Oh Man, What Cleveland Research. Please proceed with your question.
Hi, guys good morning.
Just a follow up on that that question.
In the past few used to talk about the medium size customer recovery from lapsed customers are folks who used to do business with could you remind us of what your headroom is of gaming chair with with those folks.
Yeah. So.
We thought we sound interesting dynamic with mid size customers during the quarter that is.
Sense reversed so let me talk about that for just a second so with large customers.
We ended up prioritizing a lot of pandemic efforts for large customer hospitals in government customers in particular in the central manufacturing businesses and others distribution businesses. As a result of that we held pandemic product from from the website in some cases and you're seeing all all the competitors do that.
And we did see the mid sized customers get hit harder during the initial shelter in place orders, what we've seen though is they've actually come back stronger and so we're seeing very strong growth with good size customers and the last six weeks, which is which is encouraging.
We've acquired customers. Then then we really ever have during this period, because we've had product and many others you haven't.
So we think we got a very strong a lot of headroom with mid sized customers. We were at 1.18 billion and we think we can get back to their and beyond overtime. So we think he's got along a long way to grow to get outgrowth of mid sized customers and.
The pandemic spent a strange period for everything, but we're now starting to see that growth come back in again.
Okay Gotcha. Thanks, and then how shall we think about inventory specifically for the rest of the year and maybe just some thoughts on working capital for the second half what would be great. Thank you.
So you know I'll turn it over to Tom here in just a second I I would say, we have made significant inventory investments to be able to get continuity supply for our customers.
So.
Then we obviously typically would given given some of the supply challenge that existed in the world.
And that is that has been working capital build we would expect that bill to stay.
Throughout the remainder of this year and into next year.
Before it starts to bleed off but I'll turn it over the top.
Yeah.
D G.
Yeah, what was part of our operating cash flow bridge was a significant investment into working capital and specifically inventory when it became clear coming through the first quarter and into the second quarter that we were in a cache generation.
Position, then we felt it was right to invest in working capital use our use our strong balance sheets. So that we would be able to take care of the needs of our customers. So we have done pre buys we've done prepayments and we think we're well suited to take care of the needs going forward.
To help out those key customers.
Thank you aren't next question comes from my line of Nigel call with all three cents. Please proceed with your question.
Thanks, Good morning.
Just going back to the pandemic I've seen let's get let's let's go to.
Single channel I mean, the the gross at zero was actually pretty impressive I I suppose I'm not sure, but we get the bed itself monthly from from the website.
I think the fact is a pretty clear but is there any way to think about the scuba expansion year of the year and how much of that is contributing to the growth. This is just demand and I'm I'm curious given the nature of the shutdowns in the pandemic instead of any kind of <unk> happening between.
Single channel and the <unk> and your traditional business during this period of time.
Yeah. So so great question. So I think I mentioned, we have a very strong pipeline millions of products in the pipeline to add Zorro. If you look over the last three or four years, even look at curves of new product dads and they're they're productivity remains a big part of the growth of Zorro and.
What's called normal times, we would expect.
[noise] dad's over the next three to five years to be as much as half of the growth.
Business.
And so that that's obviously an important growth driver.
We have not seen any further cannibalization during this period and then we've seen at other times between between zero in danger.
In fact oros door was growth has been.
A lot of it's been very very focused on very small customers. During this time and getting them product they can't get elsewhere.
So we're pretty excited about the pattern I will say that both Monroe true enduro have had a higher.
Acquisition than normal and some of that acquisition has been consumers, we don't remarket to consumers.
They they do find some as people have been trying to find.
Pandemic related or really any product during this time, but the business acquisition, even stronger than normal too and that's really important number to look at.
So it got strong business acquisition, driven in part by a by product.
<unk>.
Alright, Thanks, PJ and then obviously the the way you broken up.
The mix and the price mix this quarters I think it was really helpful.
The city bits of headwinds from from price and it's customer mix.
Would you be prepared until the price in isolation, how is pricing tracking.
Right now and.
How do you feel customer pricing is you know in terms of the go forward.
Ah customers receptive.
Inflation right now any change unpleasant though.
Yeah, we haven't received any change in pricing borough of our pricing and Tom I'll, let you answered so I will say a pricing.
Normal years, we C. G. P trail off as that goes along this year's going to be.
Not as much of that as we do see price get better and we seem to get better through the second quarter and so we feel like we're going to get more price going for what time do you want to answer.
Yeah sure. Thanks for the question Nigel and I I read your note before the call and I I think it's important to note that we really haven't done anything new in terms of calculation.
We've just broken out.
Product mix with volume product mix had always been in volume, but just historically it hadn't been so relevant it was fairly static obviously with the pandemic.
Yeah, it's a much much bigger story. So that's why we that's why we broke it out and as it relates to our revenue bridge. It represents over 90 per cent of of the variance. The remainder as you note is customer and customer mix in price and.
D G said.
We've seen strengthening all over the corridor and we expect that into the future in terms of price inflation, albeit we've seen a little bit of sauce Smith as it compares to prior year.
Okay, it's quite some time Susie.
Thank you. Our next question comes on the line of credit <unk> with Longbow Research. Please proceed what's your question.
Hey morning, Guy and thanks for taking my question.
I guess just to carry that a bit further Tom in the past you've mentioned that you know some introductory pricing was certainly and Onboarding engine for a large customer acquisition I guess is that still.
A part of the strategy you highlight of some of the other pieces there, but shall we spoke like prices from a strategic standpoint to be a bit lower than that large customer.
Piece of the business going forward.
Yeah, I would I would say, that's that's probably paused a little bit with the pandemic just with the focus with the P. P E. But it's certainly still part of part of the acquisition strategy and maybe cents.
Brought up gross margin related let me, let me try to unpack it even a little bit further than it did and the prepared remarks as we're not given guidance Wanna be as helpful. As we can to to everybody putting their models together, so as we said and the prepared remarks.
We've got 60%, which is covid related so on 330 310 bps.
That's roughly 180 bps.
Favorable versus prior year, you've got NSM is 30 bps. So there is 210 in total and the remainder is cost.
Slash other and is D. G mentioned historically going from Q T Q3, we would see a meaningful decline in terms of gross margin right.
This year going.
It relates to Q3, we expect that to be mitigated somewhat for the following reasons N. S. S. M will no longer be ahead. When so we will gain that that we also see the tariff cadence improving.
So tariff related cost inflation will improve a little bit and then we see price inflation strengthening as well and we expect that to continue into into cute three now the big wildcard of course is the pandemic impact as it relates to gross margin so that.
That is really the wildcard in terms of what the actual gross margin right will be for Q3.
What we do expect though as we compare the gross margin right to the prior year, we don't expect to be down 310 dips.
And the U S segment, and 290 bps overall, we do expect improvement from that so.
Just wanted to give you that color to help you all with your modeling thanks.
No. That's extremely helpful. Thank you for for the clarity there.
And then just to follow up I guess, we've seen.
China in February go away here I guess, just any quick thoughts on on Cromwell, how it's executing that's still makes sense in the portfolio. Just just your high level thought it'd be great.
Yeah, I guess I'll get I'll get some some thoughts so crime well is.
It is a business that.
He was very much in our high Tech solutions model.
And a lot like Ranger they have executed I think wall the last year to put themselves in a position where.
They can grow and improve profitability dramatically.
So so the pandemic doesn't change our thoughts on the business, we've talked about sort of making sure we have a fast recover that business.
We should be able to get very clear signs on the pace of that recovery coming out of this so you know I'd say happy with the team happy with what they're doing.
Service has really really good there now and it's starting to win back some business and they're starting to to improve profitability they could prove their cost position.
Want to give that a chance to run out a little bit more obviously, the pandemic may slow that a little bit, but certainly we we still have high expectations for how they can turn it around there.
Understood well. Thanks, so much guys end up at the luck going forward here. Thank you. Thank you.
Thank you. Our next question comes on the line of beans, right with RBC capital markets.
Your question.
Thank you good morning, everyone.
Hygiene.
Maybe a couple of questions on capital allocation.
When do you think you might be resuming buybacks and then any other color on a potential dividend increase either the timing magnitude is.
Are you talking into a payout ratio of this is.
D. J S. You said these are not normal times, but yeah. How does how do you are you looking at the dividend increase.
Would expect that dividend increase would be similar to what it has been in prior years team.
With respect to timing.
<unk> been talking about it and if something happens it would probably happen in the in the third quarter.
With respect to repurchasing shares.
Right now with the Spike and are we gonna have a shut down to within a abundance of caution.
We really.
Haven't resume the the buybacks, even though we are obviously generating robust cash flow that we would probably start to think a little bit harder. The N. F Q3, and if we were gonna do something it would it would like we'd be in Q4 I would think.
That's helpful and considering the divestitures of February and Granger, China are you.
Contemplating any other portfolio moves over the near term any divestitures.
Not at this point we're not.
Good and then just last one for me could you expand on.
Context of having to soar some high demand products from I think you've described them as non standards suppliers, what the challenges all right I think you touched on freight but did you have to qualify the suppliers and how do you think this issue with this headwind debates.
Yeah. So it's been it's been a very unusual time for supply I think the things that we've been really focused on or making sure. We can get get supply of high quality products that we do have to qualify suppliers.
We have to decide whether or not the product meets our quality standards and actually does what it says it's gonna do.
And then we have to in some cases of Tom mentioned.
Yeah do you have to pay some up from money, which typically would not happen and we've done that and a number of cases.
So it's.
And as this thing on unfolded it was a little bit like the wild west in the sense that everybody claimed they had a solution in and oftentimes a solution to worry and so we've had a had to work with our team in China in our work our team in the U S to really understand the quality the availability.
The integrity of the supply and that's been really important I think we've done a nice job navigating that but I expect that to way now and some categories that may remain but generally it's gotten a little bit easier lately.
That's good to hear thank you. Thank you.
Thank you. My next question comes from Hawaii, a Hamburger, Missouri Jaffray's. Please proceed with your question.
Good morning, Thank you.
Did you you touched on the top line <unk> I was hoping maybe you could just stretch on how to think about profitability of Zorro versus monitorial are are there any structural difference is whereby.
Zorro sugar look like <unk> <unk> longer term just any thoughts there.
We have a look at that and as you know.
Besides suki is running that business.
At this point zero, a business and he's he's been the CEO of instill is is that you're open not true.
The differences if they exist a relatively minor we think that this oral business should be able to get too.
Certainly high single digit.
Rating margins, which is very profitable from return on investment capital and we've got our plans to go ahead and make that happen over the next several years and so we felt we shouldn't really good about the profitability Pat disorder.
Got it in just a follow up question I'll turn it over Tom you, you'll give some incremental color on on grass margin. So it's more of a clarification question.
If if pandemic sales continue sort of at the same base is July.
Is cute pre gross margin just down sequentially, assuming friend that makes sales going to continue at at the best they are.
Well you know just just just to reiterate hunza, there's there's going to be some <unk> for sure and that's D. N S. As Sam meeting that's the the cost Terrace and that's the strengthening pricing. We would also expect is D. G said some of the money we pay too.
Saint Airfreight supply, we would expect that too likely go down as well.
The bottom line is it's just so hard to predict something that's never happened before in terms of in terms of the pandemic.
So.
You know I'll just reiterate historically Q3 gross margin is less than Q too would not expect it to be.
Doctor Mad a couple of fall off.
Q as it has been historically.
So.
I'll leave it at that.
But we do expect that it will be significantly from me bps perspective, compared to prior year not as down as 310 or 290 for the overall company.
Great. Thank you so much.
You're welcome thank you.
Thank you. Our next question comes on the line of Michael Mccomb with Wells Fargo. Please proceed with your question.
Good morning, everyone. Thanks for sneaking in here.
If I could go to the U S segment, just thinking a little outside of the box can you kind of frame for us what the opening all branches means a from a sequential style uptick if we were thinking of that has like a non-core add back what that means in terms of sales and maybe margin mix.
Okay.
So you're talking about opening our showrooms, where we were only doing curbside for awhile.
Correct.
So I would I would say that just just rough rough math.
Walk in traffic is about 10% of our volume.
Ah revenue at least at this point and what we see is.
We see.
A modest increasingly open the showrooms it it should help margins because typically the profile of those customers are not not generally contract customers and it's usually higher margin.
Sales, so it'll be modest to be overall growth profile, but it will help and we've seen we've seen that already happened as we've opened or something.
Okay.
And then second one for me I think Nigel was mentioning the skew count additions on Zorro you have.
Hello, I guess be to see company out there with similar ambitions too rapidly increased skew count can you give us a framework for how many resellers you have added and how much it would take to get that $10 million and whether you view that town 10 million as a high hurdle low bar any commentary there'll be great yeah.
I would say that given the we're talking about every quarter, adding tens of suppliers.
So it's not thousands of suppliers record of it is tens of suppliers, but we have we have a line of sight into getting to six or 7 million excuse at this point and we feel like get into $10 million is not all that all that difficult to do given the new processes. We have in place I will say that the minoshe business in Japan is about 20.
Roughly 20 million items. So we've done this before we understand in the process and I think the team has been a great job of configuring to be able to step on the accelerator and we have a very nice pipeline at this point.
Thanks.
Thank you I have final question comes from the line of password bombing J P. Morgan.
Question.
But hey, DJ anytime thanks for letting me in here.
Extra quick one on them.
You talked about about gross margin expectations for third quarter. If you could provide any framework, maybe I missed a terrier, but any framework around how to how to think about SG&A or incrementals incremental margins and the third quarter if.
Continue to grow in that mid single digit range.
Yeah, I mean related to S. T N E.
I'll refer you back to the prepared remarks, where we think on a total company basis SG&A will be between 715.
And 730 million and.
That is a decrease obviously from prior year, but an increase from Q till as the country starts to open up and we're spending more on travel we're spending more on advertising.
Those types of things.
As it relates to decremental Marge N.
Yes, decrement, if we were to see a volume declined from 5% to 10%.
[noise] is inconsistent with what we've seen so far July today.
We would expect decremental margins to be in the 35% to 45% range consistent with what we said last corridor. Obviously, if we if we continue add a mid single digit grow to then we would flip from decremental margins too incremental mark.
<unk> and there.
I think depending on again and I have to keep I apologize I have to keep giving the <unk> qualifier of what the pandemic looks like but depending on.
How the gross margin behaves.
We could we could be around 20%.
Minus gross margins.
As long as the pandemic does does not take a really harder hit on gross margin.
What if it doesn't fit so go ahead.
Tom is we're talking about adding travel costs back.
That may sound, a little odd in today's world, what we really mean there is.
We are now able to visit most of our customers. So we're talking about mileage reimbursement for ourselves team.
Which which will increase it's not a huge number but that that's the type of.
Cost add back we would be having as being able to engage with our customers again to treat to do.
Yeah, I shouldn't they're great clarification.
I assume that 715 to 730 is embedding sales growth since you're growing five per cent well today or is the range. There because you don't do the button because you don't know.
I don't think about that.
Our assumptions.
Change frequently now as the world changes, but certainly right now we would envision all we really know is through the first three weeks we're.
About mid single digits.
Okay, Yeah, I know last one.
And I'll just reiterate it is lower than prior year, which.
And the 760 range.
Yep.
And the last one for me did you mentioned the year over your benefit from from taxes, and the second quarter to free cash flow I might've missed that too sorry about that okay.
Can you repeat the question please Patrick.
I thought I thought I read in the sides or or somewhere that there was a benefit from timing of tax payments and free casual you got a second quarter me.
Yes, yes. Thank you yeah, there was $115 million Dennis set deferral, a federal income taxes.
Instead of paying our federal payments in April dune like we did in the prior year, we will we pay them in July.
Okay. Thanks, so much for clarifying.
You're welcome.
Thank you we have reached the end of our question and answer session I'd like to turn to call back over to Mister Macpherson is there any closing remarks.
Great I'll keep the I'll keep this very short thanks for joining us today.
Certainly I think we'd all agree that there's probably more market uncertainty that at any time in our in our careers but.
Hopefully you see from our results.
We think we're prepared to perform do whatever comes.
We're excited to see some of the the non pandemic volume come back and we're trying to buy the trends.
And we're going to stay completely focused on our core business models and driving profitable share gained through.
Alright attached solutions model in North America, and our unless assortment business. So we're proud of where we are and what was accomplished and we're ready for the future. So thanks for joining us today and I wish you all wall stay safe.
Thank you this.
Teleconferencing a disconnect your lines at this time. Thank you for you I'd like to pay some of them have a wonderful day.
[noise].