Q2 2019 Earnings Call
Thank you for calling income conferencing. The next available conference specialist will be with you momentarily.
And I can I have your name please.
Hi, My name is Jacqueline Garrahan.
So the last name.
D.A.R.R.A.H.A.N.
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I went on it.
Again.
Permanent CEO , Tom Oh praised CFO .
As a reminder, some of our comments may be forward looking based on our current view of future events.
Actual results may differ materially as a result of various risks and uncertainties, including those detailed in our SEC filings reconciliations of any non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures are at the end of this slide presentation and in our Q2 press release, which is available on the IR website.
Reported result in in the second quarter included a 3 million dollar benefit to operating earnings and a three cents benefit to EPS, primarily related to a reduction in lease obligations in Canada.
This morning's call will focus on adjusted results, which exclude the items outlined in our press release. Please also note within our comments, we have removed the favorable timing impact of the North American sales meeting from gross profit margin and operating margin. The sales meeting had a positive 20 basis point impact.
On total company gross profit margin and operating margin and a positive 25 basis point impact on us gross profit margin and operating margin.
Now I'll turn it over to DG. Thanks, Irene Good morning, and thank you all for joining us today.
I'm going to discuss our first half and second quarter results and share an overview of what we're doing to drive growth in the us and through our enhanced assortment model then Tom will provide details on the quarter and we'll open it up for questions.
The demand environment has softened throughout the year.
Having said that our strategy is grounded and have grounded as having a value proposition that resonates through economic cycles.
Through our high touch solutions model, we provide services and products to customers that help save that money.
We help them consolidate tomorrow spend we manage their inventory, we provide solutions to simplify their purchasing process.
We offer product substitution recommendations, we enable standardization across sites and we help them keep their operations running and their people safe.
In times of slower growth, we partner with our customers to lower their cost, which strengthens our relationships.
We're confident in our ability to gain share in both up and down cycles with this model.
With our endless assortment model customers value, our streamlined search experience and expansive assortment.
We're investing for growth through this model and are bullish on the path ahead.
Turning to our performance so far this year.
We delivered strong operating results in the first half of 2019, despite a slower global economy and significant investments in our endless assortment model.
Year to date total company operating margin was 13% up 50 basis points, and we've driven incremental margin of 42%.
Operating cash flows in the first half of 2019 is up 14%.
We're through much of the heavy lifting on our cost takeout initiatives.
And are now focused squarely on driving profitable growth through our U.S. and m. assortment businesses.
At AIG.
The top line recovery has been slower than we anticipated we made multiple changes in a short amount of time that caused disruption to our customer base and we've seen more volume loss than we expected.
Revenue dollars were stable from first quarter to the second quarter.
Services now once again strong when we started to win new business for the first time in a couple of years, we expect to see better performance in the second half of 2019.
At Croma, we have made many changes to position the business for growth.
We redesigned the distribution center and launched or UK, leveraging the Cromwell supply chain.
Performance has lagged the short term, resulting from market conditions and our actions in the region.
Performance. It's all UK has been very strong we remain committed to this market.
Our 2019 total company outlook remains the same for gross profit margins operating margin and EPS based on our strong operating performance. So far this year.
We are lowering our estimate for market growth to minus 1% to 2% and lowering our revenue guidance to 2% to 5% growth due to the weaker demand environment and performance at AIG Guy and Cromwell.
Moving to the quarterly sales performance in the U.S.
The U.S. MRO market growth decelerated from 2% to 2.5% in Q1 to approximately 1% in Q2.
We estimate us market growth included about one point in price.
As a reminder, these are internal estimates of market growth.
The factors that determine market growth are finalized over the next 60 days.
We expect a slow market growth to continue in the second half of 2019.
In the quarter market growth slowed across all of our end markets with the exception of health care.
The core Granger business grew about 150 basis points faster than the market.
US large customer daily sales growth was 2% and 11% on a two year stack.
U.S. midsize customer growth was 5% and 25% on a two year stack.
We got off to a slower start in the first half of the year for two reasons first as we've noted we've seen a meaningful decline in the us market growth from 2018.
Second we've implemented new initiatives to drive growth in 2019 and beyond.
And these activities take time to yield results.
One example of this is our merchandising initiatives.
We've completely revamped our category review process to include the voice of the customer more to ensure that we have the right assortment and that it is presented in the right way to our customers.
This will lead to strategic product ads and improve product presentation.
To date, we've implemented this approach on a small portion of our assortment and the early results are very promising.
We expect to be through about $1 billion worth of the assortment in the second half of the year and to accelerate these changes in 2020.
We are confident in our ability to accelerate our share gain in the remainder of the year.
Our update or sales updated sales guidance for 2019 implies you a share gain of about 300 basis points in the second half and we are fully committed to 300 to 400 basis points of outgrowth.
Versus the market on average over the next several years.
Let me spend a few minutes discussing our us growth initiatives in the context of our value proposition.
While we are in the early innings of these initiatives, which I first shared in May we are encouraged by the results and remain committed to their implementation to drive the business forward.
We generally think about them in two buckets. The first our improvements to our foundation that ensure that we stay competitive and the second our incremental investments that contribute to our long term goal of 300 to 400 basis points of growth above market.
In terms of what we call advantaged MRO solutions, we are investing in our foundation to allow us to offer better solutions for our customers.
We are improving our product and customer information and building new data platform. So that we can suggest more relevant solutions online over the phone at the branch and through our sellers.
We expect to start reaping the benefit of these efforts in early 2020.
We're also investing in our website to make the search process easier.
Feedback from our customers is positive.
Spread is spend a spread evenly throughout 2019, and we're seeing strong returns from these efforts.
Moving to our second pillar differentiated sales and services from a foundation perspective, we are investing to refine our customer relationship management processes.
Increasing our efforts to serve specific markets more effectively.
And improving sales force effectiveness.
In terms of inventory management, we've done some heavy lifting to realign our offer to drive profitability.
Feedstock, which is the core piece of this offer is now profitable and ready to drive growth.
Sales through this service represent 10% revenue in 2018 in total sales with these customers represent about 30% of us revenue.
Over the long term, we expect sales through keepstock to grow much faster than the overall business.
From an incremental perspective, we are expanding our service offerings, which includes partnering with suppliers and utilizing our safety and other technical experts to help customers manage total cost.
And can keep their facilities up and running and their people safe.
We're also looking at targeted expansion of our sales force, where it makes sense.
We're planning to strategically add sellers to address changes in how customers buy and to be more relevant and select segments.
With corporate accounts, we have been very focused the last two years on communications around the price changes. We are now in a position to deepen those relationships to drive significant growth.
These relationships strep stretch from the plant, Florida, the C suite, and we have a significant opportunity to gain share with these customers based on the service and the capabilities that we can provide.
Our last pillar is unparalleled customer service.
Our first priority is priority is always to deliver a seamless customer experience.
We are known for this in the market and are focused on retaining this advantage through our order to cash work.
We have implemented a number of initiatives in the past year that have resulted in an improved customer experience.
Our metrics have improved and customer feedback is at an all time best and getting better.
In terms of fulfillment, we now have 600000 product stocked in the U.S.
It's very likely that when a customer places an order we will have the products available for delivery next day and all in one box.
We are adding capacity and capability with the addition of our distribution center in Louisville, which we expect to go line online in early 2020.
Louisville will have the most capacity in our network and will enable us to stock up to 800000 skews in the U.S with potential for more.
When we add stocked items, we tend to see significant lift in revenue.
Now historically outside of the pricing reset we've had anywhere from slightly negative share gain to up to 300 basis points.
When we've had share gain in the higher end, it's been by adding customer touches or products the initiatives I've shared do both.
Increased marketing improved product assortment and navigation expanded services and Salesforce additions and the opening of our Louisville DC is expected to allow us to grow 300 to 400 basis points faster than the market over the mid term.
I also want to spend a few minutes on the investors investments, we're making its oral use to drive long term profitable growth.
You've heard us talk about expanding the product assortment, we plan to add 1 million new items to its oral assortment this year.
We've already added 400000.
Overall, we plan to add 10 million items over the next three to five years.
The product ads are driving revenue growth similar to what we've seen historically at material.
Our investments in systems and people to help drive this growth are also going well.
We are going live with the new product information management system for Zohr, This year, which will allows or to add products at their own pace and to become less reliant on granger supply chain.
We're also improving our analytics platform, which will help us better market, our assortment to customers online.
We are investing in zoro for success.
We expect the bulk of the infrastructure investments to be complete this year, we are optimistic on the trajectory of this business going forward.
Now I will turn it over to Tom who will discuss the quarter's results in more detail.
Thanks DG.
Looking at our total company adjusted results for the quarter.
Sales were up 1% daily.
And up 2% on a constant currency basis.
Volume was up 1.5% and price was up 8.5%.
Year to date prices up 1%.
For perspective, our us and endless assortment businesses, which represent approximately 90% of total revenue were up 5%.
Well were offset by headwinds at AIG and Cromwell.
Moving to gross profit our GP rate declined 35 basis points.
The decline in GP rate versus the prior year was primarily driven.
By the other businesses.
We drove operating earnings growth of 5% in the quarter.
Our operating margin grew 30 basis points versus the prior year due to gross margin in the us.
Our cost takeout initiatives that AIG.
And cost discipline in the us and at the corporate level.
For the quarter, we generated incremental margin of 39%.
Operating cash flow was $323 million in the second quarter of 2019 up 30%.
Driven by better operating earnings and favorable working capital versus the prior year period.
Now, let's look at our performance in the U.S. as Dean mentioned the demand environment slowed sequentially from Q1 to Q2.
Daily sales were up 2% composed of volume growth of 1.5%.
And price inflation of 0.5%.
Intercompany sales to zoro contributed 8.5%, which were completely offset by the decline in specialty brands.
Our GP rate increased 10 basis points.
Excluding the remaining contract implementations price cost spread was neutral.
Gross profit margin also included a benefit from supply chain costs.
Primarily related to freight and inventory optimization.
And positive mix.
With respect to the remaining contract implementation.
We are on track to complete this work in 2019 with only 5% remaining.
In the quarter, we pass through a majority of tariff and non tariff related cost inflation, while ensuring that our pricing was market based.
We still expect price cost to be neutral for the year, excluding the remaining contract implementations.
And we've taken the following approach to mitigate any headwinds associated with price cost.
With price one of the main objectives of the reset was to ensure our pricing was market competitive.
We can move web price fluid lead throughout the year to ensure that we are priced appropriately.
With contract customers, we can adjust price a few times during the year and we manage these relationships in terms of total cost ownership to ensure that customers are getting the most value.
On the cost side.
We've been very happy with our ability to navigate the tariff environment.
As a reminder, we have a cross functional team that meets regularly and his work to minimize the impact.
You may recall, we originally expected about 2% Cogs inflation related to tariffs.
Our actual exposure through working with our supplier partners has proven to be much less.
More specifically, we've leveraged our scale and maintain strong relationships with our suppliers, allowing us to better predict and manage cost headwinds.
Also we continuously evaluate our product portfolio to ensure we have the best product at the best cost, which includes optimizing sources of supply.
Moving to operating earnings.
Operating margin was up 60 basis points in the U.S.
SGN a was flat on sales growth of 2%.
Our continued cost discipline has enabled us to maintain SGN, a while growing revenue.
And we remain fully committed to growing SGN a.
And half the rate of sales on an ongoing basis.
In Canada.
Daily sales were down 23%.
And down 20% on a constant currency basis.
Price was up 3% and volume was down 23%.
Volume decline.
Generally resulted from the customer disruptions related to the turnaround activities, we took last year.
Gross profit margin was down 150 basis points in the quarter due to negative price cost spread.
While we were able to pass through price in the quarter cost was unfavorable due primarily to lower vendor rebates on softer volume and the foreign exchange impact of us denominated product purchases.
As DNA was down 26% versus the prior year driven by the cost takeout initiatives.
Operating margin was down 30 basis points in the quarter, reflecting lower gross profit margin, partially offset by favorable SGN a rate.
We expect performance in Canada to improve in the second half of the year.
Late in the quarter, we saw encouraging data showing that service levels and web sales were improving.
As Dean mentioned daily sales were flat from Q1 to Q2, indicating signs of stabilization on the topline.
Recall that most of the significant volume decline associated with the turnaround actions occurred in the second half of 2018. Therefore, we will have easier topline comparisons in the second half of 2019.
Moving on to other businesses.
As a reminder, other businesses include our endless assortment model.
In our international portfolio.
Daily sales were up 6.5% in the second quarter and up 9.5% on a constant currency basis.
Due to strong revenue from mindless assortment model.
Well not show continues to grow significantly and we're making good progress with our growth initiatives and zoro.
Gross profit margin for the other businesses declined 220 basis points driven by promotional activities at Sorel.
Unfavorable customer mix at Cromwell and freight headwinds in Japan.
Operating margin declined 290 basis points for the other businesses, primarily driven by investments in zoro us to drive long term growth and performance at Cromwell.
Page 15 covers our guidance for 2019.
At the total company level, we are reiterating our gross profit margin operating margin and EPS guidance for the year.
Our us segment operating performance is strong.
And is more than offsetting slower performance at AIG and Cromwell.
We expect to use segment operating margin to be at the high end of the guidance range.
While AG is expected to be towards the low end of the range.
For our other businesses, we are updating our operating margin guidance.
From 6% to 8%.
Two 4% to 6% due primarily to performance at Cranwell.
Moving to our sales expectations.
Our view of the MRO market has also changed from April .
Instead of 1% to 4% growth, we now expect negative one.
To positive 2% market growth for 2019.
Due to the slower demand environment.
Uncertain economic conditions.
The early stages of our us growth initiatives.
And performance at both AG and Cromwell.
We are lowering our topline guidance from 4% to 8.5%.
Two 2% to 5%.
Now I'll turn it back to DG for closing remarks.
Thanks, Tom I would like to close by reminding you of our long term performance expectations.
We expect our initiatives in the us to allow us to grow revenue 300 to 400 basis points faster than the market on average over the next several years. We believe Canada is an attractive market for greener to be in it can grow faster than the market and be a double digit operating margin business over the next five years.
We expect continued strong growth with our endless assortment model through the strength of Monotaro in Japan, and the investments, we're making ends or use.
Overall, we expect to drive strong SGN, a leverage and continued operating margin improvement, resulting from incremental margin of 20% to 25%.
Now I will open it up for questions.
Thank you.
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[noise].
Our first question comes from David Manthey with Baird. Please state your question.
Hi, Thank you good morning.
Initially you were targeting double digit growth within the U.S. medium customer set and now we're down to sort of a mid single digit growth rate this quarter.
You mentioned the fluidity of pricing I'm, just wondering if theres anything you can talk about there as it relates to price refinements to try to re accelerate the medium customer growth that youve made recently or plan to make.
Yeah. Thanks, Thanks, Dave So so we still believe that we can grow mid size customers much faster than the market.
We will need to grow them faster than three to 400 basis points faster than the market to be able to hit our overall targets.
We we have some good signs with our midsize customers I would say that covered customers have continued to grow very strongly which which is a signal that the customers, we've acquired or actually repeating at very strong rates, which is great to see.
We feel like we have some some efforts and initiatives going on with merchandising and marketing that can help us accelerate growth.
I would point out that it's pretty new to us to be through the pricing changes and focusing on midsize customers. So we're learning every day, what's working what's not and we're going to we're going to know more as we go forward, but we still feel confident we can we can really grow significantly with that customer group and it's important for the overall economics of the company.
Okay, and then as it relates to the reduction in the revenue outlook I would assume that has more to do with your outlook for us market growth just based on percentages than than international or internal disruption.
But if you run the numbers based on the full year guidance.
To some extent it might imply flat to lower growth in the market in the second half of this year and I'm just wondering your thoughts on how severe the slowdown might be and is there a recession in your in your forecasting right now.
So.
Great question, when we formed we've talked about a lot of I would say we are we are certainly not going to forecast a recession and what we've seen in the market in the us has been slow growth, but pretty stable. The last several months. So we don't see anything that implies that we are.
Heading off a cliff in the U.S., obviously internationally there's.
Pockets that are that are more problematic than others, but in general we were not forecasting negative necessarily we think it's a possibility, but probably not a probability at this point.
Got it thanks DG.
Our next question comes from Robert Barry with Buckingham Research Group. Please state your question.
Yeah, Hey, guys good morning.
Morning, So I just wanted to circle back on the price I mean, I think the price load from one and a half in the first quarter to 0.5 into Q I think the tariff headwinds are kind of moving in the other direction. So I'm just curious how you're thinking about kind of tariffs and other inflation and and how price might track.
Over the next couple of quarters kind of either the what's happening the terrorists and inflation.
Yeah, I mean, I would say that think thanks, Rob I I would say that he you know the tariff environment still a significant uncertainty and we'll see what happens in the next couple of months in terms of either resolving it or or not.
Our philosophy is to make sure that we are price to the market and we will continue to make sure. We are priced competitively to be able to to serve our customers well and you know we will we will take actions to make sure. We we look at it every day basically to make sure were priced at the appropriate range. So that's really our philosophy and that's what we're focused on there's some uncertainty as to whether or not that the tariffs are gonna come through in a bigger way in which case price may go up or or not that but our focus is really on making sure market competitive in terms of price.
Got it I mean, just to clarify a couple of things I mean since the list three did move up I mean is that going to be a bigger headwind for you in the back half and if your pricing in the market is the fact that the pricing moderated it Granger mean that what you're seeing in the market I guess is to like customers are not getting as much price.
Yeah, we've been we've been planning for the lit hadn't returned on for quite some time the way. We've got it modeled is it's it's relatively small as we said in the prepared remarks.
We've been able to realize substantially less than the overall exposure.
So we don't we don't believe that the change and and less three is going to be that material for us.
Got it got it could I just clarify one more thing when you were talking about getting the outgrowth from what was I think a point into two to three points in the second half is that all these items on slide eight that you think are driving it and are they all just adding like 20 or 30, bips or is there one or two of them that's going to drive the lion's share of the acceleration.
So.
Yeah. Thanks for asking that yeah, we will we will provide more detail going forward on how much we expect each to <unk> to provide I will say that that this is a pretty big shift for us and mindset shift in the sense that.
We've tracked market share in the past, but we've never targeted market share growth that weve never had a set of initiatives that we are expecting to align to that growth.
At least not explicitly and we do plan to become more explicit overtime.
You know I gave the example of merchandising in the prepared remarks, which I think is a good one where.
You know this is a little bit new to us we are having to break down some barriers to execute faster and move faster on some things and and we're seeing good results and we do expect that that momentum to continue to build and so we'll provide more specific details, but know that yet at page eight is pretty important for us right now I would say.
All right. Thank you.
Our next question comes from Christopher Glynn with Oppenheimer. Please state your question.
Yeah. Thanks, just a couple of questions about the endless assortment strategy there.
You know what the incremental investment you're putting in this year is that investment in the cost base or does it tail off next year and what are you thinking about timeframe for that business to be standalone.
[noise] capable.
Yeah, so that but let me get it on the last one second most of the most of the investments that we're making in terms of getting platform and platform independent should be we should be through that by the end of this year.
So we expect some of the cost we've added in terms of analytics and people to stay but a lot of the cost will fall off next year as well.
In terms of Standalone it'll come in pieces. So one of the biggest things we're doing is.
Developing the capability for that business to add their own items and to add items with third party shippers, which will make that business less reliant on Granger, obviously for the core Granger items Granger will still fulfill.
But that business will become less directly reliance on the greater supply chain over time.
And so that that should be working to implement that that system in the third quarter by the end of the year, we should have that capability. Similarly, the data and analytics platform should be complete by the end of the year. So a lot of this should really be through.
This year in terms of giving that business more independents and that's really what we're targeting.
Okay, and then just a follow up on the medium.
If you go a little deeper into what you're seeing in terms of customer retention versus the pace.
Positions and you know overall, how is the base holding on from the initial burst of growth there.
So the base is holding on quite well as I mentioned, we have taken a portion of that base about half of the the midsize customers are now in some sort of coverage model and and that has continued to grow you know it at a pretty good clip. So so the base is held on pretty well and we are acquiring customers as well, but but certainly we're happy with what we see with the base.
Thank you.
Thank you.
Our next question comes from Deane Dray with RBC capital markets. Please state your question.
Thank you good morning, everyone.
Good morning.
Hey, It was really interesting about what you did not say in your prepared remarks or in your slides. There was no comment about weather and we've seen all kinds of pressures on your peers and you had to have felt some of the same pressures is this was a it's always an important h. back opportunity for <unk>.
Filters and refreshing.
Refrigerants, and so forth, but it didn't seem to impact you and maybe you can clarify what sort of pressures you you did see or did not say.
Yeah, I mean as you know the certainly the weather was was not helpful. But it is a very small impact to us that's it so less than half a percent impact. So we didn't we didn't call it out as a as a separate line.
Good I appreciate that and then just to clarify and just make sure I'm clear on this when you cut the sales high end of guidance.
You caught that more than what the market growth caught on the high end, so three and a half points on the on your sales are high and so why are you finding that more is that all Canada and Cromwell. It just yeah just to clarify that please yeah. It's a lot a lot of it is crumbling, Canada, yeah being being.
Shrinking so that's that's a big part of it absolutely.
Got it and just one last quick one I really it's helpful. On the appendix, where you give the monthly progression and can you comment on how June and it as being the strongest month and what sort of set up have you seen in July so far.
Yeah, I mean as you know we are we don't want to over index on any any monthly trends given some of the noise that could happen in the month I would say that you know we do feel like we gave a little bit more share in June and we do feel like the market like I mentioned before is not falling off a cliff.
We expect to be in a slow growth market moving forward and and Ah you know, it's been pretty stable from our perspective over the last several months.
Thank you.
Our next question comes from Josh Pokrzywinski with Morgan Stanley . Please state your question.
Hi, good morning, guys.
Hi, good morning.
On the a and I appreciate the color you guys gave on the tariff environment and you have the ability to navigate to add a little bit better as we move into the 25% on whats three or maybe I missed it but how would you kind of checked out against the the pricing environment out there. So maybe you have to ask for a little bit less price, but what's the appetite in the market you know some other folks in the space of mentioned, that's gotten a bit more challenging.
You know what what would be your take on those.
Yeah, we're we're finding that we're able to pass on most of the and most of the tariff related you know price increases you know the one thing that we called out in terms of price neutral is the only thing impacting that that we excluded was the price reset.
We've had a great relationship since the tariffs started working with our supplier partners.
They want to sell their products with us and it's it's been going extremely well as the result show.
Got it that's helpful and then it just coming back to analyst assortment.
Obviously, there's some some kinda us.
Strategic synergy or operational playbook synergy from MINOSA ROE with a with Zorro. Once zoro is further down the path and you know maybe you just kind of learned all at Cannes is you know is there a place for him and I will throw in the portfolio I'm. You know just given that it's you know, it's a little bit more distant and you know probably doesn't get full credit you know from an external perspective, given you know the strength of the business.
Yeah. So so you know at right now we're learning a lot from another true there's a lot to learn from from their success.
There's there's probably more leadership synergy then then might be even to recognize in the sense that the leaders of all of the businesses get together frequently and talk about what they're doing.
We haven't talked much about so our UK that's already pays on a terrific path. It will be profitable early 2020, that's partly because of the linkages. They have with the Minotaur Airlines or U.S. you know, it's a fair question, but for now we certainly feel like we're getting a lot of synergy data.
Out of the portfolio and it's it's it's an important part of our part of our portfolio going forward.
Got it thanks for the color I'll leave it there.
Thank you. Our next question comes from Ryan Merkel with William Blair. Please state your question.
Hey, Thanks, So first off a really nice job on the U.S. margins.
My question is what is surprising you positively to hit the high end as of operating margin guidance, just given the slower sales trajectory.
Well I think it's been our ability to generate incremental margin.
We know we're in a a choppy a slowing slowing market and our our sales growth isn't going to be as great as we had planned.
We're doing a lot of good work on Cogs as we described I think managing the tariff environment very well, we're being very fiscally responsible on SGN, a while also really continuing to invest in our priorities advertising digital. So it's it's really comes down to our ability to generate incremental margin. I mean, we had we had very good results as we called out.
Okay. That's helpful.
And then moving to Canada.
I hear what you're saying average daily sales were stable from the first quarter, but the recovery still seems to be tracking a little bit slower. So what are the main issues and then any change to getting to breakeven by the fourth quarter.
So yeah.
The main issues have been a win when we went through some of the changes which were significant and there were many changes that we made.
We we had some customers reduction that that we work on it fully expecting I would say the most important thing for me is that the service has improved in the business. We are hearing better things from our customers were starting to win back some customers, which is really really important I think the bisha. The business is very well positioned from a cost and business model perspective, now and we need to get the top line going and that's taken a little bit longer than we thought that's really the only thing that concerns us at this point.
And then breakeven by the fourth COVID-19 is there any update that you can provide.
Well, if we is as we said in our guidance, which is one to five four for Canada, we believe to be tracking to the low land. So so for the answer would be yes.
You know breakeven or better than breakeven for the year.
Okay, great. Thanks.
Okay. Thank you.
Our next question comes from John inch with Gordon Haskett. Please your question Oh, Thanks, Good morning, everybody.
When we talk about the trajectory in the quarter or was there a step down from the first to second quarter as we hit April and then how did sort of medium versus large play out sequentially. If there's any color you could provide there that gives us I know Judy do Youve said that stable, but you know it seems like the numbers seem sort of low but it looks like they picked up is there any color you can provide.
Well, certainly I would say may was lower across all.
All segments, if that's what you're referring to in June It was June was better.
You know I I would say some of that some of that or factors that are frankly, not worth talking about for the last year or two in terms of setting the baseline that you're comparing to but but sir certainly we don't see like I said before we don't see anything falling off a cliff and we do see midsize customers growing faster than.
Then the rest of the business and we would expect to see that going forward.
But it sounds like you're sort of downplayed the significance of at least the monthly June a tick back up to 3% is that a function of compares or is that just you don't want to get ahead of your skis by over promising just based on one month.
Well I I mean, I guess I would would downplay made being down as low as it was as well right. So yeah. We would say that the quarter was you know if you average out the quarter.
That makes sense in terms of what we see from market growth.
And was there a disconnect between kind of the large versus the medium going back to my prior question and you know as you exited it there wasn't really so.
Really seems like medium then it's going to be pretty challenged to get back to double digit is that fair or or do you see it in the short term in the short term yeah that would that would be that would be fair. You know like I said, we're learning every day and we're doing things to continue to improve the trajectory and we like what we're seeing but but certainly in the short term that that's true.
And then your margin guidance for the year right implies a significant step down from really commendable performance on the gross and our profit margin side, especially in the U.S. or to sort of the total guide which remains unchanged for the back half what it what exactly is that seasonality or are there other things going on there are you just being conservative or why why Didnt you know why why the step down I guess, particularly at the midpoint.
Well, there's you're referring to the U.S. a year, if you're referring to the U.S. is that what kind of the whole thing right. I mean, just you look at the guide, but then you look at the you know with just the complexion of what's driving that right right right.
Okay. Yes, there is some seasonality as you look at you know the way we perform historically the gross margin does go down over over the year also recognizing the uncertain economic environment. We're in we just thought it would be prudent to be cautious and thatll be measured in our in our guidance range.
Well, Tom there's no price cost dynamic I mean, I know you're talking about tariffs do you feel like you're on top of it but there is no other price cost dynamic that's kind of playing out here that would be.
You know driving some about disruptions went up alright, then it almost implies the guy could have a little cushion in it is that fair ups its seasonality and just the just the economic environment that we're in I think it pays to be prudent.
Yeah, I agree alright, thank you very much.
Oh.
Thank you. Our next question comes from Justin Bergner with GE Research. Please state your question.
Hi, Good morning, D.J. good morning, Tom.
[noise] just on the guide you know maintained margin Guy at least at the company level and you know, 2% plus lower sales.
Just mathematically would suggest city P.S. would be 2% lower but it seems like you're maintaining that so should we also read that you're expecting operating margins to be a little bit above the midpoint of the guide at the company level to offset.
The lower sales.
Well I'm really not going to get into where we think we're going to land in the range rather than you know what we said in the prepared remarks, you know where we've been running the play in the first half have you know not getting the sales. We've won is generating very strong incremental margins and you know we're going to continue to do that in the back half and you know we think it will work out well for us, but I really don't want to get into going forward, where we think we're going to land in the <unk> and the and the range.
Understood and then on repurchases I guess, you did a healthy amount of repurchases this quarter, you've done 400 million year to date.
Yeah that would put you tracking at or above the high end of your range. If you sort of annualize that are you potentially going to do more repurchases in your earlier guide or were they just more weight into the second quarter.
Well I would go back to our capital structure tenants a one of the tenants that we have is we don't want to hold any excess cash and we were in a good position, where we were we had generated quite a bit of cash and we just use that to return back to the shareholders. So you know really nothing to read into that as it as it goes to our initial guide we're sticking with that and if it changes, we'll we'll talk about it next quarter.
Great. Thanks for taking my questions.
Thank you.
Just a reminder, if you would like to ask a question press stuff. The star key followed by the number one key on your telephone keypad.
And you can press star two to remove yourself from the queue.
Our next question comes from.
Patrick Baumann with JP Morgan Please state your question.
Hi, good good morning, if you Jake good morning, Tom.
She said.
A few follow ups here.
So a really good job on SGN a control in the first half of the year really.
It looks like it was down year over year.
On a cumulative basis can you can you take it down again year over year in the second half.
And I'm just trying to understand what the levers are.
Yeah for that if you can I ask because you said the cost actions are now I guess complete so I'm just kind of curious what levers on as you know.
Yeah. Our philosophy is that you can always optimize SGN, a and and we will continue to to look at that every every day.
So the way we're looking at though is really trying to get to our 20% to 25% incremental margin I mean, that's the objective that the organization is focused on.
But there's always there's always ways to take out costs I think in the prepared remarks, the cost and that cost takeouts ending were primarily related to Canada.
Yeah, I would I would also just add that I think if you look at our cost structure, a big part of our cost structure is.
Process cost of distribution centers contact centers, we've made some pretty big changes for example, our contact centers. They are performing quite well now they're going to continue to get better and better. So it's not so maybe the restructuring is done but we expect every single year, they get continuous improvements out of our big out of our big operations that we continue to see that and would expect to see that going forward. So it's not like we're not going to improve our cost structure is just that we may not have as much restructuring type type thing. So yes, just finally I would add one important thing is even in this down market.
Because of what P.G. talked about our focus on market share and our focus on growth.
We are not backing off of any of our strategic initiative spending to to hit an SGN a number we're continuing to go forward full speed on that.
Do you think.
A question they can decline in the second half year over year and.
What what drives that and I think last year, you had some big profit sharing headwinds in the second half that weren't impacted the numbers there and I'm just.
So maybe that's an easy comp I don't know Im just trying to kind of.
Hi does all this stuff together here.
Yeah, we we do have we do have an easier comp as far as variable compensation I'm, what I would say for the second half is we expect the SGN a rate to be a to be lower than the previous year for sure.
Oh, the deep as a percentage of sales are just saying Diaz Im glad I didn't just mail and we also expect the second half of the year to perform better than the first half of the year as it relates to favorability to the prior year.
From a absolute dollar perspective.
From a rate perspective.
Well from a from a rate personal got it got understand.
And was was that was that profit sharing expense line was that it was that a help in the second quarter year year over year was it a tailwind.
Sure.
Yeah.
And then and then just.
Yeah go ahead, I'm, sorry, I mean since right, but that's okay. That's okay, yes.
Oh, and then de DNA looks like it's down year to date, what's what's driving that.
No. That's a that's a compared to last year, we had some issues in terms of Ah.
Keep stock write off some machines older machines that we replaced we also had some capital expenditures at two of our bigger D.C.'s. So we were we had a favorable compare to last quarter.
Thank you.
Welcome.
Our next question comes from Bhupender Bohra with Wolfe Research. Please state your question.
Hey, good morning, guys.
Good morning to here sitting in for Nigel.
So just.
Tom I think you mentioned you gave some guidance on the other businesses margin here.
Can you just give some more color.
On those margin targets and you know what your confidence is actually in the back half to achieve those targets Leah.
Yes, we are.
We took down the other business unit operating margin target, primarily due to the performance in our Cromwell business unit.
Obviously with the uncertainty of Brexit also that just combined with the transformation that we've got going on in that entity.
Well, we're really changing the business model there in terms of being decentralized with the branch network and trying to have more centralization. Some of the things that we've noted on Canada, we're seeing there where we've disrupted the customer base.
Those types of things. So that's why we're taking down primarily for the other business units.
Okay, and the investment spending a big part of that or.
As a pretty small I mean, you guys have done as we speak.
Certainly the investment spending and zoro.
In the U.S. is a big part that was planned at the beginning of the year and we are we are spending that money and seeing what we want to see out of that so we had always planned for this or margins to come down in the year.
And that's what we're seeing so that that's when we talk about investment spending that's really what we're referring to.
Okay got it if I can.
No. The one here on pricing as we saw in the first quarter pricing was 1.52nd 0.5.
How should we think about the back half because you know when you look at last year second half I think we had pretty you know kind of.
Close to 100, Bips actually pricing every quarter.
Are we going to see much more realized than what we have seen in the quarter or.
As you know kind of statics kick in like in the second half plus three so if you can give some color on that thanks.
Yes, I think I get like like we said before I think our focus really is to make sure that we are market price and everything that we do.
Depending on how the terrorists play out that could mean more price or less price I think and that there's some uncertainty around that but we are tracking into watching this very very closely and our our objective always to make sure that we're priced competitively and we will make sure we do that.
Thank you.
Thank you welcome.
Our next question comes from Steve Barger with Keybanc capital markets. Please state your question.
Hi, good morning.
Good morning.
Just looking at heavy manufacturing down low single digit natural resources down mid single in general what are the customers or your sales force, saying there is there an expectation for improvement in the in the back half for those segments.
It's hard to tell I mean, heavy manufacturing, which was basically flat for the second quarter actually in June the overall market I'm, referring to was actually negative.
You know so it's hard to tell where that where that segment is going to go obviously, we've got a number of initiatives in play, which D.J. referenced in that in the prepared remarks in the Q and a did we think despite that down or slowing market, we're going to be able to gain share.
Right and just more broadly given softer markets or customers leaning towards lowering reorder points or the amount of inventory. They are willing to hold and does that change how you think about inventory at the D.C.'s.
Mmm are generally not not not much I mean, the reality is that customers don't hold a whole bunch of our inventory anyway.
And the way Weve restructured most of our large customer relationships, we're helping them manage their inventory, we said ammo cues that allow them to.
To operate at a pretty lean level. So we don't see a lot of channel loading or anything like that with our customers given that the business model and our business model is based almost entirely on helping them manage your inventory effectively.
Got it thanks.
Thank you. Thank you.
Thank you. Our next question comes from John inch with Gordon Haskett. Please state. Your question Yeah, just as a follow up I wanted to ask about Europe , you know one of the things we glean this quarter. Thus far from other companies is the European economies are actually starting to show up in a much more pronounced basis negatively and it implied that the other business results were more UK Brexit oriented maybe a little bit of your own infliction, what its going on actually with respect to fabry and just what you're seeing in continental Europe and does that weigh on the results and have any sort of bearing on the second half in terms of your own expectations.
Yeah, but I think what we've seen over there as we've seen obviously the UK market has has been struggling a bit and and we've seen some manufacturer ship some of that production from UK to the main line of Europe .
Oh, the favorite businesses had sort of consistent modest growth. This year, we think the market in the Netherlands, and Belgium, where there has been a top combined but not thought up significantly certainly there are signs of some pressures in the European market, but what we've seen it favoring hasn't really weighed on results that we see them in the UK has.
And the expectations that Gee. Good do you think it's just more of the same coming are the reasons based on just extra quarter trends or anything else that things get better a little bit worse, yeah. I mean, I would just I would just remind you they may get a little bit worse I I would just remind you that we are very small in February . So we have a full impact on US right now so I don't I also don't know that we have the best lands I mean, we have the lens of the Netherlands, primarily and some Belgium business. So we don't have anything really in France to speak of a very very little and very little in Spain. So we don't really have much exposure to the big markets to have a position.
Got it thanks very much appreciate it.
Our next question comes from Justin Bergner with GE Research. Please state your question.
Guys. Thanks for the follow up with respect to neutral price cost are you seeing any different dynamic between sort of the industrial part of your portfolio and the non industrial part of your portfolio just given some of the comments from other.
M. or distributors earlier in the quarter.
You know I have to I'm I I'd have to think about that I'm not sure I have a great answer for you to be honest I have my my inkling is probably not seeing much different but I don't know that I can.
Necessarily say that with certainty out you know, we I've looked at the total one and and I'd have to go ask some questions about that's interesting question.
Okay, Great and then lastly, with respect to the enlist assortment model you use the term continuous growth versus accelerating growth does that just reflect more challenging end markets or is there anything sort of structural.
To be read into that change in language anything structural I think there's a sort of law because universe, which is is or has been growing over 20 for the first five or six years. If we want to continue to grow in the Twentys, we need to do something else given as it gets bigger that becomes harder and harder to do so we didn't want you to think that we're going to accelerate from a twentys to thirtys or fortys, we're going to try to try to continue to have a strong growth rate.
Great. Thanks again.
Thank you. Our final question comes from Patrick Baumann with JP Morgan. Please state your question.
Hi, Thanks for giving me a follow up I just wanted to follow up on you mentioned keepstock.
And you said its now profitable and was 10% of the business in 2018 and will grow faster.
I guess than the rest of the business going forward there hasn't been a ton of visibility here. The last couple of years. So just curious if you could give a quick update on kind of what you've been doing there was it was losing money last year and kind of what changes have you made to improve profitability and make you feel like you can grow it better.
More profitably at future, we have about three years or two to three years ago, we made some changes and that improve the profitability.
We're now squarely in the in the place where we're building new capabilities, Yes, we've done some work on.
On software, we've done some work on visibility and analytics and reporting to help customers understand.
The value that we're bringing in were going to continue to push on those things that the comments really around.
We had it for a couple of years, we hadn't focused as much on capability building as we improve the profitability and now we're really focused on that and so that's going to be on this one I think it's important to note that in June we had our our fastest growth way than we've had in two years related to keep stock.
Got it Okay makes sense. Thanks, Thanks again good luck.
Thank you I appreciate it thanks.
Thanks, I will now turn the conference back over to Mr. DG Macpherson for closing remarks.
All right well good well. Thanks, Thanks for joining US you know I would just reiterate a couple of points. One is in the U.S. given the profitability. We are really focused on growth and gaining share going forward and.
It's a bit of a new orientation for us to say, we're going to we're going to gain share a consistent basis, but.
We are wiring ourselves up to be able to do that and that's our primary focus and the other is the online model continues to be very profitable on a fast grower and so we're investing to make sure we can do that.
But those two things go well and yeah, we're we're pretty excited about about the future.
I look forward to talking to you one on one so thanks. Thanks for your time I appreciate you on the phone.
Thank you. This concludes today's conference all parties may disconnect have a great day.