Laura D. Brown - Senior Vice President-Communications & Investor Relations William D. Chapman - Senior Director-Investor Relations.

retail was flat; light manufacturing, government and commercial were down in the low single-digits; heavy manufacturing was down in the mid-single digits; contractor was down in the high single-digits; reseller was down in the mid-teens, and natural resources was down in the high-teens.

The performance of the government end market was affected by softer sales to state and local customers at the June fiscal year-end compared to 2015. Given that 2015 was exceptionally strong, the low single-digit decline was within our expectations.

Similar to the quarter, sluggish demand and sales force changes contributed to the lower sales performance in June. Sales in Canada for June were down 23% in U.S. dollars and 18% in local currency.

The 18% decrease was driven by a 17 percentage point decline in volume and a 2 percentage point decline from the wildfires in Alberta, partially offset by 1 percentage point from price. All end markets were negative. From a geographic standpoint, sales in Alberta were down 30% compared to all other provinces, which were down 11% in aggregate.

Sales for our Other Businesses increased 46% in June, consisting of 31 percentage points from the Cromwell acquisition, 14 percentage points from volume and price, and 1 percentage point from foreign exchange. The organic sales increase was primarily due to strong revenue growth from Zoro U.S.

and Japan, partially offset by lower sales for Fabory in Europe and Latin America. As a reminder, we will anniversary the Cromwell acquisition on September 1, 2016. Sales growth in the month of July to-date is in line with the sales performance in June. Now I would like to turn the discussion over to Bill Chapman..

Thanks, Laura. Let's talk about performance by reportable segment, since we have already analyzed company operating performance. As a reminder, all figures below represent adjusted results. In the United States, operating earnings decreased 8% in the quarter, driven by lower sales and lower gross profit margins. The operating margin for the U.S.

segment was 17.2% versus 18.2% in the 2015 quarter. Gross profit margins for the quarter declined 90 basis points, primarily driven by negative customer selling mix and price deflation greater than product cost deflation. Operating expenses were down 2% due to lower advertising costs.

Let's move on to our business in Canada, which had an operating loss of $10 million in the quarter versus operating earnings of $9 million in the 2015 second quarter, driven by lower sales and lower gross profit.

The gross profit margin in Canada declined 640 basis points versus the prior year, driven by the combination of price deflation and cost of goods sold inflation and unfavorable foreign exchange from products sourced from the United States.

Operating expenses were down 12% versus the 2015 quarter, driven by lower SAP costs versus the prior year and lower advertising costs. The Canadian business is undergoing significant change management as a result of the SAP conversion, though we have confidence in our leadership team and the plan to return the business to long-term profitable growth.

Operating earnings in the Other Businesses were $30 million in the 2016 second quarter. Operating earnings in the 2015 second quarter were $17 million, representing an earnings increase of $13 million or 73% versus the prior year. Results included strong performance from Zoro U.S. and Japan and the earnings contribution from Cromwell.

Below the operating line, other income and expense was a net $23 million of expense in the 2016 second quarter, versus a net $8 million expense in the 2015 second quarter. The increase was driven by higher interest expense from the company's debt offerings in 2015 and 2016.

Operating losses from the clean energy investments were lower than expected in the quarter as a result of lower demand for refined coal, given relatively mild weather. For the quarter, the reported effective tax rate in 2016 was 36.6%, versus 35.4% in 2015.

The 2016 second quarter included an $0.11 per share benefit from the effective settlement of certain federal income tax issues under audit for the years 2009 through 2012. Excluding this discrete benefit, the company's effective tax rate was 39.1%.

The effective tax rate for the 2015 second quarter, excluding a year-to-date adjustment for the benefit from the company's first clean energy investment, was 36.9%.

The year-over-year increase in the tax rate, excluding the settlement benefit, was primarily due to a larger proportion of earnings from higher tax rate jurisdictions, and lower benefit from the clean energy investments in the quarter.

We currently project an effective tax rate, excluding discrete items, of 36.8% to 37.8% for the full year 2016, versus 35.2% to 36.2% provided on April 19, 2016. The increase since April is driven by the expectation of continued earnings concentration in higher tax rate jurisdictions, and lower benefit from the clean energy investments.

Lastly, let's take a look at cash flow in the quarter. Operating cash flow was $173 million versus $213 million in 2015, as a result of lower earnings. We used the cash generated during the quarter, along with borrowings, to invest in the business and return cash to shareholders through share repurchase and dividends.

We bought back 1,033,000 shares of stock for $241 million in the second quarter. Grainger returned a total of $315 million to shareholders in the quarter, including $75 million in dividends, reflecting the 4% increase in the quarterly dividend announced in April of 2016.

Capital expenditures were $54 million in the quarter, versus $71 million in the second quarter of 2015. We have revised our full year guidance for capital expenditures to $300 million to $325 million, from $300 million to $350 million announced in November of 2015.

As reported in our 2016 second quarter earnings release, we revised our 2016 sales and earnings per share guidance. For the full year 2016, we now expect 1% to 4% sales growth, and earnings per share of $11.20 to $12.20. Let's look more closely at our current expectations. We'll begin with sales.

For the full year, the midpoint of guidance is now 2.5% growth, reflecting lower-than-expected volume in the United States and Canada. We now expect foreign exchange to have no net impact on sales for the full year, due to the strengthening of the Japanese yen. As a reminder, we anniversary the Cromwell acquisition at the beginning of September.

Moving on to gross profit margins, for the full year, we still expect gross profit margins to be down 130 basis points to 150 basis points versus 2015. Gross profit margins for the third quarter are forecasted to be down 100 basis points to 140 basis points versus the prior year. Let's take a closer look at operating margin expectations.

For the full year, we now expect operating margin compression of 60 basis points to 130 basis points. The midpoint of operating margin guidance remains unchanged, as gross profit improvements over April guidance offset expense deleveraging on lower sales.

The full year guidance implies modest improvement in the second half of the year versus previous guidance. This is due to continued strong expense management and better-than-expected gross profit margin in the United States. So for the third quarter, we expect operating margins to be down 80 basis points to 170 basis points versus the prior year.

Next, other income and expense. We issued $400 million of new debt in mid-May, so there was about half of a quarter's worth of increased interest expense in the second quarter. The third quarter and fourth quarters will contain the full three months' of the higher interest expense. Finally, earnings per share.

As noted, we revised our guidance and we now expect earnings per share of $11.20 to $12.20. We now expect a $0.07 per share benefit to earnings per share in 2016 from the two clean energy investments compared to the prior projection of $0.15 per share benefit on April 18, 2016. Please see Exhibit 4 for more detail.

The earnings per share guidance includes the projected tax rate of 36.8% to 37.8% for 2016, reflecting a higher proportion of earnings from higher tax jurisdictions. Finally, please mark your calendar for the following important dates.

On August 11, we plan to release July sales and we will host our Annual Analyst Meeting on the morning of Friday, November 11, which will be held at our headquarters in Lake Forest, Illinois. If you have any questions, please do not hesitate to contact Laura Brown at 847-535-0409, Michael Ferreter at 847-535-1439 or me, Bill Chapman at 847-535-0881.

Thank you so much for your interest in Grainger..