固安捷 (GWW) 2007 Q2 法說會逐字稿

Hello. This is Nancy Hobor, Senior Vice President of Communications and Investor Relations for Grainger. I am here with Bill Chapman, Director of Investor Relations. Welcome to Grainger's quarterly audio webcast covering results for the second quarter ended June 30, 2007. This recording is intended to provide you with information on our recent performance. We ask you to use this information in conjunction with the earnings release and other financial information posted on our website.

Before we begin, I would like to remind you that certain statements and projections of future results made in the press release and this webcast constitute forward-looking information. This information is based on current market conditions and competitive and regulatory expectations and involve risk and uncertainty. Please see our Form 10-K for a discussion of factors as they relate to forward-looking statements.

Second-quarter 2007 sales were $1.6 billion, up 8% versus the 2006 second quarter. Both quarters contained 64 selling days. Net earnings increased 12% to $105 million, and earnings per share grew by 19% to $1.21 versus $1.02 in the 2006 second quarter. Sales, earnings and earnings per share were all quarterly records for the Company.

The quarter included a 3 million net gain or $0.02 per share on the sale of real estate primarily related to the Company's market expansion program. For comparison the 2006 second quarter included $6 million or a $0.04 per share gain. Last year's second quarter also benefited from the $2.3 million gain or $0.02 per share from the sale of the Canadian joint venture. Excluding these gains from both years' second quarters, earnings per share would have been up 24%. Because of the strength of the second quarter, Grainger has raised both the lower and top end of its 2007 earnings per share guidance by $0.05.

The Company's gross profit margin was 40%, up 70 basis points versus 39.3% in the second quarter of 2006. An improved product mix and our exit from lower margin business contributed to this increase. This improvement was similar to the 70 basis point expansion seen in the 2007 first quarter. Gross margins are typically higher in the first quarter than the second or third quarters due to a number of factors, including product mix and the timing of supplier funding programs.

Operating margins also increased 70 basis points in the quarter to 10.4% versus 9.7% in the 2006 quarter. And pretax return on invested capital or ROIC for the six months of 2007 increased 320 basis points to 28.6% from 25.4% a year ago. The Company continued its share repurchase program in the quarter and bought back some 560,000 shares of stock for $49 million. Dividends paid in the quarter were $30 million, up 21% on a per-share basis versus the 2006 second quarter.

Now I will focus on performance drivers during the most recent quarter. In doing so, we will cover the following topics.

First, sales by customer end market and geography in the quarter and month of June. Second, an update on market expansion and product line expansion. Third, operating performance. And last, our cash generation and capital deployment.

Let's take a closer look at the revenue line. Sales in the 2007 second quarter were up 8%. Market expansion contributed about 2 percentage points to this growth, while product line expansion added about 3 percentage points. The continuing wind down of low margin business with integrated supply customers resulted in about a 1% point drag on topline growth.

Sales in Grainger's branch-based business, which includes operations in the United States, Mexico and China were up 8%. In the United States, sales increased 8%. The increase was driven by particularly strong growth to customers in the government sector.

Here is a complete list by customer and market. Sales to government customers were up in the high-teens. A portion of this growth was driven by a large order for safety products from the US government in June. Commercial and contractor were up high single digits. Light manufacturing and resellers were up mid-single digits. Heavy manufacturing was up low single digits, and retail was essentially flat.

As a reminder, heavy manufacturing represented 20% of sales in this segment last year, followed by commercial at 19%, government at 18%, contractor at 14%, light manufacturing at 10% and both retail and reseller at 8%. On a geographic basis within the United States, we saw strength in the Great Plains and Pacific mountain regions, while sales grew at a slower pace in the West Coast and Southeast regions. Sales in Mexico were up 26%, 23% in local currency for the quarter. Sales growth benefited from a strong local economy and the ongoing branch expansion programs, which should increase the number of branches from 10 to more than 20 over the next few years. Last year the Mexican operation ended the year at eight branches.

Finally, while sales for the startup business in China improved, they did not make a meaningful contribution in the quarter. The Company continues to view this business as a long-term opportunity and has added two will-call express locations in Shanghai to increase awareness and make it easier for customers to get product.

For the Acklands-Grainger branch-based segment in Canada, sales were up 8%, 6% in local currency. This increase was primarily due to strong sales in Alberta, Ontario and British Columbia with strength in the oil, gas and mining sectors, partially offset by weakness in the forestry and manufacturing end markets in Canada.

Finally, sales for the Lab Safety segment were up 7%. Excluding the sales from the acquisitions made over the last 12 months, Lab Safety was up approximately 1%. Company sales in June were up 9% on a daily basis. The month had one less selling day than a year ago. In the Grainger branch based segment, June sales were up 8% on a daily basis.

Similar to the quarter, both market expansion and product line expansions contributed to this growth. However, the wind down of low margin business of integrated supply customers resulted in about a 1% point drag on topline growth. Sales in the United States increased 8% on a daily basis in June. This increase was driven by growth across all customer sectors.

End market trends for June were as follows. Sales to government customers were up in the low 20s. Excluding the single large order noted earlier, government would have been up in the midteens. Contractor was up high single digits. Light manufacturing, commercial and reseller were up mid single digits, and heavy manufacturing and retail were up low single digits.

For the month of June, sales in Mexico were up 28%, 23% in local currency for the month. This impressive growth was a function of an improved branch presence, along with a strong local economy.

For the Acklands-Grainger branch-based segment, daily sales in June were up 15%, 10% in local currency. The release of the new Acklands-Grainger catalog and sales flyer in early June, along with some non-recurring business with a large customer, contributed about half of this growth. Sales for the Lab Safety supply segment in June were up 8% on a daily basis, including the incremental sales from Professional Inspection Equipment Construction Book Express and make files McFeely's. Excluding these acquisitions, sales were essentially flat. For the first two weeks of July, sales growth is tracking the growth we saw in the first quarter.

Now I would like to turn the call over to Bill Chapman.

Thanks, Nancy. Let's move on to a review of our growth initiatives. During the quarter market expansion continued to deliver incremental sales growth and market share in key Metropolitan markets across the United States. The Company completed 17 branch projects during the quarter, including eight relocations, six expansions, two retrofits and one new branch. The projects result in more than 120,000 additional square feet of branch space. Incremental sales from market expansion contributed approximately 2 percentage points to the segment's sales growth, and this initiative remained profitable for the quarter.

Looking at the sales contribution from each of the phases during the quarter, Phase I was up 12%, Phase II was up 5%, Phase III was up 11%, Phase IV was up 12%, and Phase V was up 10%. The sales growth seen in all but Phase II was higher than the rest of the business.

Similar to the performance in the first quarter, in the second quarter of 2007, the Phase II markets in Southern California were slower, something we are seeing in much of the West Coast. Our product line expansion initiative in the US branch-based business also contributed to sales growth in the quarter.

To recap, we added 43,000 products in 2006 and plan to add another 25,000 products in 2007. Our most recent Grainger catalog, which was mailed to customers in February, featured some 139,000 products. The new products contributed about 3 percentage points to the sales growth of the Grainger branch-based segment in the quarter.

Let's move on to operating performance. Second-quarter operating earnings for the company increased by 15% versus the 2006 second quarter. Improved operating performance at all three of the Company segments contributed to this increase.

Operating earnings for the Grainger branch-based segment increased 13%. This increase was the result of the 8% sales growth and higher gross margins. Gross profit margins for the Grainger branch-based segment increased 60 basis points versus the 2006 second quarter. Operating margins for this segment also improved, up 60 basis points to 12.9% versus 12.3% in the 2006 quarter. Segment pretax ROIC increased 340 basis points to 37.1%, reflecting the improvements in operating performance.

At the Acklands-Grainger branch-based segment, operating earnings were up more than 240% for the quarter. The result of the 8% sales growth, improved gross profit margins and operating expenses which declined 1%. Contributing to the decline in operating expenses were just under $1 million in lower severance costs in the 2007 quarter versus the 2006 quarter. We are very pleased with the progress in Canada. This continues to be more of a bottom-line story as we identify opportunities to enhance performance through better productivity.

Pretax ROIC in this segment nearly tripled the 12.1% from 4.3% a year ago. Operating earnings for the lab safety segment increased 7% versus the second quarter of 2006. Operating expenses grew at a slower rate than sales, offset by decline in gross margins. The gross margin decline was primarily attributable to an unfavorable change in product and selling price category mix, reflecting increased sales to large customers.

Lastly, let's look at cash flow for the quarter. Operating cash flow was $98 million versus $74 million in the 2006 quarter. The Company used its cash flow to fund growth initiatives through capital expenditures of $47 million and returned $79 million in cash to shareholders through $49 million in share repurchases and $30 million in dividends. The quarterly dividend paid during the quarter reflects the 21% increase announced in April.

As mentioned in today's earnings release, we raised the 2007 earnings per share guidance to a new range of $4.75 to $4.90.

To conclude, we are very pleased about the results for the quarter with sales up 8%, net earnings up 12% and earnings per share up 19%. And we remain optimistic about our full year.

Please mark your calendar for Monday, August 13 when we plan to issue sales results for July. We also encourage you to save the date of Wednesday, November 14 when we plan to host our annual analyst meeting. If you have further questions or require additional information, please call Nancy Hobor or me. Our contact information is available on the Investor Relations website.

Thank you for your interest in Grainger.