固安捷 (GWW) 2007 Q3 法說會逐字稿

Hello. This is Nancy Hobor, Senior Vice President of Communications and Investor Relations for Grainger. And I am here with Bill Chapman, Director of Investor Relations. Welcome to Grainger's quarterly audio webcasting covering results for the third quarter ended September 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 investor relations 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.

Third-quarter 2007 sales were $1.7 billion, up 9% versus the 2006 third quarter. Both quarters contained 63 selling days. Operating earnings increased 15% to $174 million. Net earnings increased 4% to $109 million and earnings per share grew by 11% to $1.29 versus $1.16 in the 2006 third quarter. Sales, operating earnings, net earnings, and earnings per share were all quarterly records for the Company.

As a reminder, the 2006 quarter included an $8.5 million or $0.09 per share benefit from the settlement of the 2004 federal income tax audit. For purposes of comparison, let's calculate the growth without the tax benefit. If you exclude the benefit from 2006, net earnings would have been up 14% and earnings per share would have been up 21% for the 2007 third quarter.

Because of the strength of the quarter, we have raised both the lower and top end of our 2007 earnings per share guidance to a new range of $4.85 to $4.95. Included in this new guidance is up to $6 million or $0.04 a share of net severance that we will incur in the fourth quarter.

Efforts to improve productivity and efficiency led to the elimination of up to 125 positions in our information technology area. This action should generate savings of up to $12 million in 2008.

The Company's gross profit margin in the quarter was 39.8%, up 40 basis points versus 39.4% in the third quarter of 2006. Positive inflation recovery and our exit from lower margin business contributed to this increase. This expansion was partially offset by strong sales to government and national accounts, which typically carry lower gross profit margins.

Operating margins increased 60 basis points in the quarter to 10.5% versus 9.9% in the 2006 quarter. This strong operating margin expansion reflects both improved gross margins and positive operating leverage as sales grew faster than operating expenses. Pretax return on invested capital or ROIC for the first nine months of 2007 increased 280 basis points to 28.9% from 26.1% a year ago.

Let's now 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 September. Second, an update on market expansion and product line expansion. Third, operating performance; and last, capital structure, cash generation, and capital deployment.

Let's take a closer look at the revenue line. Sales in the 2007 third quarter were up 9%. I will go over sales by segment to provide a more in-depth look at what drove the growth in the quarter. Sales in Grainger's Branch-Based business, which includes operations in the United States, Mexico, and China, were up 9%. Our primary growth initiatives, market expansion and product line expansion, contribute about 4 percentage points to this growth. The continuing wind down of low margin business with integrated supply customers resulted in almost a 1 percentage point drag on top line growth.

In the United States, sales increased 9%. This increase was driven by particularly strong growth to customers in the government sector in part because September 30th is the end of the fiscal year for many government agencies.

Here is a list by customer end market. Sales to government customers were up in the midteens. Commercial and contractor were up high single digits. Light manufacturing and retail were up mid single digits. Heavy manufacturing and resellers were up in the low single digits. On a geographic basis within the United States, we saw strength in the Great Plains, South Coast, and Pacific Northwest regions, while sales grew at a slower pace in the West Coast and Mid-Atlantic regions. Sales in Mexico were up 24%, 25% in local currency for the quarter.

Sales growth benefited from a strong local economy and the ongoing market expansion program. During the quarter we opened one new branch and one Master Branch and ended the period with 12 branches in Mexico.

The final business in this segment is China. Sales for this business grew, reaching nearly $1 million in the quarter. During the last three months we added two will call express locations to increase awareness and make it easier for customers to get product. We continue to view China as a long-term opportunity.

For the Acklands-Grainger Branch-Based segment in Canada, sales were up 15%, 8% in local currency. This increase was primarily due to strong sales in Alberta and Ontario with strength in the oil and mining sectors particularly offset by weakness in the forestry and manufacturing end markets in Canada. And finally, sales for the Lab Safety segment were up 6%. Excluding the sales from acquisitions made over the last 12 months, sales were down 1%.

Turning now to September, total Company sales were up 11% on a daily basis. The month had one less selling day than September a year ago. In the Grainger Branch-Based segment, September sales were up 11% on a daily basis. Both market expansion and product line expansion contributed to this growth. However the wind down of low margin business with integrated supply customers continued to represent a drag on top line growth, less than 1 percentage point as we near the end of these contracts.

Sales in the United States increased 11% on a daily basis in September. This increase was driven by growth across all customer sectors. End markets trends for September were as follows. Sales to government customers were up in the high teens, reflecting the end of the fiscal year for many states and the federal government. Contractor was up in the low double digits. Commercial and light manufacturing were up in the high single digits. Heavy manufacturing and reseller were up mid single digits and retail was up low single digits.

For the month September, sales in Mexico were up 25% in both dollars and pesos. This impressive growth was a function of more branches, an improved branch presence, and a strong local economy. For the Acklands-Grainger Branch-Based segment, daily sales in September were up 16%, 6% in local currency.

Sales growth for the month was driven by continued strength in the oil and mining sectors of the economy. This growth was partially offset by weakness in British Columbia related to labor strikes in local government and forestry.

Sales for Lab Safety segment in September were up 4% on a daily basis including the incremental sales from Professional Inspection Equipment, Construction Book Express, and McFeely's. Excluding these acquisitions, sales were down 3% as a result of continued softness in manufacturing and services sector. Sales to government and agriculture were down due to difficult comparisons with September of 2006.

For the first two weeks of October, daily sales growth is tracking the average growth seen in the third quarter.

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

Thanks, Nancy. Let's move on to review of our growth initiatives for the Grainger Branch-Based segment in the United States. I will begin with market expansion. During the quarter, the Company completed 18 branch projects including 10 expansions, four relocations, two will call express locations, one new branch, and one retrofit. The projects resulted in more than 50,000 additional square feet of branch space. Incremental sales from market expansion contributed more than 1 percentage point to the segment sales growth and this initiative remained profitable for the quarter.

Looking at the sales contribution from each one of these phases during the quarter, Phase I was up 16%; Phase II was up 7%; Phase III was up 14%; Phase IV was up 8%; and Phase 5 was up 8%. The sales growth seen in Phases I and III was higher than the 9% reported for the rest of the business. While the growth in Phases II, IV and V was slightly below this mark.

At a market level, growth rates ranged from a high around 20% in Seattle in Phase I to mid single digit growth in Tampa in Phase III. So individual markets can experience wide variability depending on many factors.

For example in Phase II, which is located in Southern California, the underlying economy continues to be hurt by the real estate and credit markets. In Phase IV, double-digit growth in Kansas City, Baltimore, and Washington, D.C. was masked by the lower economic growth in Cincinnati in Philadelphia. And in Phase IV, the high teens growth in the Phoenix market was overshadowed by difficult comparisons in Dallas and economic related weakness in New York and Detroit.

Looking at the entire market expansion program, we are pleased by the overall results we have seen and the incremental growth this is forecasted to deliver through the year 2013. It is important to note that we have implemented some of the successful sales growth drivers in nonmarket expansion cities and this is contributing to better overall sales growth.

Since its inception in 2004, the market expansion program has added more than 1.7 million square feet of additional capacity in our U.S. branch network. In 2004, we completed the redesign and 1 million square foot addition to our distribution center network. These investments have facilitated our ability to handle the expansion of our product line, which we began in 2006. This initiative also contributed nicely to sales growth in the quarter.

To recap, over the past two years, we have added more than 70,000 products across a variety of product lines. The most recent Grainger catalog, which was mailed to customers in February, features more than 139,000 products. The new products contributed about 3 percentage points to sales growth of the Grainger Branch-Based segment during the quarter.

Let's move on to operating performance. Third-quarter operating earnings for the Company increased by 15% versus the 2006 third quarter. Improved operating performance at all three of the Company's segments contributed to this increase. Operating earnings for the Grainger Branch-Based segment increased by 16%. This increase was the result of 9% sales growth, higher gross margins, and positive operating expense leverage.

Gross profit margins for the Grainger Branch-Based segment increased by 20 basis points versus the 2006 third quarter. Operating margins also improved, up 80 basis points to 12.5% versus 11.7% in the 2006 quarter. Year-to-date pretax ROIC increased 300 basis points to 37.3%, reflecting the improvements in operating performance.

At the Acklands-Grainger Branch-Based segment, operating earnings increased 100% for the quarter, the result of the 15% sales growth, improved gross profit margins, and positive operating leverage. Operating margins improved by 270 basis points to 6.3% versus 3.6% in the 2006 quarter. In addition, year-to-date pretax ROIC more than doubled to 12% from 5% a year ago.

We continue to be very pleased and encouraged by the progress in Canada. This is the third consecutive quarter of excellent performance from a business that had been underperforming. The management team at Acklands-Grainger is very focused on identifying and executing and opportunities to enhance performance through better productivity.

Operating earnings for the Lab Safety segment increased by 4% versus the third quarter of 2006. This increase was driven by the 6% sales growth partially offset by lower gross profit margins and operating expenses which grew at a faster rate than sales. Operating expenses were affected by higher healthcare costs.

The gross margin decline was primarily attributable to an unfavorable change in product and selling price category mix reflecting increased sales to large customers.

Let's now take a look at some changes to our capital structure along with our cash generation and deployment. In late August, we announced that we had executed an accelerated share repurchase agreement. We paid for this with a combination of cash on hand and short-term debt. As a result we were able to reduce our shares outstanding by about 5.3 million shares. The final number of shares we purchased will be determined when the program concludes, which should occur no later than April 2008.

Please note that the structure of this deal has created a larger than normal short position in Grainger's Stock which should dissipate as the program is executed. As indicated in August, we estimate that the accelerated repurchase should contribute about $0.01 to 2007 EPS and about $0.11 in 2008.

As a result of the change in capital structure, we ended the quarter with $94 million in cash and $144 million in short-term debt. This is the first time in several years that we have been in a net debt position. Net interest income of $2.4 million declined 52% versus $5.1 million in the 2006 third quarter.

Lastly, we generated about $157 million of cash in the quarter. To put that in perspective, net income for the quarter was $109 million. A portion of our cash flow was used to fund the accelerated share repurchase. We also invested $60 million in capital projects to profitably growth the business. We paid $31 million in dividends in the quarter, up 21% on a per-share basis versus the 2006 third quarter.

As mentioned in today's earnings release, we raised the 2007 earnings per share guidance to a new range of $4.85 to $4.95.

To conclude, we are very pleased about the results for the quarter, with sales up 9%, operating earnings up 15%, and earnings per share up 21% adjusted for last year's tax benefit. We remain financially very strong with our AA+ credit rating and strong cash generation.

Please mark your calendar for Wednesday, November 14, when we will host our annual analyst meeting in Lake Forest, Illinois. During the meeting we will share with you our October sales information and provide guidance for 2008. Speakers will include Chairman and CEO, Dick Keyser; President and COO, Jim Ryan; Senior Vice President Finance and CFO, Oggie Loux; and the leaders from the following businesses, Y.C. Chen from the U.S. Branch-Based business; Court Carruthers from Canada; Cesar Lanuza from Mexico; and Larry Loizzo from Lab Safety Supply.

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.