固安捷 (GWW) 2007 Q4 法說會逐字稿

Hello and welcome to Grainger's quarterly audio Webcast covering results for the fourth quarter and year ended December 31, 2007. This is Bill Chapman, Director of Investor Relations for Grainger and I'm here with Laura Brown, our new Vice President of Investor Relations. Laura most recently led our marketing organization in the market expansion program and has been with Grainger for eight years.

This recording is intended to provide you with additional information on our recent performance. We invite you to use this information in conjunction with the earnings release and other financial information posted on our Website.

Before we begin, I'd 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 expectations of market conditions and competitive and regulatory environments and involve risk and uncertainty. Please see our Form 10-K for a discussion of factors as they relate to forward-looking statements.

First, let's take a look at our full-year 2007 results. Sales, net earnings and earnings per share were all records for Grainger. Sales were $6.4 billion, up 9% versus 2006 with one more sales day in 2007. Daily sales were also up 9%. Net earnings increased 10% to $420 million and earnings per share grew by 17% to $4.94 versus $4.24 in 2006. For comparability, it's important to note that 2006 included some income tax benefits of $0.15 per share. If you exclude these benefits from 2006, net earnings would have been up 14% and earnings per share would have been up 21% for 2007.

Taking a closer look at our income statement for the year, gross profit margins increased 60 basis points to 40.6% from 40% in 2006. Operating margins increased 70 basis points to 10.5% versus 9.8% in 2006. Pretax return on invested capital or ROIC for the year increased 210 basis points to 28.5% from 26.4% a year ago.

I'd also like to point out that our 2007 sales growth, operating margin and EPS results were all within the forecast we provided in November at our annual analyst meeting.

Now let's look at our 2007 fourth-quarter results. Sales were $1.6 billion, up 10%. The 2007 quarter had 64 sales days, one more selling day versus the same period last year. Daily sales increased 9%. Net earnings increased 6% to $104 million and earnings per share grew by 13% to $1.28. The quarter included severance charges of $4.5 million or $0.03 per share resulting from the elimination of positions in information technology.

It's also important to note that the fourth quarter of 2006 included $5.3 million or $0.06 per share of income tax related benefits. Excluding these two items, fourth-quarter net earnings would have been up 14% with earnings per share up 22%.

Let's now focus on performance drivers. In doing so, we'll cover the following topics. First, sales by customer end markets and geography in the quarter and then in the month of December. Second, an update on our key growth initiatives, market expansion, and productline expansion. Third, our operating performance. And last, cash generation and capital deployment.

Let's take a closer look at the revenue line. Again, sales in the fourth quarter were up 9% on a daily basis. About 4 percentage points of this growth came from the Company's key growth initiatives, market expansion, and productline expansion. Foreign exchange contributed 2 percentage points with the remaining growth coming from price and volume.

On the flip side, the midweek timing of the Christmas and New Year's holidays costs us about 1 percentage point of growth for the quarter. I'll address the specific effect on December sales growth in just a few moments.

For the Grainger branch based segment which consists of our branch based operations in the United States, Mexico and China, sales were up 7% on a daily basis in the quarter. The 7% growth consisted of 5 percentage points from market expansion and productline expansion; 1 percentage point from the sales of seasonal products; the holiday timing and the wind down of low margin contracts were a 2 percentage point drag; and the remaining growth consisted of volume and price.

Let's now review the businesses that make up the Grainger branch based segment. Daily sales in the United States increased 7%. The sales increase was driven by strong growth in the government, light manufacturing, and commercial sectors.

Here's a rundown by customer end market. Government growth continued to be strong and was up low double digits. Commercial and light manufacturing were up high single digits; contractor was up mid single digits; heavy manufacturing, reseller and retail were all up low single digits.

On a geographic basis within the United States, we saw strength in the Pacific Mountain, Mid-Atlantic, Central, South Central, Midwest and Great Plains, while sales grew at a slower pace in the West Coast and Great Lakes. Daily sales in Mexico were up 20% for the quarter in U.S. dollars and in local currency. Sales growth benefited from the ongoing market expansion program including the seven branches opened in 2007.

During the fourth hurricane-related flooding disrupted operations at the new master branch in Vista Hermosa. We expect full operations to resume early in the 2008 second quarter.

The final business in this segment is China. Sales were $1.3 million for the fourth quarter and accelerated each quarter throughout 2007. Total sales for the full-year approached $3 million. We have one master branch and five Will-Call Expresses in the Shanghai area and we continue to view our investment in China as long term.

For the Acklands-Grainger branch-based segment in Canada, daily sales for the quarter were up 23%, 6% in local currency. Sales growth was primarily driven by strong sales to oil, mining and government customers but partially offset by continued weak sales to the forestry, natural gas and manufacturing end markets. And finally, daily sales for lab safety supply were up 3% for the quarter.

Sales from the acquisitions of Professional Inspection Equipment and Construction Book Express in November 2006 and McFeely's in May 2007, contributed 5 percentage points to the sales growth. Excluding these acquisitions, sales were down by 2%.

Government and manufacturing customers accounted for the majority of the sales decline in the core lab business. Government sales were down primarily due to a government contract that expired earlier in the year. We were disappointed with the sales performance at lab. We believe we can grow this business both organically and through acquisition. In the second half of 2007, we changed the catalog media strategy. We will continue to evaluate these changes and pursue acquisition targets that complement our strategy.

Company sales in December were up 6% on a daily basis, sales were negatively impacted by the midweek timing of holidays. Both Christmas and New Year's fell on Tuesdays versus Monday a year ago. Midweek holidays tend to have a more detrimental effect on our sales. We estimate that the holiday timing represented about a 4 percentage point drag on growth for the month while currency and seasonal sales represented about a 1 percentage point benefit each or 2 percentage points for both.

In the Grainger branch-based segment, December sales were up 5% on a daily basis. Sales of seasonal products contributed about 1 percentage point to this growth. Similar to the Company, the timing of the holidays costs the segment about 4 percentage points. In addition, the wind down of low margin integrated supply contracts resulted in about a 1 percentage point drag on top-line growth. Sales growth was primarily driven by continued strong sales to government, light manufacturing, and commercial sectors.

Let's again run down the daily sales growth for each customer end market for December. Sales to government and commercial customers were up high single digits; light manufacturing was up mid single digits; contractor, heavy manufacturing, and retail were all up low single digits; and reseller was essentially flat. On a geographic basis within the United States, the Great Plains, Midwest, Pacific Mountain, Mid-Atlantic and South or Gulf Coast had strong momentum while West Coast and Great Lakes experienced slower sales growth consistent with the pattern seen throughout the quarter.

Sales in December for Mexico were up 12% on a daily basis versus prior year. The holiday impact and manufacturing plant year-end shutdowns contributed to the softness versus prior months. For the Acklands-Grainger branch-based segment, daily sales were up 23%, up 7% in local currency. And daily sales for the lab safety supply segment were up 1% on a daily basis including the incremental sales from McFeely's. Excluding this acquisition, sales were down by 3% compared to December 2006 reflecting the continued softness in sales to government and manufacturing customers.

Looking ahead to 2008, daily sales growth is tracking ahead of the number seen in December and should be within our sales guidance range of 7% to 10% growth.

Now I would like to turn over the call to Laura Brown.

Thanks, Bill. Let's move on to a review of our growth programs. During the quarter the market expansion program, something I'm very familiar with, delivered incremental sales growth and market share in key metropolitan markets across the United States. This program contributed approximately 2 percentage points of the Company's 9% daily sales growth in the quarter. In addition, I'm pleased to report that we completed all remaining projects for phases 3 and 4.

For the fourth quarter, we experienced the following daily sales growth in each phase. Phase 1 was up 19% with especially strong performance in the Atlanta and Seattle markets. Phase 2 was up 7% as the weakness in Southern California continued. We have seen more economic softness in Southern California's manufacturing segment than in other markets. Phase 3 was up 12% with Houston leading the cities in this phase.

Phase 4 was up 9% with all metropolitan markets strong except South Florida. Phase 5 was up 8% led by New York City and phase 6 was up 8% led by Chicago but slowed by San Francisco. We were disappointed by the extent of the impact of the timing of the year-end holidays. For the year, above or on target performance occurred in almost all markets except the Florida and California markets.

In 2007, we completed a record 60 branch projects within the market expansion program and added more than 450,000 square feet of additional space. From a financial standpoint, market expansion contributed $402 million in program to date sales in 2007. Operating earnings were $21.4 million for the year versus an operating loss of $8.6 million in 2006. Again, softer sales attributable to the holiday timing but better operating earnings than expected.

Turning now to our productline expansion program. Over the last two years, we have added about 90,000 additional products to our offering. These product additions were primarily in the plumbing, fastener, material handling and security product lines. Our goal is to improve customer service and capture share through a broader product offering. This program contributed about 2 percentage points to the Company's growth in the quarter; 3 percentage points for the segment.

Productline expansion delivered almost $350 million in program to date sales. In 2008, we plan to add 44,000 net new products, primarily to power transmission and fleet vehicle maintenance. The new Grainger catalog will be distributed in February and will feature more than 183,000 products, a 32% increase over the 139,000 products in the 2007 catalog.

Now let's move to quarterly operating performance. Fourth-quarter Company operating earnings were up 13% versus the 2006 fourth quarter. This includes the effect of the severance Bill mentioned earlier. Operating earnings for the Grainger branch-based segment increased 3%. This increase was the result of strong sales growth, improved gross profit margins which were partially offset by higher operating expenses. The growth in operating expenses was primarily driven by the severance charges in information technology, higher sales commissions and bonus accruals tied to better sales performance.

In addition, bad debt expenses increased due primarily to productivity issues stemming from SAP system functionality. The increase was not a result of a deterioration in customer payment patterns.

Return on invested capital for the year increased 150 basis points to 36.7% reflecting the improvements in operating performance. For the Acklands-Grainger branch-based segment, operating earnings were $14.5 million in the quarter versus $3.2 million for the 2006 quarter, the result of sales growth, improved gross profit margins and positive operating leverage. Gross margins benefited from positive inflation recovery and favorable year-end inventory adjustments resulting from improved inventory management.

The operating expense leverage was the result of improved productivity and no counterpart to the severance incurred in the 2006 fourth quarter. Operating margins improved up 620 basis points to 8.5% versus 2.3% in the 2006 quarter. The operating margin for a full year came in at 6.9%, up 420 basis points versus 2006. In addition, ROIC for the year more than doubled to 12.9% from 4.7% in 2006. Operating earnings for the lab safety segment increased 11% versus the fourth quarter of 2006. This increase was driven by sales growth and positive operating leverage, partially offset by lower gross margins. Tight expense management contributed to the positive operating leverage.

Last, let's take a look at cash flow. Operating cash flow was $132 million for the quarter and $470 million for the year due to strong operating performance. For 2007, we deployed cash to fund growth initiatives through capital expenditures of $196 million versus $139 million in 2006. At $90 million, market expansion accounted for almost half of the capital expenditures in 2007.

We also returned $113 million in dividends to our shareholders. We increased the quarterly dividend rate by 21% in April. 2007 was the 36th consecutive year of increased dividends. For the full year, we repurchased 7.1 million shares of stock for a total of $647 million. Shares were obtained through open market purchases and an accelerated share repurchase program that was announced in August of 2007. The average price paid in 2007 was $83.37. The program was completed early in January. We intend to resume purchasing shares in the open market.

To conclude, we are pleased with the results generated in 2007, 9% sales growth to $6.4 billion and 17% earnings per share growth to $4.94; operating cash flow of $470 million. With this performance as a backdrop, we reiterate our guidance and continue to expect 2008 earnings per share of $5.65 to $6.00.

Please market your calendar for February 12 when we plan to issue sales results for January and April 14, when we expect to release first-quarter earnings. Again, we encourage you to review the earnings release and other information provided on our Website. If you have any further questions or require additional information, please contact Bill Chapman, Nancy Hober, or me. Our contact information is available on the investor relations site.

Thank you for your interest in Grainger and have a great day.