固安捷 (GWW) 2008 Q4 法說會逐字稿

Hello. This is Laura Brown, Vice President of Investor Relations. Joining me is Bill Chapman, Director of Investor Relations. We are pleased to be sharing with you today Grainger's fourth-quarter results as of December 31, 2008 via this audio webcast. This recording is intended to provide you with more information related to our recent performance. Please also reference our 2008 fourth-quarter and full-year earnings release issued January 26th in addition to other information on our investor relations website to supplement this webcast.

Before we begin, please remember that certain statements and projections of future results made in the press release and in this webcast constitute forward-looking information. These statements are 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 that relate to forward-looking statements.

Let's begin by taking a look at our full-year 2008 results. Sales, net earnings and earnings per share were all records for Grainger. Sales of $6.9 billion were up 7% versus 2007. There was one extra selling day in the year versus 2007, so sales were up 6% on a daily basis. Net earnings increased 13% versus 2007 and earnings per share of $6.04 increased 22% versus $4.94 in 2007.

Taking a closer look at the income statement for the year, gross profit margins increased about 40 basis points to 41%. Operating margins increased almost 100 basis points to 11.4%. Consistent with our guidance, the operating margin expansion was driven by a near equal mix of improved gross margins and operating expense leverage.

For comparability, it is important to note that our record earnings per share of $6.04 for the year 2008 included the following items. First, $0.13 per share in charges. This consisted of the $0.05 from the settlement of a government lawsuit recognized in the second quarter and $0.08 related to the write-down of our investment in a joint venture in the fourth quarter which I will discuss in more details in a few moments. Second, $9 million in net interest expense in 2008 versus $9 million in net interest income in 2007, representing a negative swing of $18 million. Third, $8.6 million in gains on the sales of property versus $6.6 million in 2007.

Pretax return on invested capital or ROIC for the year increased 130 basis points to 29.8% from 28.5% a year ago. This improvement was the result of better operating performance partially offset by an increase in net working assets.

Let's now take a look at our 2008 fourth-quarter results. Sales of $1.6 billion were down 1% versus last year's fourth quarter. In a few moments, we will address some of the factors that contributed to our sales performance. Operating earnings increased 8% and net earnings increased 3%. Earnings per share grew by 9% to $1.39.

As noted a few moments ago, the quarter included the write-down of the Company's 49.9% ownership interest in Asia Pacific Brands India Ltd. The bankruptcy of a major supplier and the weakened global economy impaired the value of this investment. The write-down is reported below the operating earnings line. It amounted to $6 million or $0.08 per share. Excluding this charge, earnings per share for the quarter would have been up 15%.

Let's now focus on performance drivers during the quarter. In doing so, we will cover the following topics -- first, sales by customer end market and geography in the quarter and in the month of December; second, an update on our key growth initiatives in the United States; third, our operating performance; and last, our cash generation and capital deployment.

As mentioned earlier, total company sales for the quarter were down 1% versus the prior year. There were 64 selling days in the fourth quarter in both years. The 1% decline for the quarter included a 2 percentage point decline related to foreign exchange, partially offset by the combination of positive price inflation and negative volume growth. Growth slowed progressively during the quarter as daily sales were up 4% in October, down 2% in November and down 5% in December.

As mentioned in our last audio webcast, we had anticipated a drop-off in volume later in the fourth quarter, given the economy and the expectation of more plant and business shutdowns around year end. Grainger's branch-based business segment sales, which include operations in the United States, Mexico, China and Panama, were flat to prior year. Similar to company results, positive price inflation essentially offset the decline in volume. Pricing contributed 5 percentage points for the quarter. The sales of seasonal products was not a factor in the quarter.

Sales in the US were down 1%. Product expansion contributed positively for the quarter, offset by declines in sales in the top 25 metropolitan markets. On a geographic basis, sales performance was flat in the western part of the United States and negative in the eastern portion of the country.

Sales performance for the quarter by end market was as follows. Government sales were up in the low single digits. Commercial and reseller were down in the low single digits. Light manufacturing, retail and contractor were down in the mid single digits and heavy manufacturing was down in the high single digits.

Sales in Mexico for the fourth quarter were down 11% in US dollars versus the 2007 fourth quarter but were up 8% in local currency. We continue to benefit from Mexico's market expansion program. As of year end, we had 22 branches in Mexico, giving us national distribution capabilities. Since August, this business has experienced slowing sales growth due to the deceleration of the Mexican economy.

Sales for China were just under $3 million for the quarter and nearly $10 million for the year. Growth with existing customers has driven the majority of the increase. New customer acquisition and profitability remain the primary focus for this business.

For the Acklands-Grainger branch-based segment, sales were down 6% in US dollars, up 16% in local currency. In spite of an overall soft Canadian economy, the Acklands team is continuing to drive market share gains, particularly in the agriculture, mining, oil and gas and government customer segments. Sales were up strongly in all geographic regions with the exception of British Columbia, which was down mid single digits, primarily due to the forestry sector.

Finally, Lab Safety sales for the quarter were down 3% versus a year ago. The contribution from the acquisition of Highsmith was a positive 9%. Results from Lab's core business continued to decline. We are optimistic about the expected upside in sales and cost synergies from integrating Lab Safety into the US branch-based business, as announced at our November analyst meeting. We expect incremental revenue of $70 million to $100 million and cost synergies of $20 million to $30 million over the next 18 months as we work to integrate the two businesses.

For the month of December, total company sales were down 5% on a daily basis. There were 22 sales days in the month versus 20 in December last year. 2 percentage points of headwind were experienced due to unfavorable exchange rates between the US dollar, the Canadian dollar and the Mexican peso. The sales of seasonal products was not a factor in the month.

In the Grainger branch-based business segment, December sales were also down 5% on a daily basis. In the US business, all customer end markets were below December 2007 as follows. Government was down low single digits, reseller and commercial were down mid single digits, light manufacturing and contractor were down high single digits, retail was down low double digits and heavy manufacturing was down in the mid teens. As mentioned in the quarterly results, volume was notably down in the top 25 metropolitan markets. In general, sales performance was better in the western states versus the eastern part of the United States.

In Mexico, December sales were down 14% in US dollars but up 7% in local currency. As in the United States, extended manufacturing shutdowns occurred in Mexico in the month of December.

For the Acklands branch-based segment, sales were down 7% in US dollars but up 15% in local currency. Despite overall economic slowness in Canada, Acklands continued to deliver sales growth in the mid teens. Slowness in the forestry sector negatively affected sales, most notably in British Columbia.

All other geographies, with the exception of the Atlantic, and all customer end markets were up in the month of December.

Lab Safety's performance for the month of December was disappointing. Sales were down 11% and would have been down 18% without the acquisition of Highsmith. Extended plant shutdowns and the deteriorating industrial economic environment materially affected Lab's monthly performance.

As we move into the first quarter of 2009, the sales weakness seen in December is continuing into January. The daily sales rate for January is running below the 5% daily decline reported in December. The three primary factors affecting the sales decline are the continued weakness of the overall economy, as seen in continued job losses and business failures; foreign exchange, which persists as a significant headwind, particularly for Acklands-Grainger in Canada, even though this business continues to grow nicely in local currency; and lastly, the timing of the New Year's holiday. We were open for business on Friday, January 2nd, but generated less than a half day of normal sales volume. Excluding the effect of January 2nd, the run rate for daily sales is slightly below the 5% decline seen in December.

During the quarter, performance for the market expansion and product line expansion programs was materially affected by the decline experienced in the general economy. For the year, incremental market expansion sales were $476 million versus $402 million in 2007, an 18% increase. Program operating earnings in 2008 were $43.2 million, an increase of 102% over prior year. We expect to benefit from these investments through 2013, even in light of these challenging economic times.

Product expansion accounted for 1 percentage point of sales growth in the quarter. This program contributed an incremental $687 million in sales in 2008 versus $349 million in 2007. We are very pleased with the contributions from this program and plan to continue to expand our product line into the foreseeable future. Effective with the launch of Grainger's 2009 catalog, we will have over 235,000 SKUs in the catalog. This is a net increase of 52,000 SKUs year-over-year. The number of SKUs in the Grainger catalog has increased from 82,000 in 2005, essentially tripling our product offering in just four years.

Now, I'd like to turn things over to Bill Chapman.

Thanks, Laura. Fourth-quarter operating earnings for the Company increased by 8% versus the 2007 fourth quarter. This improvement came entirely from the Grainger branch-based segment. This increase was the result of improved gross margins through positive inflation recovery and operating expense leverage despite the 1% decline in sales.

Let's now take a look at operating performance by segment. Operating earnings for the Grainger branch-based businesses increased 13% versus the 2007 fourth quarter. Operating margins increased 170 basis points to 14%. This operating margin expansion was primarily the result of a 120 basis point improvement in gross margins combined with operating expense leverage.

Operating expenses as a percent of sales declined by about 50 basis points. Our expense leverage was aided by lower advertising, sales commissions, bonus, employee benefits and severance costs, along with a reduction in the Company's bad debt reserve due to better collection efficiency. In addition, gains on the sale of real estate related to the market expansion program partially offset operating expenses for the quarter by $4.6 million versus $1.8 million in the 2007 fourth quarter. Pretax ROIC for the Grainger branch-based segment increased 200 basis points for the year to 38.7% versus 36.7% in 2007, primarily reflecting the improvements in operating performance.

Let's move on to the Acklands-Grainger branch-based segment, where operating earnings decreased 14% for the quarter due to the negative effects of foreign currency. In Canadian dollars, operating earnings were up 5% versus last year's fourth quarter. This was the result of strong sales growth and higher gross profit margins, partially offset by higher operating expenses. In US dollars, operating expenses included a $2 million reserve for a potential loss due to the bankruptcy of a freight payment processor. Also in US dollars, operating margins in Canada decreased 80 basis points to 7.7% for the quarter versus 2007.

For the full year, operating margins increased 50 basis points to 7.5% versus 7.0%. Pretax ROIC improved 140 basis points to 14.3% in 2008 versus 12.9% a year ago. We continue to be pleased with the operational improvements in our Canadian business.

Operating earnings for the Lab Safety segment decreased by 57% for the fourth quarter versus 2007. The decline in higher-margin core Lab Safety sales drove gross profit margins lower. Highsmith integration expenses also negatively affected performance. A combined leadership team with the branch-based business in the United States was established in mid-December and integration efforts are just getting underway.

Let's cover a few more items which affected results for the quarter. Higher interest expense represented a drag on earnings versus the prior year. In May of 2008, the Company obtained a four-year term loan of $500 million. As a result of this loan, the Company had $3.5 million in net interest expense in the quarter versus $200,000 in net interest expense in the 2007 quarter, representing a $3.3 million negative swing.

The effective tax rate for the 2008 fourth quarter was 37.9% versus 38.1% in the 2007 quarter. Excluding transactions related to equity earnings in unconsolidated entities and the joint venture write-down, the effective tax rate was 36.7% and 38.5% respectively. The lower effective tax rate for the 2008 fourth quarter was primarily the result of a lower weighted average state tax rate and increased deductibility of executive compensation expenses. For 2009, we are estimating the effective tax rate to be approximately 38.9% excluding the effect of equity in net income of unconsolidated entities.

Lastly, let's take a look at cash flow. Operating cash flow was $195 million for the quarter and $530 million for the year. For 2008, we used our strong cash flow to fund growth initiatives through capital expenditures of $195 million. We also returned cash to shareholders through $394 million in share repurchases and $122 million in dividends.

In November, we gave annual sales guidance of -5% to +5% and since then macroeconomic trends have deteriorated. Based on our sales run rate in January, we are somewhat below the low end of the range so we are implementing actions now for weaker sales. At this time, we are not in a position to provide 2009 annual sales and earnings guidance due to economic uncertainty and a lack of visibility beyond mid-January.

To conclude, we are pleased about the results for the quarter, particularly given the weakening economy, with operating earnings up 8% and earnings per share up 9% or up 15% excluding the $0.08 charge. Going forward, we are encouraged about our opportunity to continue to serve customers and gain market share despite these challenging and uncertain times.

Thank you for your interest in Grainger. Please mark your calendar for the release of January sales on Wednesday, February 11. If you have any questions, please do not hesitate to contact Laura at 847-535-0409, Nancy Hobor at 847-535-0065 or me at 847-535-0881.