固安捷 (GWW) 2009 Q1 法說會逐字稿

Hello, this is Laura Brown, Vice President of Investor Relations, along with Bill Chapman, Director of Investor Relations. We are pleased to provide additional color on Grainger's results for the quarter ended March 31, 2009 via this audio webcast. This message provides you with more insight into our results for the first quarter of 2009. You should also reference our earnings release issued April 14, along with other information available on our Investor Relations website.

Before we go any further, 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.

We'll begin by reviewing total company results, then move into a discussion of performance by segment. Please note that beginning with the 2009 first quarter we changed our segmentation to reflect the integration of Lab Safety Supply into the US Branch-based business. We'll discuss the rationale and mechanics of the change when we get to segment results. A schedule containing 2008 quarterly sales and operating earnings reflecting the revised segmentation is included on the first-quarter earnings release.

For the 2009 first quarter company sales were $1.5 billion, down 12% versus the first quarter of 2008. There was one less selling day in the 2009 quarter, so sales were down 10% on a daily basis. Operating earnings were down 14% and net earnings declined 16% versus 2008. Earnings per share of $1.25 declined 11% versus 2008.

Please note that beginning with 2009 we adopted an accounting change related to stock-based compensation. This adoption led to a change to the calculation of earnings per share. As a result, earnings per share for the 2008 first quarter were $0.02 lower than originally reported; the revised calculation also resulted in a $0.01 reduction in the 2009 first quarter. For additional information and a restatement of last year's earnings per share by quarter, please see page K-41 in our 2008 Form 10-K.

Taking a closer look at some key metrics on the income statement, gross profit margins increased about 200 basis points to 43%. We benefited from positive inflation recovery in the quarter, although we expect the magnitude of the benefit to wane going forward as we lap last year's May and August price increases.

Our strong gross margin helped to partially offset the sales decline as operating margins only decreased 30 basis points to 10.9%. Our cost reduction efforts also helped us in the quarter but were not sufficient to offset the 12% decline in sales. We'll talk more about our cost initiatives and margin trends later.

For comparability it is important to note that earnings per share for the quarter of $1.25 included the following items. First, $0.03 per share in severance charges; in February we announced the decision to eliminate 300 to 400 jobs over the course of the year. The quarter included severance charges of $5 million. Second, $1.2 million in higher net interest expense versus the 2008 first quarter. And third, no gains on the sales of property versus $1.3 million of gains last year.

Let's now focus on the key factors that drove performance during the quarter. In doing so we'll cover the following -- first, sales by customer end market in the quarter and in the month of March; second, an update of our product line expansion program in the United States; and third, operating performance by segment. We'll conclude with our cash generation and capital deployment.

As mentioned earlier, daily sales for the Company were down 10%. The 10% decline for the quarter consisted primarily of a 14% decline in volume partially offset by a 6% year-over-year increase in price. In addition, foreign exchange contributed approximately 2 percentage points to the decline. Sales levels weakened slightly during the quarter with daily sales down 9% in January, down 10% in February and down 12% in March.

Let's move on to our segments. We changed our segmentation beginning with the 2009 first quarter. This change was prompted by the integration of Lab Safety Supply into our core Grainger business in the United States. We now report two segments, the United States and Canada. Our remaining operations in Mexico, Puerto Rico, China and Panama that are dissimilar in profitability and size are now reported under a grouping titled other businesses.

Please refer to our earnings release for a restatement of prior year results reflecting the new segmentation. In addition, a spreadsheet containing daily sales history, recast for the new segmentation, can be found on the Investor Relations website under news releases and supplemental information. Branch count information is also available as a tab on the same spreadsheet.

Sales in the United States, which represents about 89% of total company sales, were down 11%, 10% on a daily basis for the quarter. Sales performance drivers were similar to company results with volume declines being partially offset by price increases. The sales of seasonal products had no affect on the sales decline for the quarter.

One of the most frequent questions we get is what are you seeing in the economy? So let's take a look at sales by customer end market. Within the United States daily sales performance for the quarter by end market was as follows -- government sales were essentially flat versus last year. Within the government sector military was up mid teens while state and local government was down in the high single digits.

Commercial and retail were down in the high single digits. Light manufacturing was down in the low double digits. Within this sector sales to food processing customers were up in the mid single digits while sales to furniture manufacturers were down nearly 30%. Contractor and reseller were down in the low teens and heavy manufacturing was down in the mid 20s.

For our segment in Canada daily sales decreased 18% in US dollars but were up 2% in local currency. This segment represents about 10% of total company sales. In spite of a weakening Canadian economy our team has been taking share, particularly among government customers. At the other end of the spectrum, forestry, heavy manufacturing and mining were the weakest customer end markets.

Let's conclude our review of sales for the quarter by looking at other businesses. This group includes our operations in order of size in Mexico, Puerto Rico, China and Panama and represents less than 2% of total company sales. Daily sales for this group were down 7%, primarily the result of a large decline in Mexico partially offset by increases in China and Panama. For Mexico daily sales in dollars were down 23% but up 3% in pesos.

For the month of March total company sales were down 12% on a daily basis. There were 22 sales days in the month versus 21 last year. Volume declines partially offset by price increases continued to be the story in March. In addition, we were hit by 3 percentage points of headwind due to unfavorable exchange rates between the US dollar, the Canadian dollar and the Mexican peso. The sales of seasonal products were not a factor in the month.

As noted in our last audio webcast, we expected March to be weaker than February and that turned out to be the case. We estimate that the absence of the Easter holiday in March this year versus last year probably contributed about 2 percentage points to sales in the month ranging from a 1 percentage point contribution in the United States to a 10 percentage point positive factor in Mexico.

So excluding those benefits March would have been down about 14%. Having the Easter holiday in April of this year may hurt us by at least that much if not more. We continue to see soft patches around holidays as businesses look for more ways to lower cost.

Let's move on to sales by segment. Daily sales for the United States were down 10%. Customer end markets within the 50 states were as follows -- government was flat; commercial and retail were down high single digits; light manufacturing was down low double digits; contractor and reseller were down low teens; and heavy manufacturing was down in the mid 20s.

For our Canadian segment daily sales in March were down 22% in US dollars and down 2% in local currency. Sales for this business would have been down more, but benefited from the absence of the extended Easter holiday. Conversely results in April will be negatively affected.

Daily sales for our other businesses were down 1%, primarily the result of a large decline in Mexico offset by growth in China and Panama. In Mexico daily sales were down 18% in US dollars but up 12% in local currency. An easy comparison due to the extended Easter holiday in March of 2008 contributed most of this increase in pesos.

As we move into April the sales weakness seen in the first quarter, particularly the trends seen in March, are continuing. In fact, with our earnings release occurring on Tuesday, April 14, we are just coming off the Easter weekend. It should be no surprise if sales for Good Friday and Easter Monday were quite soft. We're open for business both of these days and we count those as selling days, although some of our customers are not open.

So April sales trends to date are running below the 14% normalized decline seen in March. I'd now like to turn things over to Bill Chapman.

Thanks, Laura. Let's move on to a quick review of our product expansion initiative. Sales from products added to our offering accounted for $195 million in sales during the quarter. This compares to a $137 million contribution in the 2008 first quarter. Since 2005 we have tripled the number of SKUs in the Grainger catalog. Our 2009 catalog, launched in February, contains nearly 233,000 SKUs representing a net increase of 50,000 SKUs year over year.

Operating earnings for the Company decreased by 14% versus the 2008 first quarter. This decline was primarily the result of the 12% sales decrease coupled with operating expenses which declined at a lower rate than sales. This was partially offset by an increase in gross profit margins. Earnings for the two segments were down while the other businesses showed some year-over-year improvement.

Let's now take a look at operating performance by segment. Operating earnings in the United States decreased 11% versus the 2008 first quarter. Operating margins only declined by 10 basis points to 13.2% versus 13.3% a year ago. This performance was primarily the result of a 230 basis point improvement in gross margins driven primarily by positive inflation recovery.

Operating expenses as a percent of sales declined about 100 basis points. Even though we reduced operating expenses in areas such as payroll, benefits, bonuses, sales commission and travel, this was not sufficient to offset the 11% sales decline.

Let's move on to the segment in Canada where operating earnings decreased 49% for the quarter. This decline was primarily due to reported sales being down 19% coupled with a 140 basis point decline in gross profit margins.

The decline in gross profit margins was attributable to three things -- first, higher cost of goods sold due to the effect of foreign exchange on products purchased from the United States; second, growth among larger customers who paid lower prices; and third, additional price competition in the marketplace. In Canadian dollars operating earnings were down 37%.

Operating results for the other businesses improved year over year moving from a loss of $4.2 million in the 2008 first quarter to a loss of $2.9 million in 2009. The lower operating loss was primarily attributable to our operations in China.

Let's cover a few more items which affected results for the quarter. Higher interest expense and lower interest income 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 we had $1.8 million in net interest expense in the quarter versus $600,000 in net interest expense in the 2008 first quarter representing a $1.2 million negative swing. The effective tax rate for the quarter was 39.2% versus 38.7% last year. The higher effective tax rate this quarter was primarily the result of lower earnings in foreign jurisdictions with lower income tax rates, as well as current estimates of the overall US state income tax rate.

Lastly, let's take a look at our operating cash flow which was $42 million for the quarter. Cash generated by the business along with our strong cash balance was used to fund capital expenditures of $28 million and return capital to shareholders. During the quarter we paid $31 million in dividends and returned $128 million to investors through the repurchase of 1.9 million shares.

As Laura discussed earlier in the podcast, we've seen a continued deceleration in our sales results in March and extending into April. With that as a backdrop, we're not convinced that our sales decline has hit bottom. Until we have greater visibility we do not believe it makes sense to provide guidance. In the meantime we are taking additional steps to gain market share using our financial strength.

We are adding modestly to our sales force to further improve customer coverage and are offering some additional customer incentives including a limited free freight promotion. These actions should cost us between $25 million and $50 million this year and will affect our margins in the near term. The exact level of investment for the year will depend on the success of these initiatives.

To conclude, we are encouraged about our position in the marketplace and our ability 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 May 12 when we plan to release April sales results. If you have any questions please do not hesitate to call Laura at 847-535-0409, Nancy Hobor at 535-0065 or me at 535-0881. Thank you.