固安捷 (GWW) 2010 Q1 法說會逐字稿

Hello. This is Ernest Duplessis, Vice President of Investor Relations. With me is Bill Chapman, Director of Investor Relations. We are pleased to share with you some information regarding Grainger's first quarter 2010 results via this audio webcast. Please also reference our 2010 first-quarter earnings release issued April 14, in addition to other information available 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. So now let's get started.

The story for the quarter was strong sales and operating earnings growth for our business in the United States, along with improved operating performance for our emerging international businesses. These results, combined with improving economic environment, have given us the confidence to increase and narrow the ranges for our earnings and EPS guidance. We now expect sales to grow 9% to 12% and are forecasting EPS of $5.70 to $6.10 for the full year 2010. We will talk more about our revised guidance and our assumptions at the end of this recording.

For the Company, total sales of $1.7 billion were up 14% versus the 2009 first quarter. Operating earnings increased 15% while net earnings increased 3%. Earnings per share of $1.31 increased 5% versus the 2009 first quarter.

You may be wondering about the difference in growth rates. Well, here is the short answer. Our results include two unusual items. First, a $0.15 one-time, non-cash charge for the write-off of the deferred tax asset related to the new healthcare legislation. Second, an $0.08 per share benefit from the implementation of our new employee paid time-off policy where paid time off is now earned in the current year versus the preceding year as was the case under the old policy. We expect a similar benefit of $0.08 to $0.09 in each quarter of 2010 representing $0.34 to $0.35 per share for the year.

Keep in mind, this benefit will not repeat in 2011. These two items combine to reduce reported earnings per share by $0.07. So if you were to exclude those items, earnings per share would have been $1.38, up 10%, versus $1.25 in 2009.

During this 20-minute recording, we will provide additional color on our results and expectations going forward. We encourage you to continue to listen in or take a look at the script of this podcast that is available on our Investor Relations website.

In a few minutes, we will take a closer look at sales results for the quarter. In the meantime, let's walk down the operating section of the income statement. Gross profit margins were down about 75 basis points versus last year. A 10-basis point improvement in the US business was more than offset by faster sales growth from our international businesses, which have lower gross margins. We will provide more detail when we review the business by segment.

Reported operating margins were up about 10 basis points to 10.9%. However, if you exclude the $10 million benefit in the quarter related to the change in the paid time-off policy, the Company's operating margin actually declined by 60 basis points to 10.3%.

Similar to the scenario with gross profit, operating margin expansion in the US business was more than offset by our international businesses. On a purely organic basis, stripping away acquisitions and foreign exchange and excluding the benefit from the change in the paid time-off policy, the Company's operating margin was closer to 10.8% compared to 10.9% in 2009.

Let's now focus on performance drivers during the quarter. In doing so, we will cover the following topics -- first, sales by segment in the quarter and the month of March; second, our operating performance by segment; third, cash generation and capital deployment; and finally, we will wrap up with a discussion on our 2010 guidance and other key items of interest.

As mentioned earlier, total Company sales for the quarter were up 14% versus the prior year. There were 63 sales days in both the 2010 and 2009 quarters. Daily sales increased 12% in both January and February and were up a robust 18% in March. Organic growth was responsible for nearly half of all of the 14% increase for the quarter. The vast majority of the organic growth was attributed to volume as price was essentially flat. In addition, acquisitions contributed five percentage points of growth and foreign exchange added another three percentage points.

Let's move on to sales by segment. We reported two segments -- the United States and Canada. Our remaining operations in Japan, Mexico, India, Puerto Rico, China and Panama are reported under a group entitled Other Businesses. As a result of obtaining a 53% interest in the Japanese business last September, we are now reporting 100% of the sales of the subsidiary. However, the business in Japan only adds a small increment to earnings since we have already been reporting our 38% minority share of their earnings prior to obtaining a controlling interest in September of 2009.

Sales in the United States segment, which accounts for about 83% of the total Company revenue, increased 8% in the quarter. By month, daily sales were up 6% in January and February and up 10% in March. Keep in mind that the Company had increasingly easier sales comparisons in the quarter. Going forward, sales comparisons remain relatively easy until the fourth quarter.

Sales by customer end market serve as a telling barometer of economic activity in the United States. Here is what we saw in the quarter. Heavy and light manufacturing were up in the low double digits. Commercial and government sales were up in the mid single digits. Reseller and retail sales were up in the low single digits. Contractor was down in the mid single digits.

Ongoing work to integrate our direct marketing business, lab safety supply with Grainger industrial supply also contributed to sales growth in the quarter within the United States. On a project-to-date basis, which encompasses 15 months, the integration has resulted in $65 million in incremental sales. As you can see, we are well on our way to reaching the $70 million to $100 million target by the end of June.

In addition, this combination has already yielded $31 million in cost savings versus our goal of $20 million to $30 million by the end of 2010's second quarter. Part of our integration effort is the creation of a common distribution platform for all the brands in the United States. I am happy to report that we officially launched this capability in our Greenville, South Carolina distribution center in the quarter. Going forward, the new distribution centers planned for Northern California and Chicago will have the same capability.

Now let's turn our attention to the Canadian business. Sales in Canada represented about 12% of total Company revenues. For the quarter, sales in Canada increased 35% in US dollars and were up 13% in local currency versus last year. On a daily basis in Canadian dollars, sales were up 4% in January, up 13% in February and up 20% in March. Sales in Canada benefited from the growing momentum in the Canadian economy.

For the quarter, we saw strength in the oil and gas, agriculture and mining, utilities and forestry sectors, partially offset by weakness in sales to the government. Some of the sales growth in February and March came from select large customers that were shut down for maintenance, resulting in some large, low-margin orders that is not expected to repeat in the near term.

Let's conclude our review of sales for the quarter by looking at the other businesses. Again, this group includes our operations in Japan, Mexico, India, Puerto Rico, China and Panama and currently represents about 5% of total Company sales. Sales for this group were up 259%, primarily the result of the incremental sales from the businesses in Japan and India with Mexico and China making strong contributions as well.

Earlier in the quarter, we reported sales results for January and February and shared some information regarding sales performance in the month. Let's now take a closer look at March. Total Company sales were up 18% on a daily basis in March versus March of 2009. There were 23 selling days in March of 2010 versus 22 last year. Contributing to higher daily sales growth in March were 10 percentage points due to volume, five percentage points from acquisition and three percentage points due to foreign exchange.

In the United States, March daily sales were up 10%. This growth consisted of nine percentage points of volume, along with one percentage point from acquisitions. Here's how each of the US customer end markets performed in the month. Heavy manufacturing was up in the high teens. Light manufacturing was up in the mid-teens. Commercial and reseller were up in the high single digits. Government and retail were up in the low single digits and contractor was down in the low single digits.

Daily sales in Canada for March were up 48% in US dollars and up 20% in local currency. As noted earlier for the quarter, sales benefited from some large customer orders and incremental sales from acquisitions. From a customer segment standpoint, we saw the strongest growth in sales to the oil and gas, agriculture and mining and forestry markets while sales to the government declined.

Sales growth in the month of April is off to a slower start than we saw in March. A portion of the headwind is attributed to a lower business activity around the Easter holiday in the early part of the month. As a point of reference, last year, Easter was celebrated on April 12. Now I would like to turn over the discussion to Bill Chapman.

Thanks, Ernest. First-quarter reported operating earnings for the Company increased by 15% versus the 2009 first quarter. This increase was primarily the result of the strong sales growth and operating expenses, which grew at a slower rate than sales. This positive cost leverage was partially offset by a 75 basis point decline in gross margins. The decline in gross margin was attributable to our international businesses, primarily Japan, India, and Canada, partially offset by the 10 basis point improvement in gross margin for the US business.

Operating expenses increased 11% for the quarter. The increase in operating expenses was driven by a number of factors, including higher sales commissions, bonus and profit-sharing costs associated with improved Company performance. Company operating earnings adjusted for the $10 million paid time-off benefit were up closer to 9%. Operating expenses, excluding this benefit, were up 13% due to the higher sales commissions employee benefits costs just mentioned.

Let's now take a look at operating performance by segment. Reported operating earnings in the United States increased 16% versus the 2009 first quarter and operating margin increased 110 basis points to 14.3%. Gross profit margins increased 10 basis points in the United States. Our gross margin expansion was muted due to larger customers growing twice as fast as small and medium-sized customers. Operating expenses increased 4%, the result of higher sales commissions, bonus and profit sharing tied to improved performance. Other operating expenses actually declined year-over-year.

If you exclude the portion of the employee benefit policy change attributable to the US business, or $9 million, operating earnings for this segment were up 11% and operating margins were up 50 basis points to 13.7%. For our business in Canada, we were disappointed by the fact that operating earnings were up 6% versus the 2009 first quarter, but down 12% in local currency. Operating performance was negatively affected by a 50 basis point decline in gross profit margins and operating expenses, which increased at a faster rate than sales due to increased sales commissions and our sponsorship of the Winter Olympics in Vancouver. Gross margins declined as sales to large customers who have the largest discounts grew particularly fast in the quarter.

Operating performance for our other businesses improved versus a year ago. These businesses operated at breakeven in 2010 versus a $3 million loss a year ago. Incremental earnings from the growth and consolidation of our business in Japan, combined with improved performance in Mexico and China, contributed to better results for this group.

The effective tax rate for the quarter was 45.1% due to the writedown of the deferred tax asset triggered by the new healthcare legislation. Excluding this charge, the effective rate would have been 39.3%.

Lastly, let's take a look at cash flow for the quarter. Operating cash flow was $113 million versus $43 million in 2009. This sharp increase was primarily due to the absence of a bonus payout and a lower profit sharing trust payment in the 2010 first quarter versus 2009. Cash allocated to capital expenditures was $14 million in the quarter. So free cash flow was essentially equal to net earnings for the quarter. In addition, the Company returned $34 million in cash to shareholders in the form of dividends.

As reported in our first-quarter 2010 earnings release, we raised and narrowed both sales and earnings guidance for the full year 2010. We now expect sales growth in the range of 9% to 12% and earnings per share in the range of $5.70 to $6.10. As a reminder, our full-year guidance excludes the $0.34 to $0.35 benefit from the paid time-off policy change and the $0.15 charge related to the new healthcare legislation.

Our improved outlook is being driven by better top-line performance. So let's take a look at the components of our revenue expectations. First, we saw stronger organic sales growth, or sales excluding acquisitions and foreign exchange, in the first quarter than we had been forecasting. We were expecting organic growth in the range of 2% to 5% and finished the quarter at 6% organic growth. As a result, we now expect organic growth for the year of four to six percentage points.

Second, acquisitions are contributing more to top-line growth than we had been expecting. We are forecasting about four percentage points of top-line growth to come from acquisitions. This is up slightly from the three percentage point assumption we communicated in November and January. Keep in mind that the earnings drop-through in the initial year of an acquisition is typically less than Company average.

Also, please recall that the 2010 year is a transition year as we move from being a minority owner to a majority owner of the business in Japan in September of 2009. As Ernest mentioned, for most of the last year, we reported no sales and 38% of the earnings from Japan reflecting our minority ownership. In 2010, we are reporting 100% of the sales, but only 53% of the earnings.

Finally, we still expect one to two percentage points of top-line growth to come from foreign exchange. Again, the earnings drop-through from foreign exchange is about $0.01 to $0.02 of EPS as foreign exchange also inflates cost. The earnings drop-through for FX is certainly much lower than you would expect from a 1% to 2% increase in organic sales.

In summary, we are raising and narrowing our sales and EPS guidance for 2010. We continue to expect earnings per share to grow 1.5 times our organic sales growth rate of 4% to 6%. We have added $0.20 of earnings per share to the high end of our range, primarily driven by higher organic sales growth followed by acquisition sales growth and cost leverage. We remain cautiously optimistic about the economy in the second half of 2010.

Thank you for your interest in Grainger. Please mark your calendar for the release of April sales on Wednesday, May 12. If you have any questions, do not hesitate to contact Ernest at 847-535-4356, Nancy Hobor at 0065 or me at 0881. Thank you.