固安捷 (GWW) 2010 Q2 法說會逐字稿

Hello, this is Laura Brown, Senior Vice President of Communications and Investor Relations. I am pleased to be back working with the investor community in my new capacity. After 11 years with Grainger, Nancy Hobor is retiring. With me is Bill Chapman, Director of Investor Relations. He and I look forward to continuing to work with all of you.

We will now share an update on Grainger's second-quarter 2010 results via this audio webcast. Please also reference our 2010 second-quarter earnings release issued July 15, 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.

The story for the second quarter was strong sales and exceptional operating earnings leverage for our business in the United States, along with solid contributions from Canada and continued improved operating performance for our emerging international businesses.

Our strong organic sales performance is evidence that we continue to gain share. These results combined with an 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 12% to 14%, and are forecasting EPS of $6.10 to $6.40 for the full-year 2010, excluding unusual items. We will provide more details to our revised guidance at the end of this recording.

For the Company, total sales of $1.8 billion were up 16% versus the 2009 second quarter. Operating earnings increased 40% and net earnings also increased 40%. Earnings per share of $1.73 increased 43% versus the 2009 second quarter.

Consistent with the first quarter of 2010, we had an approximately $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 remaining quarter of 2010, representing approximately $0.34 per share for the year. Keep in mind this benefit will not repeat in 2011. So if you were to exclude this item, earnings per share would have been $1.65, up 36% versus $1.21 in 2009.

As an additional reminder, the second quarter of 2009 included a reduction to sales, gross profit and operating margin in the amount of $15 million, due to a free freight promotion.

During this 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. It is available on our Investor Relations website.

In a few moments, we will take a closer look at sales results for the second quarter. In the meantime, let's walk down the operating section of the income statement. Gross profit margins were up approximately 110 basis points versus last year. A larger improvement in the US business was partially 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 200 basis points to 12%. 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 increased by 150 basis points to 11.5%. Similar to the scenario with gross profit, operating margin expansion in our US business was partially offset by our international businesses.

On a purely organic basis, stripping away acquisitions and foreign exchange and excluding the benefit from the change in paid time off policy, the Company's sales grew 9% and operating margin was closer to 11.9% compared to 10.1% in 2009. Excluding the effect from discontinuing last year's free freight promotion, the increase was approximately a 90 basis point improvement.

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 June; 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 16% versus the prior year. There were 64 sales days in both the 2010 and 2009 quarters. Daily sales increased 16% in April and May, and 18% in June. Organic growth was responsible for more than half of the 16% increase for the quarter. The vast majority of the organic growth was attributable to volume, as price was essentially flat. In addition, acquisitions contributed 5 percentage points of growth and foreign exchange added another 2 percentage points.

Let's move on to sales by segment. We report two segments, the United States and Canada. Our remaining operations in Japan, Mexico, India, Puerto Rico, China and Panama are reported under a grouping titled 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 this subsidiary.

However, the business in Japan only adds a small incremental earnings since we had already been reporting our 30% minority share of their net earnings prior to obtaining a controlling interest in September of 2009.

Sales in the United States segment, which accounts for about 84% of total company revenue, increased 11% in the quarter, 9% without acquisitions. By month, daily sales were up 8% in April, 10% in May, and up 14% in June. Sales comparisons for the third quarter remain relatively easy, but get tougher in the fourth quarter.

Sales by customer end market serve as a barometer of economic activity in the United States. Here is what we saw in the quarter. Heavy manufacturing and reseller related to the Gulf of Mexico oil spill cleanup were up in the low 20s. Light manufacturing was up in the low double digits. Commercial and retail sales were up in the mid single digits, and government and contractor were down in the low single digits.

The integration of our direct marketing business, Lab Safety Supply, with Grainger Industrial Supply also contributed to sales growth in the quarter within the United States. The integration is now substantially complete after 18 months and has resulted in $88 million in incremental sales versus our targeted increase of $70 million to $100 million.

In addition, this combination yielded $40 million in cost savings versus our goal of $20 million to $30 million over the same time period. We are very pleased with the results of the integration and will no longer be reporting these results separately from the US business.

Now let's turn our attention to the Canadian business. Sales in Canada represent about 12% of total company revenues. For the quarter, sales in Canada increased 29% in US dollars and were up 14% in local currency versus last year. On a daily basis in Canadian dollars, sales were up 17% in April, up 12% in May, and up 14% in June. In May and June of 2009, Canada realized incremental sales related to H1N1 products which affects the year-over-year comparisons, given the sales did not repeat this year.

Sales in Canada benefited from the continued growing momentum in the Canadian economy. For the quarter, we saw strength in the oil and gas, agriculture and mining, forestry sectors and heavy manufacturing, partially offset by weakness in sales to the government and utilities.

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 4% of total company sales. Sales for this group were up 226%, 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 April and May, and shared some information regarding June sales performance during the month.

Let's now take a closer look at final June results. Total company sales were up 18% on a daily basis in June, versus June of 2009. There were 22 selling days in June in 2010 and 2009. Contributing to higher daily sales growth in June were 11 percentage points due to volume, 4 percentage points from acquisitions, 1 percentage point due to foreign exchange, 1 percentage point related to sales of seasonal products, and 1 percentage point related to the Gulf oil spill cleanup efforts.

In the United States, June sales were up 14%. This growth consisted of 10 percentage points of volume, along with 2 percentage points from acquisitions, 1 percentage point from the sales of seasonal products, and 1 percentage point related to the Gulf Coast oil spill cleanup efforts.

Here is how each of our US customer end markets performed in the month. Reseller sales were up in the mid 30s, driven by products related to the Gulf Coast oil spill cleanup. Heavy manufacturing was up in the low 20s. Light manufacturing was up in the low double digits. Commercial and retail were up in the high single digits. Government sales were flat, and contractor was down in the low single digits.

Daily sales in Canada for June were up 23% in US dollars and up 14% in local currency. From a customer sector standpoint, we saw the strongest growth in sales to the forestry, agriculture and mining, oil and gas, and heavy manufacturing markets, while sales to government and utilities customers declined. So far in July, sales growth in the month of July is consistent with June, with continued benefit from the Gulf Coast oil spill cleanup efforts and the hot weather occurring in much of the United States.

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

Thanks, Laura, and welcome back. Second-quarter reported operating earnings for the Company increased by 40% versus the 2009 second quarter. This increase was primarily the result of strong sales growth, gross margin expansion, and operating expenses which grew at a slower rate than sales.

Gross profit margins increased 110 basis points to 41.9% versus 40.8% in the 2009 second quarter. Roughly half of the increase in gross profit margin was due to a three-month free freight promotion in the 2009 second quarter that did not repeat.

Operating expenses for the Company increased 13% for the quarter versus the 2009 second quarter. The increase in operating expenses was primarily due to higher payroll and benefits costs tied to better volume and improved profitability, combined with incremental operating expenses for the businesses acquired over the past 12 months.

Excluding the $10 million benefit from the change in the paid time off policy, operating expenses increased 15%. So company operating earnings adjusted for the $10 million paid time off benefit were up 33%. Operating earnings adjusted for the $10 million paid time off policy and the prior-year free freight promotion of $15 million were up 21%.

Let's now take a look at operating performance by segment. The reported operating earnings in the United States increased 31% versus the 2009 second quarter. The operating margin in the US business increased 240 basis points to a record 15.4%.

Earlier, we talked about the $10 million benefit for the change in the paid time off policy. If you exclude the portion of the employee benefit policy change attributable to the United States, or $9 million, operating earnings for this segment were up 26%, and operating margins increased 180 basis points to 14.8%.

About one-third of the gross margin expansion was due to the three-month free freight program we ran last year that reduced margins. The remainder of the improvement in gross profit margins was due to positive inflation recovery, partially offset by negative mix attributable to better sales growth to larger customers.

Operating expenses in the United States increased 8%, 11% after excluding the $9 million employee benefit policy change. The increase in operating expenses was due exclusively to higher payroll and benefits costs, such as sales commissions and bonuses tied to higher volume and improved profitability. Other operating expenses declined slightly year-over-year due to cost reduction efforts over the past 12 months and lower bad debt expense.

Let's move on to operating performance for our business in Canada. Operating earnings increased 30% in US dollars, up 16% in local currency. Operating margins were relatively flat as the increase in operating expenses offset a 200 basis point improvement in gross profit margins. The improvement in gross profit margins for the quarter was primarily due to favorable foreign exchange rates and an increase in sales to small- and medium-size customers which have higher margins.

Operating performance for our other businesses improved versus a year ago. These businesses generated an operating profit of $2 million in the quarter versus a loss of $3 million a year ago. Incremental earnings from the growth in consolidation of our business in Japan, combined with improved performance in Mexico and China, contributed to better results for this group.

Lastly, let's take a look at cash flow for the quarter. Operating cash flow was $173 million versus $190 million in 2009. This slight decrease was due primarily to an increase in accounts receivable tied to the strong sales growth. In addition, we bought back nearly 2.4 million shares in the quarter. That is on a base of about 73 million shares at the beginning of the quarter.

In addition to returning $257 million in cash to shareholders through share repurchase, we paid out $41 million in dividends. This reflects the 17% increase or $0.54 per share announced in April.

Beyond share repurchases and dividends, we spent about $14 million in the quarter on capital expenditures. As a result, free cash flow for the quarter was $159 million.

Now that we have six months of activity behind us, let's take a fresh look at expectations for capital expenditures for the year. In November of 2009, we provided an initial estimate of $150 million to $175 million for the full-year 2010. With year-to-date capital expenditures of $28 million, we are running well behind that pace.

Weather-related construction delays for our 800,000 square-foot distribution center in Northern California have been the primary source of the lower than expected spending. We now expect capital expenditures for the year to be in the range of $125 million to $150 million. As reported in our second-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 12% to 14% and earnings per share in the range of $6.10 to $6.40.

As a reminder, our full-year guidance excludes the following unusual items. First, the approximately $0.34 per share benefit from the paid time off policy change; and second, the $0.15 charge related to the new healthcare legislation recognized in the first quarter.

Our improved outlook is being driven by better top-line performance, so let's take a look at the components of our expectations. First, we are seeing stronger organic sales growth, or sales excluding acquisitions and foreign exchange, than we had been forecasting. We were expecting organic growth in the range of 4% to 6%, and finished the quarter at 9% organic growth. As a result, we now expect organic growth for the year of 7 to 9 percentage points.

Incremental sales from the oil spill cleanup are embedded in this forecast. Acquisitions should add another 4 percentage points to the top line, while foreign exchange should contribute about 1 percentage point for the year, as these impacts moderate in the back-half of the year.

Second, top-line comparisons in the back-half of the year will be more difficult as we anniversary the Indian, Japanese and Imperial acquisitions in June, September and October respectively.

Third, sales comparisons in the fourth quarter will be the toughest of the year. The fourth quarter of 2009 was the only quarter to show positive sales growth last year. In addition, we lose one selling day in the fourth quarter. The fourth quarter of 2010 will have 63 selling days versus 64 in 2009.

Fourth, excluding unusual items, our new EPS guidance anticipates 50 to 100 basis points of operating margin expansion on organic sales growth for the year. We expect the operating margin expansion to come from both gross margin improvement and better cost leverage. We expect the operating margin for the second half of the year to be improved from the first half, given higher estimated volume and continued strong operating leverage.

In summary, we are raising and narrowing our sales and EPS guidance for 2010. We continue to expect earnings per share to grow 2 times our organic sales growth of 7% to 9%. So we have added $0.40 to the low end and $0.30 to the high end of our EPS range, primarily driven by higher organic sales growth and continued cost leverage.

Thank you for your interest in Grainger. Please mark your calendar for the release of July sales on Thursday, August 12. If you have any questions, please do not hesitate to contact Laura at 847-535-0409, or me at 847-535-0881. Thank you.