固安捷 (GWW) 2010 Q3 法說會逐字稿

Hello. This is Laura Brown, Senior Vice President of Communications and Investor Relations. With me is Bill Chapman, Director of Investor Relations.

Thank you for accessing this webcast featuring an in-depth review and analysis of Grainger's third-quarter 2010 results. Be sure to reference our 2010 third-quarter earnings release issued October 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.

The story for the third quarter was strong sales and exceptional operating earnings leverage across all of our businesses. Solid organic sales performance is evidence that we are continuing to gain market share. Going forward, we expect to continue taking share although revenue growth should moderate in the 2010 fourth quarter as we will explain a bit later.

Given our performance to date and our expectations for the fourth quarter, we increased our sales and EPS guidance as reported in our third-quarter earnings release issued October 14, 2010. We now expect sales to grow 14% to 15% and are forecasting EPS of $6.40 to $6.70 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 $1.9 billion were up 19% versus the 2009 third quarter. Operating earnings increased 35% reflecting strong leverage across the business. Net earnings were up 4% and earnings per share of $2.06 increased 10% versus the 2009 third quarter.

There were two unusual items in the third quarters of 2010 and 2009. Last year, we recognized a $47 million pretax gain or $0.37 per share for our additional investment in MonotaRO, our business in Japan. This year, we had a benefit from the implementation of our new employee paid time off policy.

So the 2010 third quarter included an additional $0.07 per share. If you were to exclude the $0.07 benefit and the gain from MonotaRO recorded in 2009, net earnings for the quarter would have been up 25% and earnings per share would have been up 32% versus the 2009 third quarter.

In a few moments, we will take a closer look at sales results for the third quarter. In the meantime, let's walk down the operating section of the income statement.

Gross profit margins were up slightly, less than 10 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 150 basis points to 13.2%. However, if you exclude the $8 million benefit in the quarter related to the change in the paid time off policy, the Company's operating margin would have increased by 110 basis points to 12.8%. Similar to gross profit, operating margin expansion in our US business was partially offset by lower but improving operating margins at our international businesses.

On a purely organic basis, stripping away both acquisitions and foreign exchange and excluding the benefit from the change in the paid time off policy, the Company's sales for the quarter grew 13% and operating margin was closer to 13.3%, up 160 basis points versus 11.7% in the 2009 third quarter.

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 in the month of September; second, our operating performance by segment; third, cash generation and capital deployment; and finally, we will wrap up with an update on our 2010 guidance and other items of interest.

As mentioned earlier, total Company sales for the quarter were up 19% versus the prior year. There were 64 sales days in both the 2010 and 2009 quarters. Daily sales increased 21% in July, 20% in August, and 18% in September. Organic sales accounted for 13 percentage points of growth in the quarter.

The vast majority of the organic growth was attributable to volume, including 3 percentage points for sales of oil spill cleanup related products and 1 percentage point from the sales of seasonal products. In addition, acquisitions contributed 5 percentage points of growth while foreign exchange added another percentage point.

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, Panama, and Colombia are reported under a group titled other businesses. Sales in the United States segment, which account for about 85% of total Company revenue increased 15% in the quarter, 13% without acquisitions. By month, daily sales were up 17% in July, 15% in August, and 13% in September.

Sales comparisons for the third quarter were relatively easy but get progressively tougher in the fourth quarter. Sales by customer end market serve as a barometer of economic activity in the United States.

All segments were up versus the prior year quarter. Specifically, reseller was up in the high 30s related to the Gulf of Mexico oil spill cleanup. Heavy manufacturing was up in the low 20s. Light manufacturing was up in the low double digits. Retail was up in the high single digits. Commercial was up in the mid-single digits. Government and contractor were up in the low single digits.

Now let's turn our attention to the Canadian business. Sales in Canada represent about 11% of total Company revenues. For the quarter, sales in Canada increased 22% in US dollars and were up 15% in local currency versus last year. Acquisitions made during the last 12 months in Canada contributed 3 percentage points to the sales growth for the quarter.

On a daily basis in Canadian dollars, sales were up 13% in July, up 14% in August, and up 19% in September. Sales in Canada benefited from the continued growing momentum in the Canadian economy.

For the quarter, we saw renewed strength in heavy manufacturing and continued strength in the oil and gas, mining, and forestry sectors. This was partially offset by weakness in sales to the government and contractors.

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, Panama, and Colombia and currently represents about 4% of total Company sales. Sales for this group were up 191%, primarily the result of the incremental sales from the businesses in Japan and Colombia acquired within the last 12 months. In addition, the businesses in Mexico, India, and China generated strong sales growth in the quarter.

Earlier in the quarter, we reported sales results for July and August and shared some preliminary information regarding September sales performance.

Let's now take a closer look at final September results. Total Company sales were up 18% on a daily basis in September versus September of 2009. There were 21 selling days in September in 2010 and 2009.

Contributing to daily sales growth in September were 11 percentage points due to volume, including 3 percentage points from the oil spill, 5 percentage points from acquisitions, and 1 percentage point due to the foreign exchange. Sales of seasonal products were not a factor in September.

In the United States, September daily sales were up 13%. This growth consisted of 10 percentage points of volume including 3 percentage points related to the Gulf Coast oil spill cleanup efforts. Acquisitions added 2 percentage points and price accounted for 1 percentage point of growth.

Here is how each of our US customer end markets performed in the month. Reseller sales were up in the low 40s, driven by products related to the Gulf Coast oil spill cleanup. Heavy manufacturing was up in the high teens; light manufacturing was up in the high single digits; retail was up in the mid-single digits; contractor, commercial and government were up in the low single digits.

Daily sales in Canada for September were up 24% in US dollars and up 19% in local currency.

From a customer sector standpoint, we saw the strongest growth in sales to the heavy manufacturing, mining, oil and gas, and forestry markets while sales to government customers were slightly behind the prior year.

As expected, daily sales growth so far in the month of October is trending at about half the [19]% growth rate seen in the third quarter. Roughly half the reduction in daily sales growth rate stems from lapping prior-year acquisitions and a lower expected benefit from foreign exchange. The other half of the reduction is lower expected organic growth related to a slowing of the inventory build cycle, smaller contributions from oil spill related product sales, and tougher comparisons.

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

Thanks, Laura. Third-quarter reported operating earnings for the Company increased by 35% versus the 2009 third quarter. This increase was primarily the result of strong sales growth, a small increase in gross margin, and operating expenses, which grew at a slower rate than sales.

Excluding the $8 million or $0.07 per share benefit from the change in paid time off policy, operating earnings were up 30%. Operating margins reflecting this adjustment were 12.8% for the quarter, up 110 basis points versus the 11.7% in the 2009 quarter.

Operating expenses or SG&A for the Company increased 14% for the quarter versus the 2009 third 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 from the businesses acquired over the past 12 months. Excluding the $8 million benefit from the change in the paid time off policy, operating expenses increased 16%.

Let's now take a look at operating performance by segment. Reported operating earnings in the United States increased 29% versus the 2009 third quarter. This earnings growth was due to a combination of higher gross profit margins and operating expenses, which grew at a slower rate than sales.

Earlier we talked about the $8 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 for $7 million, operating earnings for this segment were up 25% and operating margins increased 130 basis points to a very strong 15.9%.

Gross profit margins in the United States increased 20 basis points to 42.5% versus the 2009 third quarter. This increase was primarily driven by price increases exceeding product cost increases. This improvement in gross profit margin was partially offset by negative selling price mix resulting from strong growth to larger customers. In addition, gross profit margins in the 2009 third quarter benefited from a $10 million reduction in the LIFO reserve, making for a more difficult comparison this year.

Operating expenses in the United States increased 9% -- 11% after excluding the $7 million employee benefit policy change. The increase in operating expenses was due primarily to higher payroll and benefits costs such as sales commissions and bonuses tied to higher volume and improved profitability. Non-payroll related operating expenses increased but at a lower rate due to ongoing efforts to manage costs.

Let's move on to operating performance for our business in Canada. Operating earnings increased 74% in US dollars, up 64% in local currency. Operating margins increased 220 basis points to 7.2% due to a 340 basis point improvement in gross profit margins.

The gross profit margin expansion for the quarter was primarily due to favorable foreign exchange which helped reduce procurement costs for products paid for in US dollars and favorable product mix driven by strong growth in sales of globally sourced products.

Operating performance for our other businesses improved versus a year ago. These businesses generated an operating profit of $4 million in the quarter versus a loss of $2 million in 2009.

Incremental earnings from the acquired businesses in Japan and Colombia, strong earnings performance in Mexico and Panama, and lower losses in India 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 $217 million versus $275 million in 2009. Cash flow generation was stronger in 2009 due to inventory and accounts receivable reductions that occurred during the recession and did not repeat in 2010.

In addition, we bought back nearly 2.3 million shares in the quarter. That's on a base of about 71 million shares at the beginning of the quarter. In addition, we returned $248 million in cash to shareholders through share repurchase and paid out $39 million in dividends. This reflects the 17% increase or $0.54 per share announced earlier this year.

Beyond share repurchases and dividends, we invested about $46 million in the quarter on capital expenditures. As a result, free cash flow for the quarter was $171 million.

Let's take a look at expectations for capital expenditures. With $73 million in capital spending to date, we still expect the full year to be in the range of $125 million to $150 million, as noted in July.

As reported in our third-quarter 2010 earnings release, we raised both sales and earnings guidance for the full year 2010. We now expect sales growth in the range of 14% to 15% and EPS in the range of $6.40 to $6.70.

As a reminder, our full-year guidance excludes the following unusual items. First, the approximately $0.30 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.

Let's now take a look at our expectations for the 2010 fourth quarter that are included in our revised annual guidance. First, we expect reported sales growth in the 2010 fourth quarter to be below the 19% growth rate in the third quarter for the following reasons, in order of importance.

First, we will see a lower contribution from acquisitions as we anniversary several investments made in the 2009 fourth quarter and expect the benefit from foreign exchange to diminish. Second, there is one less selling day versus the prior year. Third, comparisons are the toughest of the year as we reported 3% sales growth in the 2009 fourth quarter, whereas sales declined 13% in the first three quarters of 2009, and we are seeing the end of the inventory build cycle for our customers. And finally, the sales contribution from the oil spill-related products should lessen from the 3 percentage point range seen in the third quarter.

Gross profit margins in the 2010 fourth quarter are expected to be consistent with the 2010 third quarter. Both customer mix and international mix are expected to create some headwinds in the fourth quarter. On a year-over-year basis, comparisons will be more difficult as we benefited from a $10 million inventory pickup in the Canadian business that is not expected to repeat. If you were to exclude the pickup, gross profit margins should be up versus the 2009 fourth quarter.

Operating expense dollars are forecasted to increase slightly versus the 2010 third quarter, reflecting additional growth-related investments in the following areas; e-commerce, 150 new sales representatives and customer service managers for our inventory solutions business, and other services that complement our product offering.

In summary, we are raising our sales and EPS guidance for 2010. We continue to expect earnings per share to grow at 1.5 to 2.5 times our organic sales growth rate. We've added $0.30 to both the low end and the high end of our EPS range, primarily driven by better-than-expected organic sales growth and continued cost leverage.

Thank you for your interest in Grainger. Please mark your calendar for the release of October sales on Friday, November 12, and our annual analyst meeting at our headquarters location in Lake Forest on Wednesday, November 17.

If you have any questions, please do not hesitate to contact Laura at 847-535-0409 or me at 847-535-0881. Thank you.