固安捷 (GWW) 2010 Q4 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. The purpose of this audio webcast is to provide you with some additional color and perspective on Grainger's fourth-quarter 2010 results. Please be sure to reference our earnings release issued January 25 in addition to other information available on our Investor Relations website to supplement this webcast.

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.

Strong sales growth and exceptional operating earnings leverage was the story for the quarter. Our record performance was driven by the US business, along with solid contributions from many of the international businesses. Strong organic sales performance in the quarter further demonstrates that we have continued to gain marketshare.

For the Company, total sales of $1.8 billion increased 12%, up 14% on a daily basis versus the 2009 fourth quarter. On a reported basis, operating earnings increased 28% and net earnings increased 36%. Reported earnings per share of $1.83 increased 44% versus the 2009 fourth quarter.

Let me walk through some unusual items in both periods to describe a normalized view of our results. Number one, consistent with the first nine months of 2010, we had a benefit in the quarter from the implementation of our new company policy where paid time off is now earned in the current year versus the preceding year, as was the case under the old policy.

The $0.04 per share benefit in the fourth quarter was a bit lower than originally expected because more employees elected to carry over their remaining paid time off into 2011 than we had forecasted. The full-year benefit of this change amounted to $0.28 per share. It is important to note that this benefit will not repeat in 2011. So if you were to exclude this $0.04 item, earnings per share for the quarter would have been $1.79, up 41% versus $1.27 in 2009.

Number two, in the 2009 fourth quarter, we recorded an asset impairment charge of $9 million, or $0.07 per share. And number three, in the 2009 fourth quarter, we recorded a severance charge of $7.5 million, or $0.05 per share, for positions that were eliminated during that quarter.

Excluding these three items from their respective years, 2010 fourth quarter earnings per share would have been up 29% versus an adjusted $1.39 in the 2009 period.

I would also like to highlight one more item that contributed to earnings in the 2010 fourth quarter. As noted in the earnings release, we benefited from some tax credits and incentives from various states that temporarily lowered our effective tax rate to 36.6% versus a more normalized rate of 39.1%. This favorability contributed about $0.06 per share to earnings for the quarter.

In a few moments, 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. Our gross profit margin for the quarter was down approximately 10 basis points versus last year. Improved gross profit margins in the United States and in the other businesses were offset by a decline in the gross profit margin in Canada. We will provide more detail when we review results by segment.

Reported operating margins were up about 145 basis points to 11.6%. However, if you exclude the $4 million benefit in the quarter related to the change in the paid time off policy and exclude the unusual items from the 2009 quarter, the Company's operating margin increased by 20 basis points to 11.3%.

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 December; second, our operating performance by segment; third, cash generation and capital deployment; and finally, we will wrap up with a discussion on our 2011 guidance and other key items of interest.

As mentioned earlier, total Company sales for the quarter were up 12% versus the prior year and up 14% on a daily basis. There was one less selling day in the quarter, 63 days versus 64 in the 2009 fourth quarter. Strong volume growth was responsible for the majority of the revenue increase, contributing 9 percentage points of the 14% increase in daily sales. An additional 2 percentage points of growth was attributable to oil spill-related sales. In addition, price, acquisitions and foreign exchange each contributed 1 percentage point to Company sales growth in the quarter.

Let's move on to sales by segment. We report in two segments, the United States and Canada. Our remaining operations in Japan, Mexico, India, Colombia, China, Puerto Rico and Panama are reported under a grouping titled Other Businesses. Sales in the United States segment, which accounts for about 83% of total Company revenue, increased 9% in the quarter, 11% on a daily basis. Volume represented 7 percentage points of the 11% increase. Sales of oil spill-related products contributed 2 percentage points. Price and the sales of seasonal products each contributed 1 percentage point.

All US end markets posted growth versus the 2009 fourth quarter. Here is what we saw in the quarter. Reseller, driven by oil spill-related sales, was up in the high 40s. Heavy manufacturing was up in the high teens. Light manufacturing was up in the low double digits. Retail was up in the high single digits and government, commercial and contractor were up in the low single digits.

It is important to note that our government business has been flat to growing modestly since March of 2010. More recently, this end market was down low single digits in October and up low single digits in November and December of 2010. While we are not anticipating growth in overall government spending in 2011, we continue to see opportunities to gain marketshare at many levels of government.

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 20% in US dollars and were up 15% in local currency. On a daily basis, sales were up 22% and 17% in Canadian dollars. Sales in Canada benefited from share gain and the continued momentum in the Canadian economy. Volume accounted for 12 percentage points of the growth and acquisitions contributed 5 percentage points. For the quarter, we saw strength in the heavy manufacturing, forestry, mining and oil and gas sectors, partially offset by weakness in sales to the government.

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, Colombia, China, Puerto Rico and Panama and currently represents about 5% of total Company sales. Sales for this group were up 48%, primarily the result of the incremental sales from the Colombian business, combined with double-digit sales growth from all of the other international businesses.

Earlier in the quarter, we reported sales results for October and November and shared some information regarding December sales performance during the month. Let's now take a closer look at final December results. Total Company sales were up 16% on a daily basis in December versus December of 2009. There were 21 selling days in December 2010 and 22 selling days in December 2009. Contributing to higher daily sales growth in December were 10 percentage points due to volume and 3 percentage points related to the oil spill. We also believe that we benefited from the favorable placement of the Christmas and New Year's holidays, which fell on Saturdays, thus minimizing the potential business disruption during that week.

In addition, acquisitions, foreign exchange and seasonal products each contributed 1 percentage point to sales growth for the month. In the United States, December daily sales were up 14%. This growth consisted of 9 percentage points of volume, along with 3 percentage points related to the oil spill. Price and seasonal products each contributed another 1 percentage point to the sales growth for the month.

Here is how each of our US customer end markets performed in December. Reseller sales were up in the mid-60s, driven by products related to the oil spill. Heavy manufacturing was up in the low 20s. Light manufacturing and retail were up in the low double digits. Commercial was up in the high single digits. Government was up in the low single digits and contractor was down in the mid single digits.

Daily sales in Canada for December were up 17% in US dollars and up 12% in local currency. Volume accounted for about 8 percentage points of the growth, and acquisitions contributed another 4 percentage points. From a customer sector standpoint, we saw the strongest growth in sales to the heavy manufacturing, agriculture and mining and forestry markets, while sales to government customers declined.

With four selling days left in the month, January sales growth is trending at a more moderate rate than December. As of today, we are expecting daily sales growth in January to be around the midpoint of the 5% to 9% range that we forecasted for the full year.

Here are a few factors to consider as we compare sales trends in January versus December. With four selling days left in the month, January sales growth is trending at a more moderate rate than December. As of today, we are expecting daily sales growth in January to be within the range we forecasted for the full year, which is between 5% and 9%. Here are a few factors to consider as we compare sales trends in January versus December.

First, we are up against more difficult comparisons in January than we had in December. Second, in December, we benefited from a 3 percentage point lift from oil spill-related sales. We do not expect any sales related to the oil spill in January or in any other month in 2011. As a result, the oil spill will represent about a 1 percentage point sales headwind for the year.

Third, strong sales of seasonal products contributed 1 percentage point to top-line growth in December. We do not expect this to repeat in January. In fact, the snowstorms that disrupted travel and transportation in the South and East Coast earlier in January are expected to be a drag on sales growth for the month. For example, our distribution center in Greenville, South Carolina was closed for nearly two days at the height of the snow and ice storms.

Finally, December included a half a month of sales for Highsmith, which we sold in mid December. It is important to note that despite the differential in growth rates between December and January that I just covered, the actual sales dollars per day in January is forecasted to be in line with December, excluding oil spill-related sales. Now I would like to turn the discussion over to Bill Chapman.

Thanks, Laura. Fourth-quarter reported operating earnings for the Company increased by 28% versus the 2009 fourth quarter. This increase was the result of positive expense leverage from the 12% sales growth in the quarter. The story behind the Company's operating performance can best be told by reviewing segment performance, so let's begin with the United States.

Reported operated earnings in the United States increased 24% versus the 2009 fourth quarter. Operating performance in the United States was driven by better gross margins and positive expense leverage. The improvement in gross profit margins was primarily due to positive inflation recovery, partially offset by negative mix attributable to proportionately higher sales to large customers.

Operating expenses in the United States increased 3%, 4% after excluding the paid time off 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.

Excluding the benefit from the paid time off policy change in 2010 and the severance and impairment charges in 2009, quarterly operating expenses in the United States increased 7%. If you exclude unusual items in both years attributable to the United States, operating earnings for this segment were up 16% and operating margins increased 90 basis points to 14.7%.

Let's spend some time looking at what is behind the operating performance for our business in Canada. Operating earnings decreased 32% in US dollars and 35% in local currency. This decline was the result of lower gross profit margins and negative expense leverage.

In the fourth quarter of 2009, we recognized a large inventory pick-up making for strong gross profit margins in the 2009 quarter, but a very difficult comparison in the 2010 quarter. As a result, our gross profit margin in Canada decreased 300 basis points versus the 2009 fourth quarter.

Early in 2010 in Canada, we implemented a new process for booking inventory adjustments to reflect changes on a more timely manner and to avoid large inventory changes at year-end. In addition to the year-over-year decline in gross margin, operating expenses in Canada increased at a faster rate than the 20% sales growth. The 27% increase in operating expenses, 22% in local currency, was primarily driven by the following -- higher commissions and bonuses tied to higher sales, higher volume-related headcount, incremental costs for the stabilization and ongoing operation of the new distribution center in Vancouver that opened in the second quarter and the additional operating expenses related to the acquisitions made in Canada during the last 12 months.

While we experienced strong sales growth in Canada, we were disappointed with the operating performance of the business in 2010. The local management team is aggressively working to attain a better balance between revenue growth and profitability. Actions include better price discipline to protect gross profit margins, continued expansion of small customer and private-label sales initiatives, both of which carry higher gross profit margins, and revised commission and bonus plans that place more weighting on profitable growth. As a result of these and many more actions, we are expecting marked improvement in 2011.

Operating performance for our other businesses improved significantly versus a year ago. These international businesses generated an operating profit of $5 million in the quarter versus a loss of $3 million a year ago. While all of these businesses contributed to the improvement, we saw particularly strong results from our operations in Mexico, Japan, Puerto Rico and China.

Lastly, let's take a look at cash flow for the quarter. Operating cash flow was $104 million versus $223 million in 2009. This decrease was primarily due to an increase in inventory and accounts receivable tied to the strong sales growth. Despite the year-over-year inventory growth, inventory turns actually increased slightly. Days sales outstanding, or DSO, was up about two days in the 2010 fourth quarter versus the prior year, due primarily to the timing of the oil spill-related sales in the quarter and the effect of the holidays on the Company's cash processing schedule. We use the cash generated to invest in the business and pay $38 million in dividends, which reflects the 17% increase in the quarterly dividend and rate announced last April, or $0.54 per share. Beyond dividends, we spent $56 million in the quarter on capital expenditures.

Now let's take a look at the full year. Operating cash flow was $596 million in 2010 versus $732 million in 2009. Again, the investments in working capital to support the 15% sales growth during the year accounted for the majority of the year-over-year difference in cash flow. Capital expenditures for the year were $128 million and $142 million in 2009. The Company bought back 4.6 million shares during 2010 for $505 million and has approximately 8.1 million shares remaining on the current authorization.

In addition, we paid shareholders a total of $152 million in dividends. So for the full year, we returned a total of $657 million to shareholders in the form of dividends and share repurchases. At our analyst meeting in November, we issued sales and earnings guidance for 2011 and we reiterated that guidance today.

We continue to expect sales in 2011 to grow in the range of 5% to 9% and 2011 EPS in the range of $7.15 to $7.90. At the midpoint of our sales guidance, operating margins should increase about 50 basis points for the year and earnings per share should grow at about two times the rate of sales growth.

Here are a few additional considerations as you refine your models. First, sales comparisons for the year will get tougher in the first quarter and will be difficult for the remainder of the year. Second, we will have one additional selling day in the first quarter and for the year. The other quarters will have the same number of selling days as they did in 2010. Third, the $0.28 per share benefit in 2010 related to the change in our paid time off policy will not repeat in 2011. This benefit rounds to $0.28 and was spread as follows -- $0.08 in the first quarter, $0.08 in the second, $0.07 in the third and $0.04 in the fourth quarter.

Fourth, the 2010 first quarter also included a $0.15 charge for the write-down of a deferred income tax asset following the passage of the healthcare legislation. And finally, we expect the effective tax rate for 2011 to increase slightly from 2010 to a new rate of 39.2%. This increase reflects a number of changes, including the higher income tax rate recently adopted in the state of Illinois. We are expecting that the higher Illinois state tax rate reflected in the 39.2% rate will represent about a $0.01 to $0.02 drag on EPS in 2011.

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