W.W. Grainger's Management Discusses Q3 2011 Results - Earnings Call Transcript

W.W. Grainger, Inc. ( GWW)

Q3 2011 Earnings Call

October 18, 2011 8:00 am ET

Executives

Laura D. Brown – Senior Vice President, Communications

William D. Chapman – Investor Relations

Presentation

Laura D. Brown

Hello, this is Laura Brown, Senior Vice President of Communications and Investor Relations. With me is Bill Chapman, Director of Investor Relations. We are pleased to share with you an update regarding Grainger’s Third Quarter 2011 Results via this audio webcast.

Please also reference our 2011 third quarter earnings release issued October 18th, 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.

We are excited to report that Grainger delivered another record quarter. Strong sales growth and gross margin expansion was the story for the quarter. Thanks to the success of our growth drivers, we continued to gain market share during the quarter just as we did throughout the downturn.

Our growth drivers include expanding our product line, increasing our sales force, enhancing our eCommerce capabilities, growing our inventory management services and investing in our international operations. One of the highlights of the quarter was the acquisition of the Fabory Group. Fabory is a leading European distributor of fasteners and related MRO products. The closing of the acquisition took place on August 31st.

We are also very pleased to announce that we have raised our guidance for the year. As noted in the release, we are now expecting sales for 2011 to grow 11% to 12%, with earnings per share of $8.80 to $9.00, excluding unusual items. Please note that our guidance reflects higher growth-related spending for the remainder of the year, which we will discuss later in this podcast.

Let’s start with total company results, then dig deeper into our segments. Company sales increased 11% versus the 2010 third quarter. We had the same number of selling days this quarter as 2010, so reported sales growth and daily sales growth were the same.

Operating earnings and net earnings increased 21%. As highlighted in our release, earnings per share of $2.51 is an all-time record and represents a 22% increase versus 2010. As a reminder, the 2010 third quarter included a $0.07 per share benefit from the change in the Company’s paid time off, or PTO policy. Excluding the PTO benefit in 2010, third quarter earnings per share increased 26%.

In a few moments, we’ll take an in-depth look at sales results for the quarter. Let’s now walk down the operating section of the income statement. Gross profit margins increased to 43.2%, up 160 basis points versus last year, with higher gross margins in the United States, Canada and in our Other Businesses.

Again this quarter, we were able to manage product cost inflation below price increases. We’ll provide more detail when we review the business by segment. Reported company operating earnings for the quarter increased 21%. Company operating margins were 14.3%, up 110 basis points versus the prior year. If you exclude the $8 million benefit in 2010 from the PTO change, operating earnings were up 25% and operating margins increased 150 basis points. This strong performance was primarily driven by the 11% sales growth and the 160 basis point improvement in gross profit margins.

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

As mentioned earlier, sales for the Company increased 11% for the quarter. Of the 11% sales growth for the quarter, volume contributed 8 percentage points, price added 3 percentage points, acquisitions contributed 2 percentage points, and foreign exchange added 1 percentage point.

Sales related to last year’s oil spill in the Gulf of Mexico represented a headwind of 3 percentage points. Daily sales growth by month was as follows, 10% in July, 10% in August, and 14% in September. Excluding Fabory, daily sales in September increased 10%. It is important to note that despite the uncertainty in the economy, we saw consistent, 10% sales growth throughout the quarter.

Let’s move on to sales by segment. We report two segments, the United States and Canada. Our remaining operations, Fabory in Europe, Japan, Mexico, Colombia, India, China, Puerto Rico and Panama are reported under a grouping titled Other Businesses. Sales in the United States, which accounted for 81% of total company revenue in the quarter, increased 7%. By month, daily sales in the United States increased 5% in July, 8% in August and 7% in September.

The 7% sales growth for the quarter consisted of 7% volume growth and 3 percentage points from price, partially offset by a 3 percentage point drag from the oil spill-related sales in 2010. In August, we put through a modest price increase in the U.S. business tied to commodity inflation.

Now we’ll cover our sales performance by customer end-market in the United States. Domestic growth initiatives, including product line expansion, sales force expansion, eCommerce and inventory management services are driving the company to grow faster than the economy and gain additional market share.

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