W.W. Grainger Management Discusses Q2 2012 Results - Earnings Call Transcript

W.W. Grainger, Inc. (GWW)

Q2 2012 Earnings Call

July 18, 2012, 8:00 a.m. ET


Laura D. Brown – Senior Vice President, Communications

William D. Chapman – Senior Director, IR


[No Q&A Session for this event].


Laura Brown

Hello. This is Laura Brown, Senior Vice President of Communications and Investor Relations.

With me today is Bill Chapman, Senior Director of Investor Relations. We are pleased to share with you some information regarding Grainger’s second quarter 2012 results via this audio web cast. Please also reference our 2012 second quarter earnings release issued today, July 18th, in addition to other information available on our Investor Relations website, to supplement this web cast.

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.

Healthy sales growth, consistent execution, and impressive margin expansion was the storyline for the quarter. This performance was largely driven by continued enhancements to the foundation of our business and aggressive investment in our growth programs .

As a result, we reiterated our 2012 sales growth guidance of 12 to 14% and raised the bottom end of our earnings per-share guidance as referenced in today’s earnings release. We will now expect EPS of $10.50 to $10.80 for the full year 2012. At the end of this recording we’ll talk more about our guidance and related assumptions.

We’ll start with total company results, and then take a closer look at our segments.

Company sales increased 12% versus the 2011 second quarter. We had 64 selling days in both quarters. Operating earnings increased 18 %, while net earnings increased 12 %.

As highlighted in the earnings release, earnings per share of $2.63 for the quarter represents an all-time company record and represents a 12% increase versus 2011. The 2011 quarter included a $0.12 per-share benefit from the settlement of tax examinations; excluding this benefit, the earnings per share increased 18 % versus 2011.

In a few moments we’ll analyze our sales results for the quarter. Let’s now walk down the operating section of the income statement.

Gross profit margins increased 40 basis points to 43.5 %. Our purchasing scale enables us to manage price changes in line with the market and ahead of product cost inflation. We’ll provide more detail when we review the business by segment.

It is important to note that our gross profit margin follows a fairly consistent annual pattern with generally the highest gross margins in the first quarter of each year. This is primarily driven by supplier funding for our annual customer trade shows early in the year, which is accounted for as a credit to cost of goods sold.

So the sequential decline in our gross profit margin from 44.4% in the 2012 first quarter to 43.5% in the 2012 second quarter is normal and expected.

Our company operating margin increased 80 basis points to 14%. This improvement was driven by solid sales growth, gross margin expansion and positive expense leverage. Operating expenses grew 11%, including $24 million in incremental growth-related spending in the quarter, and the operating expenses from the businesses in Europe and Brazil, which we acquired during the last 12 months.

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 June. Second, operating performance by segment. Third, cash generation and capital deployment. And finally, we’ll wrap up with a discussion of our 2012 guidance.

As mentioned earlier, company sales increased 12% for the quarter. Daily sales growth by month was as follows; 12% in April, 13% in May, and 12% in June. The 12% sales growth for the quarter included 5 percentage points from acquisitions and a 2 percentage point decline from unfavorable foreign exchange.

As a point of reference, foreign exchange represented a 1 percentage point headwind in the 2012 first quarter.

On an organic basis, sales for the quarter increased 9% including 6 percentage points from volume and 3 percentage points from price.

Let’s move on to sales by segment. We report two segments; the United States and Canada. Our remaining operations in Asia, Europe, and Latin America are reported under a grouping titled Other Businesses.

Sales in the United States, which accounts for 77% of total company revenue, increased 7% in the quarter, consisting of 4% volume growth and 3% from price. Despite the hot weather in late June, sales of seasonal products were not a factor in the quarter or the month of June. Daily sales in the United States increased 7% in April, 8% in May and 7% in June.

Let’s review sales performance by customer and market in the United States. Our growth drivers, which include increasing our product line, expanding customer sales coverage, enhancing our eCommerce capabilities, and increasing our inventory management solutions are enabling Grainger to grow faster than the economy and gain additional market share. This is evident when you look at the variety of customer end markets we serve in the United States and performance for each. Heavy Manufacturing was up in the high-single digits; Light Manufacturing, Commercial, Retail, Reseller and Natural Resources were up in the mid-single digits; Government was up in the low-single digits; and Contractors declined in the low-single digits.

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