W.W. Grainger, Inc. (GWW)

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W.W. Grainger, Inc. (GWW)

Q4 2011 Earnings Call

January 25, 2012 08:00 AM ET


Laura D. Brown – Senior Vice President, Communications

William D. Chapman – Investor Relations



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. The purpose of this audio webcast is to provide you with some additional color and perspective on Grainger’s Fourth Quarter 2011 Results.

Please be sure to reference our earnings release issued January 25th 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 across all businesses and acceleration in spending on our growth programs was the story for the quarter. Continued strong organic sales performance in the quarter with 9% volume growth is evidence that we continue to gain market share.

For the 2011 fourth quarter, the company reported record sales of $2.1 billion, an increase of 14% versus $1.8 billion in the 2010 quarter. Net earnings of $148 million increased 12% and earnings per share of $2.04 increased 11% versus a $1.83 in 2010.

In the earnings release and at the end of this podcast script, we provided a walk down of items to help explain results for the quarter and highlight what items were not reflected in our guidance. The 2011 fourth quarter included a $0.16 per share charge from the closure of 27 branches in the U.S. business and a $0.07 per share gain from the sale of our 49% ownership in a joint venture MRO Korea.

These two items combined represented a $0.09 net reduction to earnings per share, resulting in adjusted EPS of $2.13. The 2010 fourth quarter included a $0.04 per share benefit from the change to the company’s paid time off policy. Excluding these items in both years, earnings per share increased 19% in the fourth quarter of 2011 versus the 2010 quarter.

In a few moments we’ll take a closer look at sales results for the quarter. In the meantime, let’s walk down the income statement. Our gross profit margin for the quarter increased 180 basis points versus last year. The increase in the company’s gross profit margin was driven by a number of factors that are explained at the segment level. In addition, the inclusion of the Fabory business for the quarter contributed to gross margin expansion, but was a drag on the company’s operating margin.

Company operating earnings of $221 million for the 2011 fourth quarter increased 5%. If you exclude the $18 million pre-tax expense from the branch closures in the 2011 quarter and the $4 million pre-tax benefit from the change in paid time off policy in the 2010 quarter, operating earnings were up 16% for the quarter. Adjusting for these items, company operating margin for the quarter increased by 20 basis points to 11.6% versus the prior-year, the strong margin expansion in the first three quarters of 2011 was tempered in the final quarter by $31 million in incremental growth-related spending. This included new sales representatives, eCommerce, advertising and expenses for our new 800,000 square foot distribution center in northern California. In addition, the Fabory business posted an operating loss for the quarter.

Net earnings and earnings per share for the 2011 fourth quarter also included a benefit from a lower tax rate than in the 2010 fourth quarter. The effective tax rate was 32.9% and 36.6% in the 2011 and 2010 fourth quarters, respectively. The lower tax rate resulted primarily from a lower state tax expense, tax law changes in Japan enacted in late November of 2011, and higher earnings in foreign jurisdictions with lower tax rates. The $31 million in incremental growth-related expenses contributed to this lower tax rate, as the spending was concentrated in the United States, which has Grainger’s largest and most profitable business, with one of the highest tax rates in the company.

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 December, second, our operating performance by segment. Third, cash generation and capital deployment and finally we’ll wrap up with a discussion on our 2012 guidance and other key items of interest.

As mentioned earlier, total company sales for the quarter increased 14% versus the prior-year. There were 63 selling days in the quarter, the same as the 2010 fourth quarter. Strong volume growth was responsible for the majority of the revenue increase contributing 9 percentage points, followed by 5 percentage points from acquisitions, 2 percentage points from price, partially offset by a 2 percentage point drag from product sales related to the 2010 oil spill in the Gulf of Mexico.

Let’s move on to sales by segment. We report two segments, the United States and Canada. Our remaining operations in Europe, Japan, Mexico, India, Colombia, China, Puerto Rico, Panama and our newest location in the Dominican Republic, are reported under a grouping titled Other Businesses.

Read the rest of this transcript for free on seekingalpha.com