W.W. Grainger, Inc. (GWW)

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W.W. Grainger (GWW)

Q2 2013 Earnings Call

July 17, 2013 8:00 am ET


Laura D. Brown - Senior Vice President of Communications & Investor Relations

William D. Chapman - Senior Director of Investor Relations


Laura D. Brown

Hi, this is Laura Brown, Senior Vice President of Communications and Investor Relations. With me is Bill Chapman, Senior Director of Investor Relations. The purpose of this podcast is to provide you with additional information regarding Grainger's 2013 Second Quarter Results. Please also reference our 2013 second quarter earnings release issued today, July 17, in addition to other information available on our Investor Relations website, to supplement this podcast.

Before we begin, please remember that certain statements and projections of future results made in the press release and in this podcast 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.

Today, we reported results for the 2013 second quarter. Company sales for the quarter increased 6% versus the 2012 second quarter. There were 64 selling days in both quarters. Operating earnings increased 11%, and net earnings increased 14%. Earnings per share were $3.03 for the quarter, an increase of 15% versus the 2012 second quarter. The 2013 second quarter included a $0.03 per share tax benefit, which we will discuss later in the podcast. Excluding this benefit, earnings per share increased 14%. We also narrowed our guidance ranges for both 2013 sales and earnings per share, which Bill will cover in detail at the end of the podcast.

Let's now walk down the operating section of the income statement in more detail. Gross profit margins increased 50 basis points to 44% versus 43.5% in 2012, primarily driven by Canada and the Other Businesses. Company operating margin increased 70 basis points to 14.7% versus 14% a year ago. Both reportable segments and the Other Businesses contributed to the increase in company operating margin, which was driven by the 6% sales increase, higher gross margins and operating expense leverage.

Operating expenses increased 5%, including $37 million in incremental growth-related spending versus the 2012 second quarter. These growth investments include additional sales coverage, eCommerce, inventory management, advertising, IT systems and expansion of the company's distribution center network.

We are continuing to aggressively invest in our growth drivers and are now estimating incremental growth-related spending of $150 million for 2013, $10 million less than we forecasted in the first quarter. The $10 million reduction in our estimate is largely driven by timing.

Given that we are at the midpoint, we thought it would be helpful to provide an update on our growth drivers. We added approximately 75 new sales representatives in the United States and expect to hire another 100 by year end. In addition, we've aggressively expanded our sales force in several of our international businesses, including Canada, Brazil and Mexico, where we've hired more than 70 new sales representatives year-to-date.

Our eCommerce sales continue to grow at twice the rate of our other channels. For the first half of 2013, eCommerce sales represented 32% of total company sales, up 200 basis points from full year 2012. We added more than 6,200 KeepStock installations in the United States in the first half of the year and are still targeting 10,000 installations for the full year. Outside of the United States and primarily in Canada, we added nearly 1,400 new KeepStock installations in the first 6 months of the year.

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 in 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 2013 guidance and other key items.

As mentioned earlier, company sales for the quarter increased 6%. Daily sales growth by month was as follows: 8% in April, 5% in May and 5% in June. As a reminder, April included a 2 percentage point benefit from the timing of the Easter holiday. The 6% increase in sales in the quarter included 4 percentage points from volume, 2 percentage points from price and 1 percentage point from acquisitions, partially offset by a 1 percentage point drag from unfavorable foreign exchange.

Let's move on to sales by segment. We report 2 business segments: the United States and Canada. Our remaining operations located primarily in Asia, Europe and Latin America are reported under a grouping titled, Other Businesses.

Sales in the United States, which accounted for 77% of total company revenue in the quarter, increased 7%. This sales growth was driven by 4 percentage points from volume, 2 percentage points from price and 1 percentage point from the Techni-Tool business acquired on December 31, 2012. Daily sales increased 9% in April, 6% in May and 6% in June. The timing of the Easter holiday contributed 1 percentage point to daily sales growth in April.

Let's review sales performance by customer end market in the United States. Light Manufacturing was up in the high-single digits. Heavy Manufacturing, Commercial, Contractor and Natural Resources were up in the mid-single digits. Government and Retail were up in the low-single digits, and Reseller was down in the low-single digits. Our continued success with manufacturing customers further reinforces our commitment to add products and services to best serve customers in this important end market. The addition of more sales representatives, more products and more KeepStock installations are all contributing to share gain.

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