W.W. Grainger, Inc. (GWW)

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W.W. Grainger (GWW)

Q4 2013 Earnings Call

January 24, 2014 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

Hello. 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 fourth quarter 2013 results. Please also reference our 2013 fourth quarter earnings release issued today, January 24, 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 year 2013 and updated our earnings per share and sales guidance for 2014. For the full year 2013, company sales increased 5% to $9.4 billion. Net earnings increased 16% to $797 million and earnings per share increased 17% to $11.13. Operating cash flow increased 21% to $986 million. Despite a challenging economic environment, this was a solid year for Grainger as we continued to invest in infrastructure and growth designed to accelerate our share gains within the MRO market and increase our size and scale.

We also updated our guidance. We now expect 2014 earnings per share of $12.10 to $12.85 and sales of 5% to 9% growth. This change is largely due to a weaker Canadian dollar in recent months and the divestiture of a number of the direct-marketing Specialty Brands that were sold on December 31, 2013. Our 2014 guidance issued on November 13, 2013, called for earnings per share of $12.25 to $13 and sales of 6% to 10% growth.

To better understand our performance, the majority of the analysis and commentary for the remainder of the podcast excludes the effects of the charges in 2013 and 2012. Details regarding the charges can be found in the 2013 fourth quarter earnings press release and Exhibit 1 of this podcast posted on the Investor Relations section of our website.

Excluding the charges from the years 2013 and 2012, company operating earnings increased 8%, while net earnings increased 9%. Earnings per share were $11.52 for the year, representing a 10% increase versus $10.43 in 2012. Unfavorable foreign exchange was a significant headwind throughout the year, reflecting a $0.08 per share reduction to earnings per share.

Now let's turn to the 2013 fourth quarter. Results were within the expectations issued at our Analyst Day in November. Guidance for the 2013 fourth quarter included 6% to 8% sales growth and earnings per share of $2.53 to $2.73. Company sales in the fourth quarter increased 7%. Excluding the charges from 2013 and 2012, operating earnings increased 3%, while net earnings increased 6%. Adjusted earnings per share were $2.59 for the quarter, representing an increase of 7% versus the 2012 fourth quarter. Unfavorable foreign exchange was a headwind, while the acquired businesses with lower gross margins and acquisition-related costs negatively affected operating margins. E&R Industrial, E&R, was slightly accretive to earnings in the quarter, performing ahead of our original expectations.

Let's now walk down the operating section of the income statement. Gross profit margins were 42.3% versus 43.6% in the 2012 fourth quarter. The 130 basis points decrease was driven by lower gross margins from the acquired businesses, which accounted for approximately 2/3 of the decrease. The remainder of the decline related to faster growth with lower-margin customers. In our Third Quarter Podcast, we forecasted that gross profit margins would decline as much as 40 basis points. The actual decline was larger than expected due to E&R's strong sales performance and the addition of the Safety Solutions acquisition in December. In addition, higher-than-expected freight costs, lower-than-expected supplier rebates contributed to the decline.

On an adjusted basis, company operating earnings for the quarter increased 3%. The earnings growth was driven by the 7% sales increase and operating expenses growing at a slower rate than sales. Operating expenses grew 4%, including $31 million in incremental growth-related spending. Incremental growth spending for the full year 2013 was $132 million versus 2012. Operating expenses benefited from $22 million in gains from the sale of fixed assets and the divestiture of the direct-marketing Specialty Brands in the fourth quarter. The majority of the gains were offset by severance and other related costs. A schedule summarizing incremental growth spending for 2010 through 2013 can be found in Exhibit 4 of this podcast posted on the Investor Relations section of our website.

Company operating margin decreased 40 basis points to 12.3% versus 12.7% a year ago. In our Third Quarter Podcast, we shared that operating margins in the fourth quarter could decline as much as 20 basis points. The actual decline exceeded our estimate, primarily due to strong performance from E&R, the Safety Solutions acquisition and unfavorable foreign exchange, which was more of a factor than we anticipated. Excluding the acquisitions, the company operating margin for the fourth quarter would have been flat versus 2012.

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, the month of December and January sales so far; second, operating performance by segment; third, cash generation and capital deployment; and finally, we'll wrap up with a discussion of our 2014 guidance and other key items.

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