W.W. Grainger, Inc. (GWW)

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W.W. Grainger (GWW)

Q3 2012 Earnings Call

October 16, 2012 8:00 am ET


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

William D. Chapman - 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. We will share with you some information regarding Grainger's Third Quarter 2012 Results via this audio webcast. Please also reference our 2012 third quarter earnings release issued today, October 16, 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.

Before I discuss the quarter, I'd like to first highlight the $0.66 per share reserve for the expected settlement with the U.S. Department of Justice, which includes the following 2 parts: number one, a $70 million pretax charge for the proposed settlement in principle with the DOJ over the interpretation of contract language signed more than 10 years ago with the General Services Administration and the U.S. Postal Service; and second, a $6 million pretax reserve related to tax, freight and miscellaneous billings for these customers.

We are close to having this longstanding dispute behind us. It is important to note that the proposed settlement does not any admission of wrongdoing by the company and avoids costly and lengthy litigation. The GSA contract dates back to 1999 and the government remains one of our larger customer end markets. As a case in point, throughout the multi-year audit, the government continued to buy from Grainger and in fact, increased its purchasing during that time. In 2011 alone, our sales to the GSA and the U.S. Postal Service totaled approximately $200 million. Additional information regarding this case can be found in the earnings release issued on October 16, along with previously filed 10-Qs and 10-Ks.

Please note that the following analysis and commentary for the remainder of this podcast excludes the effect of the $0.66 charge. From a segment presentation standpoint, the entire charge is recorded in the United States segment.

We'll start with total company results and then take a closer look at our segments. Performance for the quarter was driven by sales growth and market share gains, coupled with strong gross margin expansion. Company sales increased 8% versus the 2011 third quarter. We had 63 selling days in the quarter, 1 less than the previous year, which cost us approximately $33 million to $38 million of revenue growth. Sales growth on a daily basis increased 10%. Operating earnings increased 9%, while net earnings increased 11%. Earnings per share, excluding the $0.66 charge, were $2.81 for the quarter, representing an increase of 12% versus the 2011 third quarter. It is important to note that one less selling day represented approximately $0.05 to $0.10 per share in lower earnings on an incremental basis. With fewer selling days, only expenses that are truly variable are avoided, while fixed and semi-variable costs must be absorbed by a lower sales base.

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 43.6% versus 43.2% in 2011. 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.

Company operating margin increased 20 basis points to 14.5% versus 14.3% a year ago. This improvement was driven by solid sales growth and gross margin expansion. Operating expenses grew 9%, including $19 million in incremental growth-related spending in the quarter and inclusion of operating expenses in Europe and Brazil, which we acquired since the start of the 2011 third quarter.

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 September; second, operating performance by segment; third, cash generation and capital deployment; and finally, we'll wrap up with the discussion of our revised 2012 guidance.

As mentioned earlier, company sales for the quarter increased 8% on a reported basis and 10% on a daily basis. Daily sales growth by month was as follows: 11% in July, 10% in August and 9% in September. The 10% daily sales growth for the quarter included 3 percentage points from acquisitions and a 1 percentage point decline from unfavorable foreign exchange. We reached the anniversary of the acquisition of the business in Europe on August 31. Accordingly, the quarter includes 2 months of incremental sales and operating results. On an organic basis, which excludes acquisitions and foreign exchange, daily sales for the quarter increased 8%, with 4 percentage points from volume and 4 percentage points from price. Daily organic sales growth by month was as follows: 8% in July, 7% in August and 8% in September.

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

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