Laura Brown
Management
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 First Quarter 2015 Results. Please reference our 2015 first quarter earnings release issued today, April 16th, in addition to other information available on our Investor Relations website, to supplement this podcast. Today we also announced a permanent change to our capital structure and our intent to buy back $3 billion in stock by the end of 2017. In just a moment, we will provide some additional commentary regarding this important communication. 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. Our capital structure announcement details our plan to repurchase $3 billion of our stock over the next three years. This represents approximately 19% of today’s market capitalization. Year to date, we have purchased $150 million in shares. The additional repurchases will be funded with a combination of $1.2 billion of internally generated cash and $1.8 billion of new, permanent debt over the next three years. Here are some important points to keep in mind. The cost of debt is at historic lows. The issuance of permanent debt will increase the efficiency of our balance sheet and will lower our cost of capital. We expect to issue $1 billion in long-term debt in June to help fund the program. Our new target debt ratio of 1.0 to 1.5 times EBITDA was chosen specifically to preserve our access to the Tier 1 commercial paper market. The timing, size and structure of the share repurchase and debt issuance is flexible enough to allow for continued investment in the business, while being meaningful to the equity markets. We fully intend to continue our 43-year track record of increasing our dividend. Finally, the repurchase will be EPS accretive. The incremental $1 billion in repurchases, beyond the $400 million previously announced, should add $0.08 to $0.12 earnings per share in 2015. Let’s move on to our quarterly results. Today we reported our 2015 first quarter. Our performance was characterized by continued share gain in our U.S. business and in our single channel online businesses. At the same time, the strength of the U.S. dollar represented a significant headwind to our topline growth, as did our direct and indirect exposure to the oil and gas sectors in North America. With no evidence of any change to this pattern in sight, we have adjusted our full year guidance. At the end of this recording, we’ll talk in more detail about our expectations and assumptions for the full year 2015. Let’s begin with an overview of the quarter. Company sales increased 2%. We had 63 selling days in the quarter, the same as in the previous year. Operating earnings declined 1% and net earnings were down 3%. Earnings per share of $3.07 were flat versus the previous year. Results included $0.02 per share in charges related to the previously announced shutdown of the business in Brazil and $0.01 per share in charges for restructuring Fabory in Europe. Excluding these charges, earnings per share increased 1% to $3.10. Let’s now walk down the operating section in the income statement in more detail. Reported gross profit margins decreased 0.3 percentage point versus the prior year to 44.8% driven by lower gross profit margins in the Canadian segment and the Other Businesses. Company operating earnings declined 1% versus the 2014 quarter. This decrease was primarily driven by the performance of the business in Canada reflecting continued headwinds from the economy due to exposure to oil and gas, coupled with unfavorable foreign exchange. Operating expenses for the company increased 3% and included $33 million in incremental growth and infrastructure spending. 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 in the month of March, second, operating performance by segment, third, cash generation and capital deployment and finally, we’ll wrap up with a discussion of our 2015 guidance and other key items. Before we begin our sales discussion, please note that some of our businesses have a different number of selling days due to local holidays. Despite this, we use the number of selling days in the United States as the basis for our calculation of daily sales. Company sales for the quarter increased 2%. The 2% sales growth included 1 percentage point from acquisitions, namely WFS Enterprises Incorporated acquired in September of 2014 in Canada, and a 3 percentage points reduction from foreign exchange. Excluding acquisitions and foreign exchange, organic sales increased 4% driven exclusively by volume growth. By month, total daily sales growth was as follows, 3% in January, 2% in February and 1% in March. Let’s move on to sales by segment. We report two 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. Our Other Businesses also include results from our single channel online businesses in Japan, MonotaRO, the United States, Zoro and Europe. Sales in the United States, which accounted for 78% of total company revenue in the quarter, increased 4%. The sales growth was driven by 2 percentage points from volume, 1 percentage point from sales of Ebola related safety products and 1 percentage point from higher sales to Zoro, the single channel online business in the United States. By month, daily sales increased 4% in January, 4% in February and 4% in March. Let’s review sales performance by customer end market for the quarter in the United States. Commercial was up in the high single digits driven by strong performance in the Healthcare sector, Light Manufacturing, Government and Retail were up in the mid-single digits, Heavy Manufacturing was up in the low single digits, Contractor was down in the low single digits and Natural Resources and Reseller were down in the mid-single digits. Now let’s turn our attention to the Canadian business. Sales in Canada represented 10% of total company revenues in the quarter. The business in Canada continues to face a challenging economy given the country’s exposure to oil and gas. Results reported in U.S. dollars are further affected by the stronger U.S. dollar. Sales for our business in Canada declined 8% in the quarter were up 3% in local currency. The 3% sales increase in local currency consisted of 7 percentage points from WFS and 2 percentage points from price. This growth was partially offset by a 5 percentage points decline in volume and a 1 percentage point decline from lower sales of seasonal products. The 5% volume decline for the quarter was primarily driven by lower sales to the Oil and Gas, Construction, Reseller, Commercial, Retail and Heavy Manufacturing customer end markets partially offset by growth to customers in the Utilities, Light Manufacturing, Transportation, Forestry, Mining and Government customer end markets. On a geographic basis, sales in the province of Alberta, which represents more than a third of the company’s business in Canada, was down in the mid-teens in local currency. Local currency sales for all provinces except Alberta and British Columbia were up versus the prior year. By month, daily sales in Canadian dollars increased 6% in January, 1% in February and 2% in March. Let’s conclude our discussion of sales for the quarter by looking at the Other Businesses. This group includes our operations in Asia, Europe and Latin America, and represents about 12% of total company sales. Sales for this group increased 8%, 21% in local currency consisting of volume and price. The sales increase was primarily due to sales growth in our single channel online businesses in the United States and Japan, as well as our multichannel business in Mexico. Earlier in the quarter, we reported sales results for January and February, and shared some information regarding performance in those months. Let’s now take a look at March. There were 22 selling days in March of 2015, one more than in 2014. Company daily sales increased 1% versus March of 2014. Sales results in March included 1 percentage point from acquisitions and a 3 percentage point decline from foreign exchange. Excluding acquisitions and foreign exchange, organic daily sales increased 3% driven by 4 percentage points from volume, partially offset by a 1 percentage point decline in price. We also benefited from modest cost deflation, which helped mitigate the negative price realization in the United States. Price increases in Canada offset inflation from a weaker Canadian dollar on U.S. imports. In the United States, daily sales in March increased 4%. This increase was due to a 5 percentage point increase in volume, partially offset by a 1 percentage point decline in price. March customer end market performance in the United States was as follows. Commercial was up in the high single digits, driven by strong sales to customers in the Healthcare sector, Light Manufacturing was up in the mid-single digits, Heavy Manufacturing, Retail and Government were up in the low single digits, Contractor was down in the low single digits, Reseller was down in the mid-single digits and Natural Resources was down in the low double digits. Daily sales in Canada for March were down 9%, but were up 2% in local currency. The 2% daily sales increase consisted of 6 percentage points from WFS and 3 percentage points from price, partially offset by a 6 percentage point decline in volume and a 1 percentage point decline from lower sales of seasonal products. The volume decline was driven by lower sales to the Oil and Gas, Contractor, Commercial, Government, Heavy Manufacture and Retail customer end markets, partially offset by growth in the Utilities, Light Manufacturing, Transportation, Mining and Forestry customer end markets. On a geographic basis, sales performance in Canada was driven by softness in the province of Alberta, which represents slightly more than a third of our sales in Canada and was down mid-teens in local currency in March. Daily sales in March for our Other Businesses increased 3%, 18% in local currency. The 18% daily sales growth in the Other Businesses was primarily driven by Zoro U.S. along with strong growth from the businesses in Japan and Mexico. Looking ahead to April, daily sales growth to-date is running in line with the sales growth reported for March. Now I would like to turn the discussion over to Bill Chapman.