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#Hello, this is <UNK> <UNK>, Senior Vice President of Communications and Investor Relations.
With me is <UNK> <UNK>, Senior Director of Investor Relations.
The purpose of this podcast is to provide you with additional information regarding Grainger's 2015 second-quarter results.
Please also reference our 2015 second-quarter earnings release issued on 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 2015 second quarter and updated our sales and earnings per share guidance for the full year.
We delivered a solid quarter from an EPS standpoint and while our gross profit margin was less than we expected we were able to generate positive cost leverage as an offset.
I'd like to share with you what we are seeing in the market.
We remain in a soft demand environment.
Deflationary commodity prices, the strength of the US dollar and the economy in Canada continue to be headwinds.
Despite all of this, we continue to gain share with customers who value a broad product offering, inventory management services, technical services and fast reliable delivery.
In addition, we are growing rapidly with small customers through Zoro and MonotaRO.
And we remain focused on productivity to fund our growth and infrastructure investments and reduce the effect of lower gross profit margins.
Last month we announced that DG Macpherson will assume the newly created role of Chief Operating Officer effective August.
We expect this move will ensure tighter coordination between operating functions, business units and business models.
Also last month we issued $1 billion in new 30-year debt.
We using the proceeds as part of our $3 billion share buyback program announced on April 16.
Before we begin the review of results, I would like to remind you that there were adjustments to reported results in the second quarters of both 2015 and 2014.
In 2015, we took $0.02 per share in charges related to restructuring at Fabory and the shutdown of the Brazil business.
In 2014, we recorded a $0.15 per share charge related to the transition of Fabory's employee retirement plan in Europe.
During the 2015 second quarter, Grainger invested in a limited liability company established to produce clean energy.
In addition to supporting the operations of this entity, we received a pro rata share of energy tax credits.
Tax credits earned net of operating losses from this investment lowered the Company's effective tax rate in the 2015 second quarter and contributed approximately $0.09 per share to earnings.
For the full year, energy credits are expected to result in a 1.4 percentage point reduction in the Company's effective tax rate.
With that as a backdrop let's look at our results for the 2015 second quarter.
Company sales for the quarter increased 1% versus the 2014 second quarter.
Excluding foreign exchange and acquisitions, organic sales increased 3%.
There were 64 selling days in both quarters.
Report operating earnings increased 5% or 1% adjusted.
Reported net earnings increased 7% and adjusted net earnings were up 3%.
Reported earnings per share were $3.25 for the quarter, an increase of 11% versus the 2014 second quarter.
Excluding the adjustments from both years, earnings per share were $3.27, up 6% versus the prior year.
We also revised guidance for sales and earnings per share which <UNK> will cover in detail at the end of the podcast.
Our 2015 guidance issued on April 16, 2015 included 1% to 4% sales growth and earnings per share of $12.25 to $12.95.
We now expect 2015 sales growth of 0% to 2% and earnings per share of $12 to $12.50, which includes the benefit of the energy tax credits.
Now let's walk down the operating section of the income statement in more detail.
Gross profit margins in the second quarter decreased 50 basis points to 42.6% versus 43.1% in 2014 due primarily to faster growth with lower gross margin customers, lower supplier rebates tied to volume and price deflation versus cost inflation driven by foreign exchange.
Operating expenses for the Company declined 3% driven by lower payroll and benefits.
The Company generated $28 million of productivity savings to fund $25 million of incremental growth in infrastructure spending.
Total Company operating earnings were $357 million, an increase of 5% versus the prior year.
The reported operating margin was 14.1%, an increase of 50 basis points versus the prior year.
The adjusted operating margin was 14.2%, an increase of 10 basis points versus the prior year.
Let's now focus on performance drivers during the quarter.
In doing so we will 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 will wrap up with a discussion of our 2015 guidance.
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.
As mentioned earlier, Company sales for the quarter increased 1%.
Daily sales growth by month was as follows; up 1% in April, flat in May, and up 1% in June.
Results for the quarter included 1 percentage point from acquisitions and a 3 percentage point reduction from foreign exchange.
Excluding acquisitions and foreign exchange, organic sales increased 3% driven by 4 percentage points from volume partially offset by a 1 percentage point decline in price.
Let's move on to sales by segment.
We report two business segments, the United States and Canada.
Our remaining operations are reported under other businesses.
Sales in the United States which accounted for 78% of total Company revenue in the quarter increased 2%.
Results for the quarter included 2 percentage points from volume and 1 percentage point from intercompany sales primarily to Zoro partially offset by a 1 percentage point decline from price.
Let's review sales performance by customer and market in the United States.
Government, commercial and light manufacturing were up in the mid-single digits.
Retail was up in the low single digits.
Heavy manufacturing and contractor were down in the low single digits.
Reseller was down in the high single digits and natural resources was down in the low teens.
Low oil prices continue to affect our natural resources and heavy manufacturing customers.
Based on our analysis of relevant SIC codes, oil represented about a 1% drag on US sales in the quarter.
Now let's turn our attention to the Canadian business.
Sales in Canada represented 9% of total Company revenues.
For the quarter, sales increased 2% in local currency and declined 9% in US dollars versus the prior year.
The 2% sales increase consisted of 8 percentage points from the WFS acquisition and 4 points from price.
This was partially offset by a 10 percentage point decline in volume.
Based on our estimates, we believe the vast majority of the volume decline is attributable to direct and indirect exposure to oil and gas.
On an organic basis, declines during the quarter in the commercial, oil and gas, retail, construction, heavy manufacturing, forestry and transportation customer end markets more than offset growth to customers in the government, mining, utilities and light manufacturing end markets.
From a geographic standpoint, sales in Alberta were down 18% compared to all other provinces which were up 3% in aggregate.
Let's conclude our discussion of sales for the quarter by looking at the other businesses which represented 13% of total Company sales.
Sales for the other businesses increased 7% consisting of 21 percentage points of growth from volume and price partially offset by a 14 percentage point decline from foreign exchange.
The sales increase was primarily due to the growth from the single channel online businesses of Zoro US and MonotaRO and also the business in Mexico.
Earlier in the quarter we reported sales results for April and May and shared some information regarding performance in those months.
Let's now take a look at June.
There were 22 selling days in June of 2015 versus 21 days in the same month of 2014.
Daily sales increased 1% in June versus the prior year.
The daily sales increase included 1 percentage point from acquisitions and a 3 percentage point reduction 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 from price.
In the United States, June daily sales increased 3% driven by 3 percentage points from volume and 1 percentage point from intercompany sales primarily to Zoro partially offset by a 1 percentage point decline from price.
June customer end market performance in the United States was as follows.
Light manufacturing, government, retail and commercial were up in the mid single digits.
Based on our analysis of relevant SIC codes, oil represented about a 1% drag on US sales in the month.
Daily sales in Canada for June were up 1% in local currency and declined 11% in US dollars.
The local currency increase was driven by 8 percentage points from the WFS acquisition and 4 percentage points from price, partially offset by an 11 percentage point decrease in volume.
As a reminder, we will anniversary the WFS acquisition on September 2, 2015.
In Canada on an organic basis, declines during the month in the commercial, oil and gas, retail, construction, heavy manufacturing, forestry, light manufacturing and transportation customer end markets more than offset growth to customers in the government, mining and utilities end markets.
From a geographic standpoint, sales in Alberta were down 17% compared to all other providences, which were flat to the prior year in aggregate.
Daily sales for our other businesses increased 6% in June consisting of 20 percentage points from volume and price partially offset by 14 percentage points decrease from foreign exchange.
The daily sales increase was primarily due to strong revenue growth from Zoro US, Japan and Mexico.
Sales growth in the month of July is currently trending slightly below the growth rate reported for June.
Now I would like to turn the discussion over to <UNK> <UNK>.
