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W.W. Grainger, Inc. (NYSE:GWW)

W.W. Grainger Analyst Day Call

November 16, 2011 13:00 pm ET

Executives

Jim Ryan - Chairman, President & CEO

DG Macpherson - SVP, Global Supply Chain

Court Carruthers - SVP & President, International

Mike Pulick - SVP & President, Grainger U.S.

Paul Miller - VP, eCommerce

Ron Jadin - SVP & CFO

Analysts

Ryan Merkel - William Blair

Deane Dray - Citi

Sam Darkatsh - Raymond James

Hamzah Mazari - Credit Suisse

Robert Barry - UBS

Terry Darling - Goldman Sachs

John Inch - Bank of America

Holden Lewis - BB&T

Greg Molinelli - PRIMECAP

Jim Ryan

How’s everyone doing today? Thanks for coming. A couple of years ago, somebody came up to us after this meeting and said Grainger, you've got a great story but what are you doing to get the word out and help educate people about what's going on here. So hopefully you've been seeing from us the last couple of years that we are getting very aggressive about getting the word out to our customers and what Grainger can do for them and we think that's a great story. So thanks for coming today and we are excited to share with you our plans for 2012.

Many of you have been here before, but to those of you that are new we are glad you are here. You are going to hear some things today that are familiar about Grainger, but you are also going to hear a lot about the excitement that we are building around what this company can deliver for businesses and institutions around the world. We think this is an exciting story, regardless of what's going on in the economy. So I would like to get started today by introducing our leadership team and we will start with Laura Brown.

Laura is our Senior Vice President for Communications and Investor Relations. Laura has been with the company for 12 years. She has had a variety of functional and business roles here at Grainger including finance, marketing. She headed up our market expansion program and before Grainger, she was with Baxter and Alliant Foodservice.

Court Carruthers is right there. Court, our Senior Vice President and President of Grainger International. Court’s been with the company for nine years. With Grainger, he came up to our Canadian business in both sales and operations and was its President. Court came to us from Purolator.

Tim Ferrarell, he is the Senior Vice President and Chief Information Officer is Tim. Tim’s been with the company for 28 years. He served in a variety of different leadership positions including marketing product management, quality, business planning and systems and Tim’s been our CIO for four years.

John Howard is our Senior Vice President and General Counsel. John’s been with Grainger for 11 years. He is got responsibility to the company’s legal and administrative functions as well as M&A and business development. His background includes both corporate and government work with Tenneco, the US Department of Justice and John was also the Chief Legal Counsel for the Vice President of the United States.

Joseph High. Joseph is back there. Many of you may not have had the chance to meet Joseph. He’s been here for six months. He has a long history of leading human resources roles with Owens Corning, ConocoPhillips, Rockwell Automation, Cummins Engine and he is our new Senior VP of Human Resources.

Ron Jadin, Senior Vice President and Chief Financial Officer, Ron’s been with the company for 13 years. He has served the company as Head of Corporate Planning and Financing Analysis. He’s been Head of Finance for our US business Grainger Industrial Supply and he has also been Vice President and Controller. Ron came to us from the General Electric company.

D.G. Macpherson. DG is the Senior Vice President of Global Supply Chain and DG also heads our corporate strategy. And DG has been with the company for four years and he came to us from the Boston Consulting Group.

Mike Pulick was our Senior Vice President and President of our US business. Mike’s been here for 12 years. He ran both Product Management and Customer Service in the US before becoming President and Mike also came to us from GE.

This is an outstanding group of leaders. As you can see, we’ve got a solid mix of people that have grown up with the company and grown up in the industry combined with people that have a wide variety of experiences from other places and other companies and I think that combination of skills and experiences is one of our great strengths and you will see that’s the most for the rest of the organization.

This is also a leadership team that is absolutely wired and delivering a high level of short-term performance, they also have a high level of responsibility for building a successful business that’s going to endure long into the future.

So because we’re going to be talking about the future and I ask you to take a look at our forward-looking statement. I had a chance to talk to a number of you over lunch and I think many of you recognize that this is an exciting time in our industry and we’re going to talk a lot about that today and this is specially an exciting time for Grainger.

There are strong signs that this industry is either at or near a tipping point and our business and our strategy is built for this period of time. We have a business that’s built for two of the most significant trends that are going on in this industry now and true to this trends that we think it will be the most significant into the foreseeable future and that’s a customer validation to the supplier base and their adaption of e-Commerce as a way to get more productive.

Grainger is the company that has not only has a great strategy, but it is well positioned to do spend. We know how to execute and we have good stores of capital. And this is a business, as I mentioned, that’s well positioned regardless of what goes on in the economy.

So as you can see by these charts, we’ve outperformed the last three years during both the severe recession and (inaudible) recovery and if you look at these comparisons of earnings performance and sales and compare them to our industry as a whole, you will find the comparisons even much more dramatic.

We run this business with industry-leading service as the priority regardless of an up economy, regardless of a down economy because we have been able to prove over the years that great service helps companies get outside of their business and produce those long-term results.

We fund our growth investments through improvements in productivity and this is a business where we can both invest in growth and expand margins over the long term. And that’s a great position to be in because there are fundamental changes going on in this industry that are going to provide great opportunities to grow.

So the economic environment is providing, is causing what we believe to be fundamental changes and permanent changes in customer behavior. If you were here last year, I told you the story about a customer that I met our National Trade Show and Sales meeting and this was the customer that was Head of Purchasing for a large manufacturing facility in Carolina and he was both excited and concerned. He was excited that he would be use that function and he was concerned with what he had to do.

So he was now responsible not only for buying for one large manufacturing facility, but for three and what he was concerned about was his staff was now smaller than it was before the one facility that he was responsible for. So I asked him what he was doing, how was he dealing with that and he said the first thing that he was dealing was making a supplier base of almost 2000 suppliers and cutting it in half.

And not cutting it in half over the course of a year or two, but cutting it in half over a couple of months and he was going to cut it in half again and then again. Now for him this was a matter of survival because he just didn’t have the resources to manage that many supplier relationships and all the invoices, the purchase orders, the shipments receiving orders there and everything that goes on, he is managing a large customer base.

And I asked him, how it was going and he was having great success. Now the total spend across those three facilities was down significantly, it was down about 30% or 40%. The Grainger’s business with them was up 15%, but we were benefitting from a supplier consolidation and in that case there were clearly winners and losers, significant in terms of volume moving around that business.

The reason that I bring that up again is because here a year later we hear that story playing out over and over and over again regardless of the size of the company, regardless of the industry, regardless of the geography, whether it is domestic companies here in US or companies around the world. That story is playing out over and over again.

When I asked this purchasing guy, what happens when the business recovers, are you going to go back to the old cluster and without hesitation his response was no. We figured out how to do more with less. We figured out how to get more productive. We are going to continue to consolidate our supplier base and we are going to continue to look to eliminate waste from our purchase perspective.

That permanent change in customer behavior is driving fundamental change in this industry. Customers are spending money with suppliers that they know can help them get cost out of their operations and they are not only consolidating product suppliers, but they are consolidating service suppliers as well.

So this customer had a number of service suppliers coming in and managing and selling up to them. Somebody coming in and going up to them [supplies them] it takes the suppliers for and (inaudible) that goes back. They were finding opportunities of cost savings and consolidating net debt as well. So as a result, you are seeing in this industry, you are seeing the large companies, the large competitors that have the ability to invest in these kinds of services we've seen the large companies grow at two to three times related to rest in the industry.

And you are seeing the smaller distributors that have a strong technical capacity you are seeing them continue to do well also. But everybody else appears to be struggling. So there's some pretty clear evidence that there's consolidation going on in this industry and there is a lot of argument about how fast that consolidation is going. But what we are seeing is we are seeing that the pace of that consolidation is picking up and that we expect it to pick up into the foreseeable future.

We also expect M&A activities to continue to improve as these conditions continue. And the question for us and the question for you is what does this all means for Grainger. Well we think this is a lot of good news because our business as I mentioned is still to take advantage of these trends. We've got a highly integrated multi-channel business model, especially in the US that's designed to help businesses get more productive and that is the theme that we hear today that’s helping us get more productive.

As you may know, we've been investing in our infrastructure over the last five years even through a tough economy and these investments are allowing us to expand our product line throughout North America at unprecedented rate. In US alone, in the last five years we have joined some 82,000 products in stock to over 350,000 products in stock and at the same time we’ve maintained our inventory turn rates, we’ve maintained our order fill rates and just to inform you we’ve maintained our customer service rates all at or near all time highs.

We can service 2 million customers, 400 facilities in US, 1 million products, 120,000 transactions a day and we have a high capacity, high capability, highly integrated IT back-on in US that is able to handle that kind of volume.

We’ve also been investing in new eCommerce. Today we do over $2 billion a year through that channel and we were recently ranked by internet retailing magazines so this is not suitably this is internet retailing magazine as the 15th largest retailer in North America. We do $8 billion of business, $250 at a time, and we have real economies of scale. And we believe the design and the capacity of our foundation is broad line, high service industrial distribution business. Absolutely a competitive advantage today and its going to be even more so competitive advantage into the future; we’ll talk a lot about that today.

So on top of that foundation, we are investing in things that we know work to drive growth. In all of our businesses, we’re expanding our product line. Product line expansion over the last several years, we’ve added 200 to 300 basis points in top-line revenue and we see that continuing. We are adding sales reps in all of our businesses because we know that our highest share of a customer spend come from new type of sales rep design.

We’re investing in eCommerce. Today, 25% of our revenue comes through our eCommerce channel, which is our fastest growing and is the most profitable channels. We’re building out our inventory management services, not just in the US and Canada, but across all of our businesses because this trend of businesses we’re looking to get more productive and asking the suppliers to do more is a worldwide trend and it’s part of our business inventory management services which in direct response to the customer demand.

We’re also proving that we can grow through acquisitions and we’re expanding internationally. Our international businesses are our fastest growing and next year it will represent 25% of our revenue. So we’ve been able to continue these investments in growth while we’re continuing expand margin. Three years ago, we announced that expanding operating margins by 50 basis points a year on average is something that we were committed too.

And I am here to tell you that we’ve been able to detect all events through the period of recession and we expect to continue to expand operating margins by an average of [50.6] basis points per year and for the foreseeable future. So this is a business where we are able to aggressively invest in growth, aggressively invest in our infrastructure and future end margins.

Now, we’re confident in our ability to grow the top-line and expand margins because we’re disappointed with how we attribute and the key to execution for us has a lot to do with people and processes and our incentives; so with our people, our play engagement for our high (inaudible) in everyone of our business. The average turnover in US for example, we’re 2.5 times better in employee turnover than the national average and we have got a very disciplined approach to hiring, training, elements, rewards, compensation and benefits and we generally hear about the people that work here, generally everyone say that it’s a great place to work.

And we also have discipline in the process that we run the business. All the continuous improvements that’s the core how we build and all the improvement that’s core of how we go out and get those operating – and scaling of this business. We document processes, we measure cycle time, we measure improvement, we measure quality and we measure costs. We do this with all of our businesses; we are very disciplined in that regard. And a great example is how we have applied lien principles to the operations at our distribution centers in the US.

In the US, over the last eight years our productivity has improved by more than 20% and at the same time our accident rate has decreased by 38% and we have been recognized by Occupational Hazards’ Magazine as one of the 10 safest companies in the US.

Now in addition to people and processes, we also have aligned incentives and having incentives that are aligned to delivering results are absolutely critical for us internally and absolutely critical externally with our shareholder base as well. So two-thirds of the people in the company are on the defined contribution opportunity program and those contributions are determined each year based on the performance of the company and that opportunity program is the primary retirement vehicle for again two-thirds of people in the company.

The others in the business also have their incentives tied to performance and we have virtually no unfunded pension liabilities. The top 1,600 leaders in this business are on management incentive program that’s driven by two things; sales growth and return on invested capital. And that formula for the top 1,600 leaders is the same for everyone. And across the company, we have a strong paper performance incentive system that supports that very disciplined approach that feature internally and we think is well aligned with (inaudible).

Now the returns that we generate from spun execution help us fund growth. We believe that delivering improved returns on invested capital aligns well with interest of our shareholders. ROIC is essential feature of our management incentive program as I mentioned and we know that further improvements on return on invested capital is going to come from continuing to invest in profitable sales. Standard chain today is leading DSO, we are six days to 13 days better with our DSOs than our competition. And as we have already shown, maintaining inventory levels while we continue to expand our product offering it’s a great way to continue to improve our return on invested capital.

With this kind of unprecedented growth that we have in our product line in US and our other business as well, maintaining inventory turns while we’re going through that kind of unprecedented expansion in business, very difficult to do and it had great benefit on the capital spend we want to do.

Our strong balance sheet gives us financial flexibility to drive greater shareholder returns. This is a chart and normally you have seen before and a few charts that we like to show a lot. Over the last five years, we've spent $2.5 billion buying back 29 million shares at an average price of $84 a share. Over the past 27 years, we've reduced our shares outstanding by more than 40% and 25% of that has come within the last decade. 2010 was our biggest year for share repurchase. In 2010, we repurchased about $500 million of shares. We've been active in the market this year. We will continue to be active in the markets and we plan to continue our history of regular share repurchases.

And as you probably know, we also have a track record of 40 years of increasing dividends. Over the past five years we've increased our dividend at an average rate of 18%, a track record we are very proud of and we are committed to increasing dividends at rates faster than earnings growth over the next three to five years.

So the point that I would like to leave you with on this is that this is a very solid company with some exciting prospects for growth. Future is very bright of this organization because of what I’ve talked about and especially because of the people here.

So we’ve got a great line of presenters today to talk to you in some more depth about how we are going to get great benefit from what we believe is an increasingly dynamic industry and we are going to start with DG Macpherson, our Senior VP of Global Supply Chain and also our Head of Corporate Strategy.

DG Macpherson

Thanks Jim. Good afternoon. It’s a fairly simple statement to make, but when our foundation is strong the business performs well and it’s a statement that we remind ourselves of each and everyday in our business and I am going to spend time talking about our foundation and the actions we are taking to make sure its string today and also the investments we’re making to make sure that going forward for a long time we have a healthy and powerful business.

So the purpose of this discussion the foundation means making sure that we have a very broad product line with great availability and great service for our customers; making sure that we execute very well on the supply chain and drive continuous improvement throughout the entire business; making sure that we have strong margins based on our activities around private label, global sourcing and purchasing leverage and making our information technology resources help each and every business grow profit; that’s going to be the focus of my discussion today.

So let me start with product breadth and availability and having a very broad product assortment with great service to our customers has been a foundation for the business for decades. And when we have the items that our customers bought in stock that is great a benefit for our customers; it also allows us to have conversations with customers about service and performance rather than price, so it’s a powerful offer for us.

And really in each business, we ask ourselves on a consistent basis, what is the product offer that is a competitive advantage in that market and provides quality customer service. And the important thing here is that, the answer to that question very dramatically based on where you are at.

So depending on the country you’re in or the region you’re in get a very different answer. In the US for example, we have a lot of very strong competitors with extremely broad offering and so competitively advantages offer in the US would look like hundreds and thousands of items in stock to ship today to get to your door to mall. And so that’s the answer to that question in the US.

But if I give another example, I went to Mexico; the answer would look very, very different. I’ve been to Mexico City quite this year and we had customer lunches and I’ve got several fireboard discussion and those especially been interest, the people have taken me inside and said, you know, you offer an absolutely tremendous product breadth and availability for our business. One was a hotel operator and another was a manufacturer. They both operate that without any prompting and the thing that’s interesting is we stock 80,000 items roughly in Mexico today.

So a competitively advantage offer in Mexico that’s hundreds of thousands items, 80,000 and our plans in Mexico are to continue to add products about 10,000 a year. The plans in Mexico also include leveraging the assortment we have in the US. So we can take items that are small moving in Mexico that we stock in the US and provide those items faster than any competitor to that market.

And so that’s just an example where we look at this competitively. And the point here is that, what a competitive product breadth and offer means very dramatically by country. So we’re basically configuring ourselves to win in every market that we have.

So once we figure out what that offer looks like, we need to make sure that we have physical assets to deliver. And in the last couple of years and going forward, we have been very, very active in improving our distribution assets.

If I start with using existing space, a couple of years ago, we started reconfiguring the Greenville distribution center in South Carolina. This is a building that is 1.2 million square feet, a very large building; but it was configured originally for a very different purpose and it’s only stocking about 100,000 items.

We went through a lot of work that have been structured in the building; we’re now working on a broad space. That building now houses about 350,000 items, provides much better service up and down both for our customers and it also improves our transportation cost in the East Coast. The transition has been very smooth, the building is operating extremely well and driving significant productivity improvements year-over-year.

Another example of using different spaces in Mexico; we have two buildings in Mexico that functions primarily, one in Monterrey which is a bigger building and one in Mexico City and both of those buildings, they were originally designed for a much narrow assortment, but we have the space in those buildings, we’re reconfiguring those buildings on a consistent basis making sure we really think about how to reslot those items in that building to get the most in and out of that and that’s really been enable us to grow in Mexico City.

At the same time, we started thinking about the future, what we need to do to invest, to make sure we can win in the long run. In October, we actually started up the building in San Francisco, not actually in San Francisco, its 90 miles Southeast of San Francisco. It’s very different than San Francisco, but it’s a building of 820,000 square feet. It can house well over 300,000 items, we have gone live with about 40% of the volume, we’re going to fit into the building now. It will be fully operational by the end of the first quarter 2012 and this is a real game changer for our customers. We have gone from the position where we had a disadvantage on the West Coast in some of these products breadth and availability to one where we think we’re going to have the breadth.

Additionally, at the end of 2012 and up to 2013 we are going to relocate our central stocking DC which is here in the Chicago area to a building that’s Southwest of Chicago. This will be a 1 million square foot building that is able to house 0.5 million products. The advantages here, we are going to have much better sort mechanisms to have more products for our customers. It’s also going to be much more efficient building. So those of you who have been in our Niles building, you would recognize that it’s very old. The site patterns aren’t very good, so it’s not the best use of configuration. So we’re going to have nice clean building to run as simply stock in locations starting in 2012, 2013.

And finally, in Acklands-Grainger in Canada, we are in the process of going live; by the end of January we’ll be live in the building in Saskatoon. Much smaller, 100,000 square foot building, but this is a building that we’re moving from our 40, 46 year old building into this new building and its our highest share market within Canada and we’re going to ensure that we continue to have advantage of some product breadth and availability in that region.

One of the point on this, as we do this, we’re making sure that we are a good source of the environmental as well. Monterrey is only gold certified distribution center in Mexico. San Francisco is being gold certified and Chicago will be done too. So we are working hard to make sure that we still then take care of the environmental as well. So in short, we are making the necessary investments to make sure that we have the product breadth and availability advantage in the long haul.

So we do about a 120,000 to 130,000 transactions a day. When you have that many transactions in a date, execution matters a whole lot. It’s always going to be a business where execution is a competitive advantage and we are very focused on that execution. If you listen to calls and you get customer satisfaction feedback, it’s little with the basics; do you have the product I need, we are able to guide new active products. We are able to get it on time, see that it is damaged when it arrives. So we are laser focused on making sure we do those things well.

For our business execution and improvement boils down to continuity. So we are very, very focused on continuous improvements throughout this. And Jim talked about the DC improvements, here is an example of the improvement we had over the last couple of years in our distribution centers. I would point to one, I would point to order accuracies, we have reduced this by 50% over all three years in our DC spend, laser focus on the basis. Our most common area that you can see is actually quantity. We are shipping quantity to customers. We've been very focused on accounting, on making sure we make counting signs and getting everybody to (inaudible).

In terms of our continuous improvement path, I think there's two areas that we are really focusing on so that we can create more value. The first is working cross functionally. So making sure that our improvement effort is focused all the way throughout the business across the value chain.

One example here would be a customer service organization and the supply chain this year, worked closely together to think differently about how we pick, pack and ship orders that are destined for what we call KeepStock for inventory management for customers and we've made some changes that we've highlighted in the company report. These changes are going to add a little bit of time to our processing in DCs to pick out a lot of time in the branches. So this is an example of working together to improve our processes from end to end. The other thing we are really working on now is standardization.

So where it makes sense to standardize processes, we are really focused on that. The customer service organization has done a nice job of standardizing processes across every process that they have in the supply chains working on that as well. One example of that in the DC is we have four smaller DCs, we call the market DC that we serve, kind of we looked at areas throughout the US.

They got together and really took a hard look at how they receive products, they take products off the trailer and take it on the shelf and hence make it down too simple but we were doing things a little bit differently in those buildings and we’ve standardized the process, those four buildings within the processes and through that productivity process.

So now let's take a step back and look at our distribution network. This is as context this our DC network in North America, we have more than 20 buildings. We have great reach in these buildings. We can reach customers with products 98% of the time next day. So we have the right locations for our distribution centers. But let’s take a step back and listen to what our team members are up to.

Unidentified Company Representative

Everyday we ask ourselves how we can see yes to more customers. We know we can do that by having the right products that customers want in the right place at a competitive cost and then delivering them with care. We’re currently making investments in our distribution center network to strength Grainger’s foundation.

Unidentified Company Representative

This place is state-of-the art. It’s just amazing to be part of this group, to be part of this process.

Unidentified Company Representative

On the West Coast, we are bringing a new 820,000 square foot distribution center online in Patterson California southeast of San Francisco. This facility will stock up to 350,000 items and when it’s completely up running in early 2012, Grainger will be able to provide next day availability on the vast majority of our product line to customers up and down the West Coast. The new DC will also lower our transportation costs by serving as a hub for globally-sourced imports and exports to the far east.

Unidentified Company Representative

The Bin module is a smart portion of the distribution center where about 75% of our products is actually stored. It is stored here to be efficiently put away as well as tick so the customers get the orders accurately and on time.

Unidentified Company Representative

You know we really care about what we are doing here. We care about the customer, we care about each other and it is just that mentality that really keeps everyone going and keeps the customer happy.

Unidentified Company Representative

If we can be the successful with Chicago DC, we move from Minooka, we are going to be unstoppable.

Unidentified Company Representative

Now, on 2012 we will relocate our Chicago DC to a new 1 million square foot facility that we have purchased southwest of the city in Minooka, Illinois. The move will increase our storage capacity and allow us to deliver more products next day to customers in the Midwest. Minooka will also serve as our central stocking facility for the US. Once the transition is complete, it will help us provide better service and improve our efficiency.

Unidentified Company Representative

400,000 items in the Chicago distribution center moving during a live environment, it should be quite a task.

Unidentified Company Representative

In Canada, we’re continuing to invest in our distribution center network to put more products closer to our Acklands - Grainger customers. In early 2012, we will relocate our DC in Saskatoon to a new larger facility to meet the needs of the provinces expanding customer base. With more than 50,000 products in a more efficient layout, our new Saskatoon DC will help us deliver more products next day to our Saskatchewan customers.

Unidentified Company Representative

The interesting thing about Saskatchewan is, that region we have, it’s our largest market share region from a pure market share standpoint, with over 35% market share in that region. It’s having this DC is going to allow us to win more, say yes to our customers more often and really drive value into our business.

Unidentified Company Representative

We’ve reconfigured the Greenville, South Carolina DC so we can stock more than 350,000 Grainger products. We added a new three storey storage structure to house more products and we invested in material handling systems that get products into the DC more efficiently and help us pick, pack and ship customer orders very quickly. We’re currently making improvements in the bulk storage areas as well. The Greenville DC investments are improving service to customers on the East Coast and Latin America and lowering our transportation costs.

Unidentified Company Representative

Our distribution center in Monterrey, Mexico houses more than 70,000 products and we recently re-engineered our input process and product flows to improve both service and efficiency. As Grainger Mexico and its product line continue to grow, these improvements help us provide industry-leading, next-day reach to MRO customers in Mexico.

Unidentified Company Representative

Over the past year actually, the team has done a great job working together with the Mexico team with a global supply chain team to better improve our profits internally, how do we input process, how do we flow those processes within our network making it more efficient to better serve our customers as we continue to accelerate our goals in that business.

Our team is focused on strengthening the foundation of our supply chain network to improve service today and meet our needs in the future by having the right products in the right places to win in the marketplace.

Unidentified Company Representative

Our supply chain and our people are truly the foundation of who we are and that is our competitive advantage.

Unidentified Company Representative

Because of the growth and the expansion we are moving forward in the right direction. This is where we need to be going. For us, we are going to make sure that ones that get it done can get it done even better.

DG Macpherson

So it’s great to see the progress that we are making in terms of making sure that we have the right physical assets in place to serve the business for the long term. By the way, many of the actors are in the room, so they are real people.

So, turning to the global supply chain, I would like to talk about four primary objectives that we have in the global supply chain. The first I am going to talk about in a minute but it’s basically to make sure that we leverage our scale to get the absolute best cost in our product purchases that we can.

And I will come back to that in a minute.

The second is to make sure that we drive transportation cost savings and service for our global transportation and 18 months ago, we started with our direct sourced volume in China and Taiwan, we started appointing at consolidation centers. We have four consolidation centers. Before this suppliers used to ship directly from China, to the our facility in the US and we are putting consolidation centers to point them there.

And that has had a huge benefit in terms of our global transportation spend, we are able to take the supplier shipments, fill the trailers into larger trailers, typically fill them more fully and then point them wherever they need to go. It also improves service in terms suppliers no longer have to hold for an entire container before they ship to us and also we can also serve businesses like Acklands in Mexico directly when we get enough volume. So a big benefit for us in terms of driving transportation.

The third one I want to talk about knowledge sharing or best practices. For us that practices mean best practices in terms of product management, inventory planning, transportation management and DC operations. And we’ve really developed tight networks to professionals that work together to make sure we get the best outcome in those areas.

In one example, we now basically have the same math and logic behind our inventory planning for all of our businesses in North America. So Canada, the US, Mexico are all operating with the same logic for inventory planning. The other thing that we have is if there is ever a building that is struggling we have the ability to mobilize and help that building much more quickly than we ever had in the past. So there is a lot of cheering going on.

The last focus here is really on network design and by network design I mean whether it’s an existing business that’s been around for in active stage well over a 100 years or whether it’s a new business that you can start up. We want to make sure that we make the right decisions around building assets, supplier from those to get that business as successful as possible. So we have a cadre of folks that are very good at sneaking through network design and they work with each of the business on whatever issues we need to work through.

And one example, last year we redesigned the flows in and around Mexico. We changed the way suppliers move product in your buildings. We worked on our import process into Mexico from the US. We renegotiated transportation costs on that and the net result has been substantial reduction in costs in Mexico, improvement in delivery results and an improvement in service and that's one example. Right now, we are looking at all of the import flows in the US and Canada and we are looking at specific assets we are going to need to support Canadian growth going forward.

But one other thing I would point out here is that in order for this to work we really had to focus on accounting. So in order to be able to share best practices specifically or get to these resources in place, we had to conduct supply chain channel to use across the globe and we've been doing that for a couple of years and we are now confident that we have more talent than we've ever had to support what is a very fast growing international footprint for the business.

So if I think about ways we plan to grow and improve profitability for the business, private label certainly pops to the mind and I am going to talk about private label in the future. The first is, we want to make sure that we have the right assortment for our customers with our private label business. And there is two examples here, where I think we've done that; TOUGH GUY, we introduced TOUGH GUY brand in the US in 2008, we introduced it for its use. TOUGH GUY is a cleaning product and investment product, waste practices I think and TOUGH GUY has grown to 5,100 and its now well over $100 million in sales. It is our second largest private label. And the key here is TOUGH GUY still need or a lower cost high quality version of this type of product that is always there. We identified that need and we filled that need.

Another example that's very different and because the first time we've done this, this year that we can produce a lower cost tool brand called Contender in Mexico. We started small; started with the 130 SKUs essentially it’s hammer, types of basic hand tools; had some learnings in terms of how to do this, how to get better at going forward. But the products are now in Mexico and it’s growing very well and based on this we are going to expand the offer next year and be able to deliver it today at price point functionality of that market. First time, we’ve really focused on a specific area functionality.

So the other half to private label equation involves sourcing that private label effectively, and so we’ve been on a march over the last five to 10 years to make sure we increase the capability and volume of our globally sourced product. This chart that the white part is the portion of the US sales that is sourced directly, meaning we can hold the source 80% of that comes from China or Taiwan, but we’ve got 7% in 2007 and in 2012 we will be about 13% of product line will be sourced directly, so that’s pretty big shift.

The important thing here is those items are much more profitable for our business, its 50% more profitable at gross profit level. This expansion has incrementally added about 15 basis points to our gross profit, so its meaningful portion of our gross profit expansion. I often get asked the question of how much more we can increase it; I think there is opportunity both in terms of driving that whole line so increasing private label for all of our businesses and starting to make great progress both in US and outside the US and then continue to source more products directly (inaudible) and we still have a long world ahead to drive through.

So in order to meet that need, we have really been focusing on our increasing our capabilities and really increasing our capabilities in China. So one of the unique advantage we have in our sourcing operation is we go to the source, things that aren’t often available in stores. So we’ll store mechanical products in China that others typically don’t source and so having a strong engineering and quality capabilities within imports and this year we opened up just recently, we opened up a new engineering lab and product testing lab within the Shanghai region and we now have a lot of quality control resources of source. We have a strong group of product managers responsible for the product information especially I mentioned the consolidation incentives earlier.

Taken together, this gives us the ability to take orders from any of our business even what they want to source globally and deliver. And that’s our goal to make sure that we can serve businesses effectively, find low cost country options and go for whatever request they have. And our plan going forward is pretty simple. First, we want to leverage this capability for all of our businesses, we have opportunities to keep the private label and increase to direct source. An example of that this year, we’re going to add 5,000 SKUs from the global sourcing offer to [that thing]. So that’s a way to grow and test the ability to have low cost, high quality products in the Canadian market.

Second, to the extent possible, we want to make sure that we build areas of critical sourcing outside of China. I know all of you, sometimes I get asked well what’s happening in the labor inflation. The reality is China, the sourcing we have in China is very high quality and it would take years for inflation to make the economics flip and make it unattractive source in China. We expect China to be extremely important for us for the long time, but we do want to build other areas of critical mass. We’re making some progress there and we’ll continue to do so.

So in terms of purchasing scale and purchasing leverage, we continue to make great progress, we’re doing across all of our businesses at reducing our product cost. This year, we conducted 20th global line reviews which represented over $100 million in cost of goods sold. For us the global line review means look at all the countries, look at what they are buying, look at how much they are buying at stores and try to optimize the assortment and the cost.

So it’s not much more complicated than that. A couple of examples from this year, we looked at air compressors across the US, Canada and Mexico. We were able to save about $1 million in product cost and we are also able to improve the service into the US and Mexico by leveraging Canadian suppliers and improved the assortment. We added about 100 SKUs largely based on the Canadian offer to really shore up our product offering.

And another example we look at folks, so folks are client, our customers (inaudible) you know what we’re talking about. We saved about $200,000 in product and business review and we were also able to dramatically increase product offer across all of our businesses. So these product line reviews globally are really helping to improve our cost, but also to improve the offer for our customers.

One more area I’ll mention, this year we started looking at the way we buy fasteners; it is a very small subject of our fasteners and we have some businesses that are good at buying fasteners, Colombia. This was before the Fabory acquisition, I’ll talk about that in a second, but Colombia, Canada, and Mexico and the US, we’ll all take a look at how we are buying fasteners and we were able to identify substantial opportunities to change the process and reduce our cost. We are now brining Fabory into that mix. Now that they are part of the family and they obviously have very big fastener buy and we expect to really buy some improved economics in our fastener market. The net result of all these activities has been about $50 million for the bottom line in the last couple of years and we expect that to continue in the next year.

So clearly we have had very strong gross margin expansion in the last five years and a lot of that is due to things that we’ve been talking about today. In 2011, I wanted to point out our gross profit year-to-date is up 150 basis points; that’s a very big increase. Some of this has been improved execution and some has been one time event. So I think its better in terms of improved execution and in terms of global sourcing, in terms of private label. Our commercial team has done a great job of managing price interacting customers we’ve been building sustainable.

A couple of things that are one-time; we did saved quite in advance of cost rising and the supply cost that we had this year, we would not expect to continue forever and that will be on what we expected. The other thing I would point out is that last year we had a fairly high British Petroleum oil spill volume; we replaced that higher margin models so it’s been a few things that’s been one-time. That said, we expect to grow gross profit going forward every year more in the (inaudible).

So as a company, we are taking a hard look at our information systems and particularly our systems in Canada and Mexico are outdated and they are not really support the growth of those businesses. In addition, we’re trying to figure out how best the standardized process is in the supply chain and elsewhere in the company and so we are taking few actions with information technology. The first one is we’re implementing an SAP installation for all of the Americas; its based on the US installation. We’ve already begun work on this and we will implement for all the countries in the Americas over the next couple of years.

The other is that for critical supply chain systems, we are aligning those systems. So we’re going to align on the same product information system to make sure that we have the same product [CAGR depository] and we’re going to align on the inventory management. So we believe that changes like this are difficult to execute and take time, but when completed we’re going to be in a better position to leverage our scale to improve our position and to serve our customers and to drive different system process. So a lot of work to come, but we think we’re going to make great strides in our information technology.

So I started this by saying that when our foundation is strong each of businesses performed well, and we are making substantial investments in our foundation to make sure we are successful today and to make sure we are successful in the future.

These investments are going to allow us to make sure we have more products closer to our customers than our competitors, to make sure that we execute well [Technical difficulty] in our business, to expand our margins through private label expansion, through global sourcing and through global leverage and to make sure that our information technology supports the business needs going forward. Let me now introduce Court Carruthers, who runs our International businesses. Court’s going to talk about how the international businesses are leveraging the foundation to drive growth and profitability.

Court Carruthers

Great. Thank you, Jim. It’s a great pleasure to be here today. Had to bring my entry first before I will let you know all the content, it’s a great pleasure to be here today. I think as all of the presenters, we have a terrific story to tell not only about today but about the future. Our international business has become an increasingly important part of total company sales and is beginning to contribute meaningfully to the total profitability of the entire company. We are clearly very pleased with the continued strong performance in the business but even more excited about the upside potential going forward and not only in our current businesses that we will talk about but also for the potential of very disciplined approach to extending a select number of exciting new attractive markets focused in Latin America and Asia and look forward to going through the topic today.

The rationale for international expansion remained largely unchanged at what we’ve spoken to you about over the last few years. First and foremost, we think it’s a terrific opportunity to increase the company's exposure to faster growing markets. It’s also a great potential for us to further diversify the geographic footprint of our revenue mix and we think that's highly prudent from an economic risk management standpoint. The second (inaudible) continues to increase in importance, which is building and leveraging the global scale buying power that we have and the region that’s growing in importance is that we’ve seen over the last couple of years, an increased consolidation of our largest global supplier. It’s important that we match their scale growth and preserve our position in the channel as they grow and we grow at the same time, not also allows us to leverage the opportunities of having a broader base of large to all the suppliers.

The third important point is that we continue to have increased pull from our customers to serve them in a consistent way across multiple markets around the world. We’ve seen that pull intensify dramatically over the last couple of years. We think we’re well positioned to serve that need today, but there’s lots more upsides for us in the future, and then as you’ve already heard and continue to hear from us for all of the presentation is a great focus in this business on making sure we’re leveraging the opportunity to share buyback (inaudible)

Now, in terms of our international extension, we’ve made great progress in a short period of time. When I started with the business in 2002, our sales outside of the United States were 10% of total company sales on a much smaller base of the company revenue that we have today. And the vast majority of those sales were in the (inaudible). If you fast forward this today, we now have a presence on four continents, physical presence in 21 countries. We operate in 15 languages and we expect next year, as Jim mentioned earlier, that international, our sales outside the US will be approximately 25% of total company sales.

And when you factor in our export operations that are also in our international group, we now serve more than 500,000 customers outside the US in a 150 countries. And last week we had the top 150 leaders from around the world in the [Theory] Room that we were sitting in today and you can really feel the change in the organization as this is starting to become a truly global company with people around the world, with different backgrounds and different first languages, with a great diversity of different experiences that they bring to the table, a very exciting change that we’ve seen in the business. We think it’s dramatically positive one over the course of the last 10 years.

Within that context, we continue to focus on three key priorities and first and foremost is maintaining an aggressive focus on the improvement and the growth of sales and earnings in all of the businesses that we already operate into our markets. I'm very pleased with the continued strong performance that we’ve seen in these businesses for the first nine months of the year on a constant currency basis, revenues up 24% and operating earnings were up 151%. When you then translate that into US dollars as we report in this segment, and you’re looking at even more impressive numbers. And again, as I mentioned earlier, we’re excited about that progress. We’ve made in some a very long way in the course of the last three years.

At the same time, we’re excited about further upside (inaudible) markets. We also want to continue to focus on expanding on a very small number of attractive markets, particularly focused in Latin America and Asia, for further expansion and we’ll share with you in this presentation our thought process that we continue to further hone as we do more of the expansion activity, and the focuses we do this is making sure this investments are thoughtful, they’re disciplined, they’re well-planned and that they’re phased and scalable, so that making small initial investments are things that we can grow overtime and enhance EBITDA, profitability to sustain growth.

And then of course we need to make sure that we have the systems, the processes, the talent, the compliance mechanisms, so we continue to access that on (inaudible) one and two and we’ll talk about some of the strides that we’ve made in these areas.

So if we look first at improving the profitability of our current businesses, we’re very pleased that we’re now in a position where we have a number of different businesses in different parts of the world that are generating double-digit operating margins. That’s great improvement, over where we’re even 24 months ago. And although this is a very diverse stats of businesses, our businesses in varying stages of sales growth, maturity even this length of existence, types of market that they serve, there are a number of comment programs that we’re running to grow profitability in all of the markets.

And one of the discussions that we had at my table at lunch was how do we manage the right level of investment in these types of emerging markets, while at the same time scaling that based on all of the different opportunities that we have around the world. One of the most important things that we do from a profitability perspective is make sure that we are driving profitable sales growth, we want to keep investing in the foundation, all of those elements that we just described, but always making sure that those investments get extensive investment and growth, are less than the rate of sales growth that we have going on.

So in all of these businesses, we are very focused on making sure we are getting operating expense leverage from the profitable growth anyway. The second important point is that we’ve had very detailed focus on gross margin management and all of the different forums across these different businesses. So that can be leveraging improved pricing strategy and technology, and very sophisticated in terms of how we analyze price flexibility of a skill basis that is leveraging our private label programs around the world, that is making sure we have a very disciplined management of cost of goods sold in every market, both of local suppliers and global suppliers and by doing that we have been able to grow these businesses aggressively from organic standpoint, but at the same time leverage gross margin improvement along with that growth.

And that as you heard throughout the day, we want to focus on leveraging best practices and scale benefits across the organization, whether that’s local sourcing, talent, supply chain, systems expertise by making sure we are taking advantage of the best elements, both in the corporate structure and all of the businesses around the world and continue to drive profitability.

You heard a lot of our product line expansion, a key element of our growth initiatives around the world. What’s interesting is we do this is really trying to find the optimum mix of global leverage and local relevance and so product line expansion, although it’s something we run in many countries around the world, actually shows up differently in each country and Mexico has been a great example of that. Three or four years ago, Mexico was not very active in the [safety gear] which is one of our key product categories in both the US and Canada.

Over the course of that time we focused a lot of the product line extension on safety and with some of the products that we sell in the rest of North America but also adding new custom, local products into that mix. Today safety is the fastest growing and the largest product category in our Mexico business and it’s been a great mix of leveraging, the knowledge from our business units, I am viewing it in a way that we are doing it in a way that highly relevant locally, we have great success running that type of place around the world..

A key part as DG mentioned of our product plan expansion everywhere is our private plan and private label initiative. DG mentioned that the tender line of (inaudible) and that was our first effort of trying to leverage a global supply base, have a Grainger’s global scale and do it in a very locally, relevant way. Another great example of that is in 2011, we launched the (inaudible) Motor Line, specifically designed for India because at an India price point, India-type of specification it needs the OEM requirement there. That fits very well in the market. Leveraging at Grainger’s local supplier and also making products presence in other parts of the world and we had fantastic initial success with this product launch. We are in full capacity, adding additional program for next year, and I think a terrific example of how we meet the global scale of the company but we do it in a way that’s very meaningful and fits very well in it’s local market.

Of course, eCommerce is a critical element of our strategy in all the different parts of the world that we operate, and something that our multinational customers really demand from us in every individual market. You will hear Mike talk later about the importance of eCommerce and Paul Miller talk about the importance of eCommerce. In the US context, you have a goal of getting that to 50% of sales by 2015 but its interesting as we already had 70% of sales in our job this year. Sometimes we cut off these big numbers of where eCommerce could be. I think there might be skepticism that we’re already seeing 70% plus rates in our business expand. This is a joint venture that we started 10 years ago in that market.

It’s grown into a very sizeable business focused primarily on small customers, predominantly through an eCommerce channel, many learnings here in terms of how you go to market with e-marketing and through the eCommerce channel that we are leveraging around the world, but I think most importantly it shows the potential of how important eCommerce will be in all of our businesses.

In a similar vein, inventory management is a key part of our strategy in the US and that is something that our multinational customers request from us and expect from us around the world. We have a deep history in inventory management services in the Canadian business given our history in fasteners and other industrial products. Today in Canada we have approximately 2000 KeepStock EMI installations and 700 KeepStock vending machine installations and similar to our experience in US, we see growth rates from those customers of two to two and a half times of what we see in the regular business.

So we are leveraging that expertise from the US, from Canada into other markets so that we can provide a level of consistency for multinational customers as they deal with us around the world. And then finally since it is a little bit unique with international perspective, it is the focus on a low-cost local presence solution. And keeping in mind that in many of the countries that we operate, is there smaller countries we may operate in smaller towns and larger places like Canada that serves the resource factor.

In those types of environment, we can have a very small footprint location at a very low capital cost, very low inventory investment that will be very relevant locally. That will be the best option from a competitive standpoint in that given market gives us great competitive advantage, thorough good advantage in those markets. So that's something that we've employed both in terms of growing organically in our existing businesses and small markets and also something we've employed as being filled up with some of the, in very small countries that we started to enter and I will talk about that in the coming slide.

One of the most attractive things about Fabory is the fact that they have a very small footprint shop expansion program of about 3000 to 4000 square feet. They have added 20 of those facilities this year and our plan our plan is to add another 15 to 20 focused on Central and Eastern Europe, 15 to 2o per year in each of the next two or three years.

So switching our attention now in terms of how we think about entering the market. As we are thinking about new geographies to go through, the first thing that we consider is the attractiveness of the market and that’s some price of all of the obvious things you can think of basically how big is the market and how attractive is the economic environment, what is the MRO potential on the market, but we also spend a lot of time thinking about how do we get supply chain leverage there and we get products there in an efficient way, what is the awareness of the Grainger brand, how many existing customers do we have there, what is the political insecurity list of operating in that environment.

We bundle all of those things together to really understand the attractiveness of the market and then make sure that we match the investment that we are going to put in that market against that field attractiveness that you see there. We start with the local seller, this would be as simple as opening a sales office. We have a number of these around the world. This not only gives us a way to serve our customers by exporting products from the US through other markets to support that sales office. It’s also a fantastic way for us to get local market intelligence, local competitive intelligence, though in some small countries it is this starting point and as far we will ever go in terms of serving those customers, but for some other markets where we have future extension plans, it’s actually the entry point for us to learn more before we make further investment.

We launched our first trading concept in Trinidad last year. This is the way to provide local customer service, local delivery with duty and freight paid in local currency and without having the inventory local in the markets. I wish I had good early success of that concept in Trinidad and we’ll continue to start that out over the course of 2012.

We may then go to the next level which is putting a local inventory in a market, but doing with a reseller partner, a great example, we originally had a very large startup order from major mining projects in Mongolia. The customer then requested us to provide additional ongoing service in that market to support their mining project. It wasn’t something that we were prepared to make our own investment in, but we were able to find a partner that was already there that can supply that inventory, meet the customers’ needs without us having to make a very large capital investments in a challenging phase of the business. So it’s types of prices we use in our reseller relationships.

We had great experience in the greenfield perspective in small countries. So you’ve seen us through this in Panama, we recently opened Dominican Republic, we will open Costa Rica at the end of the year where a very small investment and a small footprint branch to be extremely meaningful from a competitive standpoint in those local markets.

Panama is a great example, we opened that business three years ago. It’s doing in excess of $10 million this year and it’s profitable this year. So we think that’s a terrific way for small markets to get there fast, to get there with a small amount of investment and to do it in a meaningful way at a decent price.

And then finally in more complicated markets where there’s advanced supply chain, strong existing customers and competitive relationships. We really prefer to go into those markets from a JV or an acquisition standpoint to make sure we can start with a scale advantage with a strong player with the right relationships as we go into markets right out of the gate.

So as we now turn our attention into looking at a specific country and how we might enter that. Clearly, if the country is not attractive, we would not be entering. Once we decide that an individual country is attractive, we then focus on understanding if there were solid acquisition target in those markets. And one of the important things about acquisition, we have no control over the timing of an acquisition and so where we spend our timings on building strong relationship with the premium players in different markets around the world because that we want to be in the first call, the only call they make when something changes in their environment and they decide that it is time to sell. We want to be the first people that they call. It’s also important to know when we’re looking at acquisitions, our strong preference would be a broadline MRO supplier at very difficult times.

So in the absence of being able to find out, we tend toward the safety and faster distributors for the simple reason because the key product lines for us is to bring some synergy and some scale for the buying side of that, but at the same time, those products and with that multiple categories of customers, they are not focused on one single industry and as a result they are a great base to start in a new country and we would then expand our product line going forward.

And then the third thing that’s really important to keep in mind is that we spend a lot of time focused on the strategic side of the business, albeit your customers, what their competitive advantages in the market, but an equal amount of time on the financial returns of the business. So it could be a great business, if we can make the financials to make sense and understand the sensitivities and the issues from a financial standpoint, then we also won’t invest.

So it’s critical in thinking about this model, we are very patient. We are very disciplined. There is a high level of focus on making sure we don’t make the wrong investment and as a result there might be some larger geographies or attractive places that we are not today, we may be trying to get there today, but we haven’t found the right entry points. So what’s important about that, is if that is okay, they are never going to try and force our way into markets in a way that doesn’t make sense.

We can’t find the right acquisition. I talked about greenfield options and those tend to be focused on the smaller markets. So we look this framework and applied it to the Fabory acquisition, we can see a little bit about our thinking. In terms of market attractiveness and we think about the upper left corner here, really the attractive elements about market are Central and Eastern Europe. That growth potential in Central and Eastern Europe is really what’s brought us about the fact.

Fabory as a company, we have had a very strong relationship with the management team for the last 2.5 to three years. We know their team well, we’ve shared groups of people, we have sent group of people back and forth to share about practices, are very comfortable with them at it. They have been selling our private brand Westward (inaudible) after the last 18, they had great commercial relationships.

So when their timing change and they have the opportunity to decide that they would essentially be selling the business, we are in the position to be the first call, knew the business well, liked the attractive upside in Central and Eastern Europe and we could make the financial returns that make sense given the financial situations they we are in.

You can see how we see start applying this model, this concept of the business. In terms of Fabory overall, we have been very pleased with the first couple of months in the business. The acquisition has been very well received, both in terms of key numbers and from the customers, we’ve proceeded very well on the integration activities that are underway.

We have actually been able to find additional synergies beyond our first thesis, primarily related to product sourcing and product line expansion. So we are very pleased with that and at the same time, still the timing in Europe has not been as favorable as we would like. So we’ve seen some volume below what our original forecast was as a result of those downturns, as a result of the daunting economy, but still very careful favorable on the transaction, very pleased with the business that we bought and it is holding very nicely towards that around that acquisition. And with that what I would like to do now is have you hear a few words from folks over there.

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So as you can, see it’s a very high quality organization, professionally managed, high degree of fastener expertise, but at the same time a great base as it relates to tools and other industrial supplies and we’re in the process already of accelerating the expansion both of the shop network, but also particularly our safety product line and further flushing out the tools line that they have in their shops to keep building that product line expansion opportunity.

And to support the growth both in our current operations as well as new markets its really important that we have the right people, systems, processes in place to make that happen and one of the most exciting things that’s happened for us so far in 2011 is the launch of our global accounts program.

As I mentioned earlier, we’ve had increasing pull from customers to serve them in consistent way in multiple countries around the world. Under Sandra Taylor’s leadership we’ve launched our global accounts team. Sandra previously managed very successfully our corporate accounts program in the US and before that had a significant amount of international experience with other multi-national companies.

Really two goals for this program, the first one is for a very small, very select group of our largest most strategic multi-national customers, we are now providing a single point of contact to those companies to coordinate activities around the world.

And the second piece is for the several hundred other customers that we deal with in multiple countries, but aren’t large enough for that level of support. We’ve now developed process, infrastructure and coordination activities to make sure that we can serve them in a consolidated and consistent way around the world and its a great initial success and feedback from our customers with the program.

The second DG mentioned, the SAP Americas platform; very excited about the additional capabilities that this will bring to our businesses particularly in Mexico, Canada and Colombia that are on older legacy systems; also a very important investment that we need to make to continue to support double digit growth in all of those markets.

It would be, I think obvious to poke some of the emerging countries that we operate in have a more difficult and challenging environment from a risk or a political perspective or an ethical perspective; what’s really critical and we spend a lot of time in working in our business is the fact that we operate the same way as it relates to compliance, standards, ethical behavior, everywhere in the world as we do in our core markets in United States and Canada.

And that’s really important for two reasons; really quick, it’s the right to do. The second important reason is that from a brand perspective, we are very cognizant of 84 years of growth and development in these brands are the most recognized and most respected brands in the industrial distribution stage in the world. They wouldn’t ever want to have something happen in a small business halfway around the world, they will do anything to furnish that brand.

One of the things that might not be as obvious though as the business become a very important selling benefit for us in the emerging economies, this is we’re focused operating the business in a transparent and ethical and compliant way, multinational customers are looking for the same in some of the markets where we operate that is not always the easiest thing to find, so we’ve actually started marketing it, making sure our customers understand how we operate and that’s been a key benefit for us at multinational customers around the world.

And of course the fuel to make all of these engines fly is really the talent, the people would make this happen day in and day out. From an international perspective, we have the challenges that are a little bit unique; one is the battle we track and retain tough talent, very difficult emerging markets around the world that is a very hot battle to keep those people.

And the second is making sure that we bring people into the organization that know how to launch new businesses, do M&A work with joint ventures in new economies where we’re not present today. We’ve made great strides over the course of the last few years both in terms developing our own people, further developing our culture internally, further strengthening the engagement of the international organization as well as bringing excellent talent that have great experience in dealing with those issues around the world. So very pleased with the strength and the depths of the team that we have in place and a critical element of our success going forward.

You’ve heard a lot today of our best practice share; I’ll give you a little bit different spin on best practice. There is a great discussion around this at my lunch table today that we’ve talked about supply chain and product sourcing and technology and eCommerce, those are obvious and important ways of leveraging that. One that might not be as clear is the fact that each of our businesses has a little bit different customer segment orientation based on the economies that they serve.

So in Canada, we have a deep history in the resource abstraction sector, mining, oil and gas as well as the transportation sector, rail in particular that moves those resources around the world as we are going in places like Latin America and China, those are important parts of the economy and so we are leveraging that expertise to grow with those customers around the world.

Similarly, in the United States with a fantastic track record at government, healthcare, hospitality, facilities maintenance and we have spent a lot of time leveraging product mix, segment expertise and with the customer relationships is a benefit of other countries outside the US and around the world.

But one of the themes we would like to lead you across all of these different presentations today is that there is a very high degree of sharing amongst all these businesses and a key focus across this higher theme of taking the best elements of each business around the world for the benefit of the corporation.

So we are very pleased with the total performance of the international group. We think that the business has come a very long way over the course of last two or three years, but equally excited about the additional upside both in our current markets and our very disciplined, very thoughtful focused and safe approach to how we are going to further expand and to meet geographic sectors primarily focused in Latin America. So it’s a great story, but even better story to come in future and we’re highly committed to executing it around the world.

I would now like to introduce Mike Pulick, President of the US Business; he is going to share our aggressive growth plan for our core United States. Mike?

Mike Pulick

Thanks Court. Well I think it’s a terrific time to be a part of Grainger. For the 12 years that I have spent with Grainger I got to tell you I am most excited about our – I am excited because of the investments that we are making in growth and those investments are being funded through productivity, we combine that with what’s happening with the economic issues and it’s a terrific time for us to take share.

So this morning or this afternoon what I would like to talk to you about is to give you a little bit overview quickly on our year-to-date performance. I’ll talk about how our customers’ behaviors change in a way that they buy MRO product. Majority of the time that I will spend with you will be the ways that we’re responding to the changing behavior and then I’ll end with what the pay off is for the our business and for our investments.

Lets for start talk a little bit about performance; we are having a terrific year, our sales are up 8% in the US on a daily basis. If we exclude the revenue due to the oil spill last year, sales are up 11%, a very strong earnings performance, operating earnings up 19% in the US and we did have a one-time event due to the way that we (inaudible) of last year.

If you exclude that, earnings are up 24% a very, very strong return on invested capital of 48.7% so overall, fantastic results in US business for 2011. But I think again for the most part (inaudible) again a number of our segments. And let’s take a deeper dive and take a look at how we are performing in many or our end markets.

Our manufacturing segment which is the way we look at it both heavy and light manufacturing, we are seeing double digit and heavy manufacturing leading the way up 15%. We’re seeing great performance across our commercial business, our retail business and the one I think we are also quite proud is the government business. I think most of you this is segment that’s been hit very, very hard at the local level, at the state level, at the federal level its not, at the budget sessions.

We think we’ve great value perhaps, this is the place that we can really shine with our customers. We can help them stretch; they are already shrinking MRO budget. We think we can help them stretch that even harder and we are adding new offerings to help them do that. Earlier this year, we dramatically expanded our public safety offerings. We added 6,000 products to our public safety offerings. We’re trying to find ways to help our government customers. This has been a good segment for us in the past. We think that it’s a great time for us to take share in this segment, and before I leave this slide I will just note that the reseller down at the bottom there, that last segment, that includes the oil spill sales. So that's the reason for the negative performance in the resell end market.

If you think back about the last 85 years, we have led the industry with three key things. We've found a market with a branch-based model that has provided local presence for us, inventory locally, we've been able to ship products to customers. We've found the market with a (inaudible) . Most of our customers have the big red book sitting on their shelf and they go to that whenever they need MRO products, and we've been very successful going to market with a direct sale model.

We've had sellers positioning on our large customers, we get on one of those customers, we talk to them about the opportunities with MRO. But what we see happening is we start to see things shift and we got evidence of that when we first look at the way that customers are searching for products in a way that they’re buying products. Traditionally, it’s the same fact, most customers back in the early 80s, they went to one of our branch, that's how they both, searched for products, that's the way that they ordered products. We are starting to see a dramatic shift in the way that customers are placing orders. If you look back in 2000, just 10 years ago or 11 years ago, 83% of our orders were placed on the phone. Today that number has dropped significantly as more and more businesses now has shifted. Customers want to do business online. It’s a way for them to drive further productivity within those businesses. We’ve also see evidence of a big shift in customer behavior in the way that they want to get the product eager. Again, back in the early 80s, most customers, they’ll do the walking to the branch and pick the product up or they would have it shifted.

It is about 50-50 in 1985. Fast forward to 2010. More than 80% now of the products that customer buy from us is shipped directly to them and just 20% of the products is picked up in the branch. We are seeing a dramatic shift in customer behavior. And that creates tremendous opportunity for us. We are seeing more, more customers that are saying bring the products to us, ship it to us or through one of our many inventory management service, find a way to bring that product if want our employee stay at the locations and we want them to be productive and doing what it takes to keep the building or facility up and running, not driving all around town trying to pick up products.

We’re using technology to reduce the cost in the way they take to place an order. They want more and more eCommerce solution. And many of our customers haven’t played attention to MRO. With the recession and other events, they’re having a look all across their businesses to find new ways to drive forcibly within those facilities. And they’re waking up to the tremendous opportunity within MRO. And what they are finding is, it’s not always about the place and the product, the time to buy, it’s really about the process. All the processing cost, the cost that it takes to search for a product, looking for different vendors, they try to use the traditional purchasing of three days than a buy, then they have all these products that they have to receive on their shipping back and then finally they got multiple [headwinds].

They’re realizing that they may consolidate some 100 and many of our customers buy our products from thousands of different suppliers that they can stage within their business. Now what’s also interesting with some of our best customers, they want possibly. Some of our best customers buy through more than one channel. They want that opportunity when they have, immediately, for products, they’re willing to drive to the brands if they need it.

Other customers want to buy online, someone calls on the phone, some want the product shipped. What we find is our best customers buy across multiple channels. I think the story here is there’s a shift in a way that our customers are buying MRO products. They’re getting for ways to drive productivity and they want cost reductions and for Grainger, we couldn’t ask for a better situation because we felt it’s duty to help them do that.

We’ve got the opportunity to add more products and adding more products is seen helping them consolidate the supplier base, could drive our efficiency and processing cost. We’ve got the opportunity to educate customers. Now I talked about the fact that customers are starting to wake up to the opportunity with MRO. There is still at tremendous opportunity to help, educate customers about this thing called MRO that initially had paid much attention to it. And you can do that by adding sellers and we’re also doing that through mass media. And finally they need help to find other ways to drive productivity. We’re finding new ways to help some of the new solutions online and we’ll also finding ways to divide a comprehensive set of employee management services and that’s the way that we’re helping them deliver productivity gains.

Let’s dive in and talk a little bit more about each one of these areas. For the first one, which is one of my favorites, which is (inaudible) high days and product management is, what we’ve been doing with our product lines and this is a remarkable story. It is a proven growth winner for us. It’s hard to believe that back in 2005 we had a product line and little bit over 80,000 products. Our new catalog that will come out in February will have over 400,000 products here in the U.S. And I think what the great story here is, not only are we adding more products to help customers consolidate their supply base, we have been able to hold order fulfillment rate and inventory turns constant throughout this full time of adding products, more products.

Now, I often get – Look, Mike, you adding hundreds of thousand products. What types of products you would be adding? And the answers that I always like to give is, you know, we are adding existing products that are similar to what we have today and I think Private Label is a great example of that.

Now, we’ve been adding Private Label products. These are high-quality products, basically at a lower cost for our customers, that they can only buy for now. And when they buy those products from us, they come back and they buy those products again, and again, and again.

And for us, as DG mentioned, higher margins for us are win-win. But now it’s not just about adding the existing products, we’re also adding brand new products thereof.

We have the desire to continue to serve multiple end markets, the end markets that I showed you up on the screen. That requires us the time to add new products than we needed before.

Healthcare is one of those areas that we think is an important growth area for us. We think that it is an area that not only are we underpenetrated in, but we think it’s an area that we’ll fix, but the end market will continue to grow.

So we added the (inaudible) set. And I think what most people don’t realize is those phones that we placed on a regular basis, at different place, because they want to (inaudible) of their employees in their hospital, and also they want to protect the (inaudible).

Now Product Line expansion has been a proven winner for us and we think there’s still room for us to grow. As we look out, we see in the U.S. product line of somewhere between 415,000 and 500,000 products in our offerings. This is an area that we’re helping customers to be more productive by adding more products like (inaudible). Now the next area that we’re helping customers is by educating them on what the opportunities is with MRO within that facility.

Now, we’ve had a proven track record of utilizing sales reps for many years, primarily calling on large customers. The opportunity to go in and help educate those customers about this area called MRO that they don’t really want to spend much time. Back in 2009 when most of our competitors were turning back due the economic time, we were adding sales. We took this as an opportunity to experiment with something that we started calling territory sales reps. We added 50 individuals in 2009 and it was an experiment at that time. These individuals were assigned a geographic territory. So they were assigned a group of zip codes. They were calling primarily on small and medium size customers. Now, this is an area that we under-penetrated in. It’s also an area that we really like from a margin perspective because they typically carry higher margins than we would with our large customers that today are covered by an account manager. So that experiment that we started in 2009 continued to grow and we’ve been adding territory sales reps since that time and each time we get a little bit better, we get a little bet better, we played around with the size of the package, we played around with the profile of the individual, we looked at the way that we compensate them. We think we are now on the verge of having a model that we are incredibly excited about. Now I am often asked so what does the territory sales rep really do, what is their normal they look like? So I have got a short video to show you that little bit of a [daylight] of what it’s like to be a TSR.

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Mike Pulick

We’ve been adding TSR since mid 2009. We are continuing to add TSRs. We added TSRs in the early part of this year. We’re adding more TSRs here in the fourth quarter. We’ll have 500 TSRs when we end this year and the most current wave of TSRs is tracking 17 to 20 months payback. So we are very excited about the way that we’ve been able to improve each hire that we’ve made and again these are individuals that are calling on existing Grainger customers that also charged without acquiring new Grainger customers with the target being small and medium-size customers and as we look out in the future, we see the opportunity and we’re targeting hiring close to 2000 more sellers by the year 2015 with majority of them being territory sales reps.

So the next area that we are helping our customers be more productive is through inventory management. So I talked a little bit about the inefficiencies of just ordering product. Once they get the product, it is very difficult to manage these types of products. They typically don’t have an inventory management system and what they always don’t understand is the demand pattern.

Most of the MRO products that our customers buy don’t repeat on a regular basis, they need help in managing that inventory. We’ve launched a comprehensive program that we called KeepStock. It’s our inventory management suite and I think what we’re most proud are is we offer customers the wide range of services that really meet their specific need.

On one end of the spectrum, we’re able to just provide simple solutions to help customers get organized. We go in and help them wherever they are storing their products, clean things up, we provide labels to them. Sometimes we’ll provide them a scanner, so they can start to track their inventory because again, typically they don’t have an inventory management system.

Many of our customers have a mobile fleet and what we find is, it’s very unproductive to try and manage the MRO products that are on a vehicle that’s driving around town. We’ve come up with an inventory management service that can help customers that have a fleet of vehicles. Many of our customers want to manage products in a secure location.

Typically that means a vending machine and we’re proud of the fact that we provide a vending machine for those customers that want to be able to control the consumption of products that they have stored in a given area of their facility. We are able to have a person come out and provide a point of used delivery of product. Many of our customers utilize what we called vendor managed inventory. This is a service where one of our service reps can go out to a customers locations on a regular basis, restock the bins and make sure that customers have what they need and for some of our larger customers like a military base or university we are able to provide an onsite branch directly at that location, so they don’t have to drive around town to get what they need. They have somebody like Grainger there to manage everything that they need.

So I’ve got a short video to show that it kind of gives you some additional color about all the ways that we are helping our customers with inventory management.

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In just five years we've gone from launching our KeepStock program to today we have 14,000 customers that are using one of those KeepStock solutions which equates to over 30,000 unique customer installations. And these customers are growing two to three times faster than the rest of our customers that don't utilize one of our services. We think this is a win for our customers who are helping them to be more productive. We think it’s a win for us.

We are going to put our foot on the gas, we are going to pick up the pace and as we look out in the future, we see the opportunity to have 45,000 customers utilizing our KeepStock solutions which would equate to well over a 100,000 unique customer installations.

Now the final area is eCommerce and we've talked a little bit about this throughout the afternoon, but this is an area that customers are migrating very, very quickly. Today, it represents more than 25% of our revenue here in the US. We see that continue to grow. As we look out in the future, this will be 50% of our business in a very short period of time. So we've decided to make a significant investment in this area.

We've already start to make enhancements to our eCommerce platform. We’ve launched the ability to help customers that want to buy online, but sometimes they need help. So we’ve launched quick-to-call where a customer can quick on a popup box that comes out and talk to one of our customer service agents. For those customers that want to talk a real person, we can provide chat so we can chat with them online and we help them navigate and help them either find the product or some of our customers even have a hard time checking out or maybe even singing up for an account.

As I mentioned, search is the big issue for many of our customers, so one of the things that we’ve also launched this year is product recommendation. This is a way that we can help them as they are looking for what they need, make recommendations for them so they can get in and get out so they can continue to be more productive.

This part of our business is growing twice as fast. We think it will continue to grow and in a very short period of time, I am going to bring Paul Miller up and Paul will talk you a little bit more about some of the things that we are doing specifically in this area and we’ll also do some demonstrations of some of our new solutions when it comes to eCommerce.

So I have talked a lot about the shift in customer buying behavior, so the question is, what does the future begin to look like? Now as I mentioned, for more than 85 years, the branches have been an important part of our business. They are important part of our business today, they will continue to be important part of our business in the future, but we also see fewer bigger branches with greater product breadth as we move in the future.

We see more and more customers they don’t want to carry the inventory. They want their product brought to them, which will mean either delivery next day through our distribution network that you heard about earlier, it would also mean leveraging one of our inventory management services. We are going to add more sellers, we are going to dramatically increase our sales force, we need to get out, we need to help customers, we need to continue to help large customers, we want to get out and we want help small and medium-sized customers, more profitable customers, understand what it takes to better manage their MRO and be more productive.

Many of our customers still use our catalog, but we see the opportunities, more and more of them are wanting other type of digital solutions which may mean having something on their phone and hopefully many of you have started to hear some of our radio ads, we’ve gotten much more aggressive with mass media. In July, we launched the national media campaign, we think it’s a great way to get out, talk to customers about who we are and most importantly what we do and how we can help them.

Now this change in customer behavior has created a tremendous opportunity for us. It’s created an opportunity for us to think about not only investing in the things that I talked about, but also looking at what are the things that we’re investing in today that we need to begin to shift our inventory towards. Shift our investment towards higher return things like inventory management services or eCommerce or TSRs or more products.

So we’ve started to make that shift. Last year we post 21 branches, this year we’ll close 33 branches and in fact majority of those branches will be in the fourth quarter we’re going close 25 branches here in the fourth quarter. This is a way that we’re talking our investment and starting to shift it to better meet customer behavior change and also shift higher return initiatives that I talked about.

Now this also creates a great opportunity for our team members. Our team members are our most important asset. We are in a relationship business. So this shift has created tremendous opportunity to leverage the expertise and skills of our team members. We’ve got team members now that used to traditionally talk to customers on the phone in the branch over the counter, they’re chatting with customers online.

So we’re also going up to the customer location and then delivering product and are helping them with one of our inventory management services. This shift in buying behavior by our customers is creating a tremendous opportunity for us to not only rethink on investments, but to move faster on those things that can help us take share.

So as I started the conversation, I talked a little bit about the buying shift and the way the customers are starting to think differently and how we’re starting to make greater investments and how we are paying those with productivity. This shift in behavior is allowing us to think about adding more products faster so we can help customers consolidate.

We are thinking differently about the way that we get on and educate customers, not just large customers but small and medium type customers so we are adding more territory sales reps. We have seen the success of what it means when we are able to provide a full suite of inventory management solutions. Our customers want choices not every single inventory management solution works the same way for each customer. We believe offering them a suite provides not only ways for them to be more productive, but also better ways for us to grow our business.

And eCommerce is an important part of our business today, it’s going to be a big, big part of our business in the future. We combine our growth initiatives with what’s happening with the economy, there is not better time for us than right now to be taking share and I couldn’t be more excited about our future.

Now it was 18 months ago that we made a decision among the leadership team that we really, really want it to double down on eCommerce. We saw the trend, we knew that this was an area that customer shift was going to rapidly start to move, we wanted to make a big investment. We wanted to make big investment in a way that we thought about investing in our technology, but more importantly we knew we want to make a bigger investment in our people. So people that it takes to really build a world-class, not just in our industry, but across all industries we wanted to build one of the best eCommerce locations.

So we will now -- and we wanted to hire a terrific individual to help us get there and I can’t tell you how fortunate we are to have Paul Miller. Paul joined us less than a year ago. We were joking other day that for everything that he has done it feels like he is been here forever, but in that very short period of time Paul and his team and he has built a very, very strong team. This team working with our technology team, working jointly together have done some amazing things.

So what I would like to do know is ask Paul to come on up and Paul if you would a little bit about your background and hopefully show some of the great things you have been working on.

Paul Miller

Thanks Mike. So I am the guy that doesn’t have videos and I am the guy that’s going to do some live demonstrations. And we all know how those can sometimes go, but hopefully it will go well and I’ll be able to give you a sense of what we’re trying to do here at Grainger and how we can really capitalize on the great work the team has done throughout the business.

So I just need to switch this over for one sec. well I’ll speak about of eCommerce, and I think about what we are doing. I couldn’t be more excited, I spent about seven years at Williams-Sonoma and I got to launch their eCommerce businesses. I also spend sometime at Sears. We have the scale of $50 billion startup as we like to call it. And when you think about it, those businesses are great but they don’t have a level of customer inventory that we do. We really get to know our customers, what is it that they really want to be able to do, how would they want to work to save time and money and what they do.

And that’s why I think is the opportunity here at Grainger is even bigger than any that I have seen. I am just logging on to grainger.com so in just a moment I’ll be able to walk you through that. But now let me switch. As I think about it, perhaps we are going to go to the slides. I told you last time that it was always fun, right? And on the guy standing between you and [Greg].Well, as we switch over to the presentation, I just want to say that how do we work through it, how do we get to a place where we really have 50% of total company sales coming from each comps. When I think about that that comes from us being really focused on what the customer is looking for. How do they do their business? How do they, actually following me, the truth coming down to rescue me, the joys of live demos, right? I am not Ron Jadin. So I will. If you like it -- Me giving Rons would be very interesting. So now what I can do offer the (inaudible) talk to you about eCommerce, But really when you get down to, you think about what it is that our customers are looking to do. They have inventory management solutions that we are putting in. They want to feel the integrate it across everything they do, whether that's using a mobile device, whether that's going back to their office and using their computer. They want to see that the integrated across everything they do. So when I think about the business, I think about how much the lines have really been blurring. I think about how B-to-B, B-to-C, one of those distinctions. I think about the fact that, let me ask you guys as question, how many of you in this room have ever bought anything online? Wow, look at that, almost majority, right. Well, as we buy things, we don't go to one site and then go to another site, they wont make my expectations are not lower. Its okay if that site is boring, its okay if I can't find what I am looking for. We go to sites and we continually evolve how our expectations are. It’s no difference for our customers. So when we talk about our goal, its not about being the best, B-to-B MRO player, its not about being the best B-to-B player. How do assume that? I am going to take you just to another level.

So I think about that in terms of not just how do we take the functionality to another level, how do we take our marketing to another level. I think about the way that people come to website, you know, they kind of lots in different ways, but when we found, we were not reaching our customers anyway near as much as we could or should have. I’ll mentioned paid search for example. We did both organic in paid search and for paid search, when I got here about a year ago, we had about 15,000 keywords that we managed.

As DG talked about inventory in expanding our product reps, think about having a half million products on a website and having only 10,000 to 15,000 that we are bidding on. Customers were out there, they were starting their searches on Google, just like we do for things that we are looking for. If you are not there and somebody else is, where are they going to go. We radically expanded our reach through paid search and we now have more than quarter of a million terms that are under management. The beautiful thought about paid search is you can be hyper critical of what the return on investment is down to day part, down to geography and down to the keyword. This isn’t just about just expanding out a number of keywords, this is about how you really throw something in a really efficient and effective way.

We are also doing more through email, we are doing more through display advertising, and let me tell you when mobile and social become things that really resonates our customers, we would be there. And I’ll talk just a couple of minutes out some of the stuffs that we’re doing in mobile. We went through -- we did and evaluation, where we said where are we? Where are we in terms of what’s critically important to our customers and so what are the things that are important, things like ease of use, things likes speed, things like some of the important functionality, like multichannel, like click-to-call, click-to -chat as Mike just mentioned. When you looked at it, we said how do we score? We’ve been working since the time I got here to try to prove our experience. And I will say it, I don’t know that we’ll be the best at every single one of these, every single time. But our goal has been to build that product roadmap

We have a sense of what it takes you to that. And again, not just steps in our narrow sort of plan, but best-in-class. So when I look at things like fast and ease of use, you look at some of the types of website that people used often. People like Google, people like Amazon, we look at them for inspiration but when I look at things like a personalize experience in how do you really connect with customers, you start looking at like mint.com, which I am sure many of you have heard of. We (inaudible) into it and it’s a personal financial services site where people will put in their most personal information, all of their financial data, also that they can get back recommendation that are highly personalized for them.

So we look at this and we think about how do we really grow and evolve this business. It’s by understanding what’s important to our customers and by over delivering on those things. So, when I think about how we’re going to do that in the future, I also think about building a capacity to do it more often, do it quicker. One of the things that we’re doing it and I believe this was discussed in last year’s meeting is we’re spending a fair bit of money to drive for new platform.

We’re not just loading everything into a new platform waiting for a big bang and saying oh, we just flipped. Now run. We continue to evolve or eCommerce experience and add value with the things I'm talking about. At the same time, we’re developing this new platform that will allow us to be much quicker in terms of being able to flip new features and functions and do things in a way that is real time. In addition to that, as we think about this business and we think about the globalization that Court talked about, there is not a better time than now to look build that you want and to be able to leverage it across multiple countries.

The platform that we are going with is highly evolved and very capable of being able to take on multiple languages and multiple currencies. And so that’s a real strong advantage whoever we are going with it. Our first group of customers is doing a lot later this month, and that’s going to be our simplest sort of customers that we can really control the experience, understand what’s going on, learn from that and adjust and through the course of this year, we will be adding the rest of our customers onto the new grainger.com system.

I want to kind of take you behind the curtain a little bit, and talk you about some of the things that we are going to be launching soon. One of the things that our customers always look for is do you have the products that I am looking for. If you have it, where it is, can I get it right now, when can I get? And so we are making some changes to our site where real time availability will come to life shortly. In doing so, the customer will enter the products that they want and by checking the availability by putting their zip code they can see exactly when they will receive the product or if they want to pick it up from one of our branches, they can see on the map where the branches are closest to them and be able to pick it up.

Think about this also when we start launching our mobile application and how powerful it will be with some of these in the field and has the ability to attribute that on a mobile pipe as well.

So as I talk about mobile, again a year ago, we have some good discussion where we really started to look at what our customers looking to do. They wanted to be able to access the same things that they accessed on their website. Sometimes, they change with that but frequently our customers are mobile. They are out there on the shop floor, they are out there in the field. They need to be able to search for products, they need to able to buy products, they need to be able to check orders and approve order and in just a moment I am going to show you how some of those things work, I hope.

One of the other things that we are doing is we are thinking about things like KeepStock, as we are in the process, we are adding functionality to integrate that KeepStock experience with both eCommerce and mobile. The little exciting things that we are doing, we are launching our mobile, and we’ve actually just launched it two customers. We have launched a series in Wal-Mart and we would now feel that then, we are doing some testing to learn how a real customers are finding it. We had feedback from our (inaudible) customers which blew us way, he literally just walked through the store and realizing the ceiling tile, opened up the applications, flip through it, found ceiling tiles, added to his order, hit, submit and he was done. He said he couldn’t believe it how simple it was and that’s it likely here. It was designed based on how our customers work for what they’re looking to do and you couldn’t have got a better feedback than that.

Okay, so here as I turn to live demo, I am going to flip over here and we’re going to go, we’re going to think about this in terms of how a typical customers really starts their search. Quite often, they might be on Google and they will search for products like the (inaudible) electrical products that we sell. Now, when they see this, I think most of you are familiar, there are paid search adds and there is natural search. We come up and vote but I am just going to go through and I am going to spend a little bit money. I am sorry Ron. But we’re going to go through to the Grainger site by clicking on that paid search add. The click will search a page on grainger.com where the customers who was asked specifically to pick up some products, in this case limit switches, they’re able to go in and they’re were able to see selection of products that we have. Now some people know exactly what they’re looking for. Some people don’t. And so what we try to do is think about how do you make it easy for that customer that really needs some help. For them to be able to look at products, for them to be able to pick the one, that’s right for them and potentially have some (inaudible) alternative. So, I am here with particular product and you can notice a few things. You can notice on the right, customers also view.

Those are the product recommendations that Mike mentioned. Those product recommendations are adding countless sales to us on a per day basis, but I’d like to look at it as getting in front of the customer, more options of what they are looking for, making it easy for them to find exactly what they need. When I go ahead and I am in the product comparison, strictly what happens is our customers have spent time and they are not exactly sure, exactly what they need. So I am just going to do a quick little dial up here to see if investment people, are they able to talk to us and help us as we are making our product decisions.

We launched this back in the summer and we now see thousands of people per day calling us or reaching out to us through the phone as well as through chat.

Operator

Thank you for choosing Grainger. We are looking forward to speaking with you. Please hold while we connect to you to a customer service associate. This call maybe monitored or recorded for quality assurance.

Rachael

Thank you for choosing Grainger. This is Rachael, how may I help you today.

Paul Miller

Hi Rachel this is Paul over at Lake Forest. We are just doing a demo. How are you today?

Rachael

I am good Paul, how are you?

Paul Miller

I am good, you know Rachel we were on a product comparison and it brings to mind how often do you have people that are looking for specific products and need help.

Rachael

Customers definitely call very often looking for products, our customers love the fact that Grainger customer service is only a quicker way when they have a question about a product or a product category.

Paul Miller

Awesome. Well thank you Rachael. We won't keep you, but we really appreciate everything you do.

Rachael

It was my pleasure Paul and thank you for choosing Grainger.

Paul Miller

Thank you. Most often we find that people either want to go through a call or go through a chat and we make it easy for them to do either. You can notice that there are stills button that are up there in terms of me being able to do that. I am going to go ahead and I am going to add some products to mu basket. Now as I added that particular switch, you can notice that some things came up here that are, you might also like products. I talked to somebody at lunch about the fact that with a half million products on the side, it would take a lot of people to go through and merchandize every single one of those combinations.

We now have the ability to use tools to be able to help us do that in an automated way and then put on top of that incremental logics and make sure that what we are doing is absolutely the best possible for our customers. So I am going to head and I have added two products in my basket. But like I said our customers aren’t always changing their debts, like I was just changing the DC.

They are out there, they’ve got their mobile devices and the way that we are thinking about things they will go ahead and they will have a smartphone of some sort. We find that penetration of smartphones among our customers is I think it is about 56%, so pretty high and we’ve launched in a way that we will be able to appeal to all the customers that have smartphones, not just folks that have any particular ones. They might have an iPhone, they might have an Android, but we will be available to work with any of those.

In the near term, we are building out of a roadmap which will allow us to have apps for all of those platform as well as things that are, as well as things that are for iPads and other devices. So I am just going to continue through the order form for a second. You can see that here our products that are available within my particular order form.

We are going to flip over now to the document camera. Interesting how these things have evolved. I remember in the day we used to have these big huge things and nothing as sophisticated as document cameras, but when I go, I am able to log into my account and I wanted to show you that the same products that they were would be in my cart.

I want to also show you that some of the things that happened with our customers is they have got orders that they have placed or that people working for them have placed and they need to approve them. So what we’ve done is we build functionality where in a very simple easy way without an inbox. The inbox is something that allows them to see all of the orders that they have pending approval. So as opposed to in the path having to go login, go through a website, we’ve added it to their phones. And we were thinking about different ways that this could be helpful to us now to be able to approve extensives or trivial things very simple easy way.

Again, we know our customers are out there in the field. We want to make it easy for them to be able to interact with us and do what they need to do. Now as well, you know, customers might be using search. They might be using browse. In this particular case, I want to take an example of somebody who was browsing for some products and we’re going to go down here. There’s a lot of categories that we have as you can see and we know that the majority of our customers you search. So that’s a big, big area of focus for us. I just happened to browse through, we’re going to go to code with tools. I'm going to choose to go down to support the thrills or any other products, I have got the thrills in this case and now you start to see the various product that we have and I can go through and I can pick whatever product I want. Very simple and easy, I'm all integrated with my account to all my payment options already set up, so I am buying on accounts. I’ve already set up with a particular credit card, easy for the customer to be able to do that.

The last thing I want to show you is estimates out in the field, they frequently are looking for a branch. Now of course these smartphones are all GPS enabled. It’s so simple and easy to buy, letting it go and using my current locations I get the branches that are closest to me. If I wanted to map it, find directions, easy enough to do that.

So really what we wanted to show you today is that we’re thinking about the customer, we are thinking about how they do business, what they are really looking to do and how can we help them? I would like to think that what we have done has started to really build value and we are starting to see that in our business. We are seeing growth that’s more than two times of the base businesses and the base business is real healthy.

So it’s really encouraging for me and just to echo something Mike said before, I couldn’t be more excited to be at Grainger than right now. We are going into a break now and after that Ron Jadin will be up talking about the guidance. So thank you very much.

Ron Jadin

Okay. Let's get started So I have got a number of comments, I've got a lot more data there that I am going to go through as you can tell, but I wanted to give you enough information for the modeling you are going to want to do. The first slide in the handout is kind of a summary and basically everything after it is kind of back-up to that and I will hit some of the high points that are basically items that are in the box. So numbers or comments at the bottom of each page are my main takeaways that I want to share with you.

So our guidance for 2011 is 11% to 12% sales, 9% to 10% with our acquisitions so you will see a lot of comparisons with and without our acquisitions. EPS of $8.85 to $9 and we've raised the low end of that for the quarter and then for the year by a nickel. And similar to 2012 10% to 14% the acquisition impact is much bigger as we have the full year Fabory 6% to 10% without and then our EPS of $9.90 to $10.65.

So we've increased the low end of the range for this year, we didn't increase the high end and that’s because we are investing more in our growth investments, so there's some sales upside you've seen in October and into November and we are reinvesting that in even more so in our growth.

So a great example of that, as we are hiring about a 100 and 150 sales people this quarter and we plan to hire another 100 in the first quarter and we've pulled that into this year, so we are in fact accelerating our investment in sales people more so than we had planned to this year.

Our guidance excludes a significant item I wanted to draw your attention to. There's a number of things in the first page of our appendix where we have items that include to normalize our earnings. As you’ve seen in our quarterly press releases with regard to earnings around some tax adjustments and some benefits adjustments that are unusually high or low that we pull out. This is one that’s in there now but it’s new and that goes to the restructuring cost around the branch folders that Mike talked about earlier. So it’s [$14 million to $18 million] $0.12 to $0.15 EPS regarding those closures that are occurring this quarter.

Our guidance for our 2012 as you can see anticipates a double digit sales and earnings growth possibly a little bit stronger than you may have expected, but really its build on all the growth investments you heard about and you’ll see a little bit more data on in this deck.

And for me one of the more significant things to also understand is that’s material effect into the first quarter, so fourth quarter of this year because of little bit lower sales quarter, our first quarter of next year similar to that relative to the second and third quarter of each year, the way that our sales and earnings ratios kind of look this quarter will be much like next quarter and then sequentially throughout next year our earnings per share ought to grow on a faster rate than sales throughout the second, third and fourth quarter.

A great example of the challenges in the first quarter are we’ve hired 300 sales people this year; 150 in the second quarter, 150 in the fourth and now I mentioned we pulled in another 100 into this quarter that we would hired in the first quarter. So we get to the first quarter of next year, we had about 400 sales people. The pay and benefits for those 400 next year in the first quarter that weren’t in the first quarter of the year before. So I have some tough comps with regard to those investments especially around sales people where the benefits come much further into the future.

And then finally, I just wanted to highlight and we’ve put this on a number of slides, basically 200 basis points of operating margin improvement this year is about three years of benefit in one. We typically get 50 to 75 basis points of op margin expansion in a year when our organic sales growth is in that mid to high single digit growth rate. So a fantastic year that those benefits are sustainable; we are going to carry in the next year and we expect to add another 50 to 80 basis points of margin improvement next year on top of this year on an organic basis. It will again show within what our acquisitions, but I think that’s kind of the apples to apples comparison for me is when we exclude acquisitions.

So let’s talk a little bit more about 2011. Yeah 2011, starting with our sales bridge and this is fourth quarter in total year kind of the main drivers of organic sales and typically we put oil spill in there but since we’re talking more about ‘11 and ‘12, I put it below what we call organic because it’s really 2010 event that just distorts some of our prior year comps. So 9% to 10% sales growth for the quarter and for the year on an organic growth basis and as you can see at the bottom of 11% to 12% sales growth for the company for the year and 9% to 10% excluding acquisitions.

The other important point here is, when I talk about acquisitions throughout my comment it’s the acquisitions that we’ve already made and closed on, the same thing with dispositions. So any future acquisitions or dispositions in our business are not in our guidance.

So we’ll look at the sales and EPS, $1.94 to $2.09 on EPS the low end is upper neck and the high end is unchanged. You can see that at a company level zero to 40 basis points of op margin expansion, are well below with what we’ve seen through the third quarter year-to-date and lot of it like I said has to do with our growth investments so we’re investing $60 million to $70 million more this year than last year and some of the growth investments you’ve heard about, about 40% of that $25 million to $30 million of it is occurring in the fourth quarter. And so it’s a significant ramp up in a quarter when our sales tend to drop off a little bit vis-à-vis the third quarter, it’s a lower volume because of the seasonality.

And the other couple of things as we started to see some cost inflation on the items that we had price increase in August so we increased some prices a little bit in event of some cost inflation that we’re going to announce in the fourth quarter. So all-in its okay, but when you think about quarter-to-quarter, we have a little bit more of the cost coming in for those price increases.

And then in addition, we continue to see as Court mentioned, very strong international growth top-line and earnings, so the earnings are growing faster than sales internationally, but their starting point is a lower op margin rate. So pretty much everything outside the US is a lower starting op margin rate and that becomes negative mix. Similarly, the acquisition of Fabory is kind of a mid single digit op margin business. It’s about 5% of our sales so that has a drag on margins.

And you can see that when you look to the right hand side of your slide what we call organic really excludes acquisitions and foreign exchange. So if you look at the op margin rate for example, zero to 40 for the company is 70 to 110 for the quarter for the organic part of the business, so very strong growth here. But it’s a bit massed. Similarly, you see EPS, I think it’s important to note, $1.94 to $2.09 for the company, it’s actually $0.02 higher when you look at it organically. So acquisitions and foreign exchange are a drag of $0.02, for Fabory its’ actually negative $0.02 to $0.03.

We have talked about being earnings neutral for the year back in August-September timeframe and because of the softness in the economy in Europe we are planning for that business to be a little bit less than we had expected back then. The other acquisitions are much smaller, Colombia and some other ones in Canada, are positive contributors but on a net effect we think it’s about $0.02 drag there.

So for the full year, 170 to 180 basis points op margin expansion, again three years expansion in one, fantastic year. I am going to dissect; it’s a little bit later on so when you think about the midpoint of that, it’s about a 175 basis points, so in the number of slides I used the midpoint of a range is just have fewer numbers and we’ll talk about what really drove the op margin expansion this year and what does next year look like I’ll put them side by side.

So organic 190 to 210, a little bit better op margin expansion, again a partial year from acquisitions has a little bit of a dilutive effect this year than next and the full year will be similar effect. But you can see, on a full year effect that you’ll look at EPS $8.85 to $9.00 and $8.79 to $8.94. The difference there is actually positive $0.06, and in this case it’s actually foreign exchange.

So, the weak U.S. dollar over the course of the year, you gross up the sale, as you gross up the costs, that our margin basis or after tax, I guess, in this case, it’s about $0.6 positive. So the little bit of a drag from Fabory is offset by Columbia and other acquisitions. So, all in, the effective acquisition on EPS is neutral. We just expected it to be that way just for Fabory when we were talking earlier.

So, for 2012, when we think about the economy in the U.S. being about 75% of our business next year, we think about industrial production and very wide ranges that we are seeing using consensus forecast USA, and also a decline. As everyone knows, industrial production this year is just short of 4%. Next year, we’re thinking of it in terms of 1% to 3% with a mid-point of two and you can see Europe there, the Euro is on GDP from 1.6 to 0.6. That’s driving our thinking about both this year and next year. Japan coming out of the [throws] of Tsunami is getting better. But we’ve grown strong in Japan despite that. So, a wide range, lower indices, is going to affect our guidance a little bit wider than probably normal.

You’ve seen this chart before from us. Decent co-relation over time, hard to think about it within a quarter, but on an annual basis the red line is our sales growth rates, the yellow line is industrial production. So when the red line is above the yellow, we’re taking share. You see a lot of that in the right hand side of the page. You see the down turn in 2009, coming out of it in ’10 and ’11, strong growth in the economy and industrial production, Grainger growing even faster and we see IP coming down 4% this year, 2% next year roughly, but as continuing to take share, in fact at an expanding rate.

So we think about sales growth drivers. Again, we are lining up here for 2012, next to ’11. So ’11 is the same slide I showed you before. I just wanted to be able to compare. So the effects of the softer economy really are causing us to think the economy and share gain to maybe a little bit lower, 5% than the low end but possibly 8% on the high end because of those growth investments. Quite similar to this year, maybe slightly up, it’s difficult to say yes, in that 2% to 3% range. So when we look at organic, that 9% to 10% from this year we have a range a little bit on the low end because of the economy but also a little bit higher on the high end because of our growth initiatives and little bit for price potentially.

Acquisitions, again it’s Fabory. No new acquisitions or dispositions, just what we've already closed, bigger impact in 2012 as we have the first full year versus four months in the prior year. So, again 10% to 14% sales growth. It’s kind of rounding. I think the 3% is more like 3.5% but in this case it looks like 4%, 6% to 10% excluding acquisitions. So that 5% to 8% I mentioned in terms of the economy and share gain, we are expecting more of that 5% to 8%. So you can see at the top of the bars on the right. That's a range for growth in the economy and share. The red is share gain, the white is economy. So I mentioned we are talking 1% to 3% for the economy next year, 2% as a mid-point. You will see that the red bars are bigger; we are expecting more growth from share gain next year than you've seen in 2010 and 2011.

So, a strong economy growth of 6-4%, but now 1-3%. But in a tougher economy, we are leveraging our growth investments much stronger. So when you look at the high end of our range is compared to history, we still have a chance of growing 8% even in a much tougher environment. And this again is – this is organic excluding price. It’s just that top line, that economy and share gain. It’s the same line that was on the other build chart for our sales growth. We think about those sales growth drivers in terms of driving shares, that 4% to 5% in the same way at the bottom you can see, we are thinking about share gain through shorter term, medium term and longer term investments. And we've heard a lot about these already, product line expansion going along a long time. We’re just adding those products every year, anything with inventory services and media, as many things that includes eCommerce but it includes a lot of our traditional media as well in terms of radio, catalog, billboards, all those things that we’re doing but also search, paid and un-paid search.

In terms of medium term, additional sales people, we’ve been adding those for a number of years, but I am thinking of a medium term because it’s closer to a two-year pay back than a one-year pay back. And then eCommerce, that’s more of a structural investments in eCommerce, building the new platform again to do that. We think that the shorter term investments drive about 2% to 3% sales growth and the medium term investments would drive another 2% on top line. That’s how we get the 4% to 5% and then the longer term investments are on DCs in the US and Canada in particular because those are the big dollar ones. And then building up US investments of SAP, for America’s SAP [system] for the benefit of cost of the business that we have in North and South America, is another long term investment. Neither of those directly drive volume and sales growth, but they do certainly create foundational capabilities for us for future growth.

So our guidance, again 8.8 billion to 9.2 billion for sales for next year, 990 to 1065, 20 to 50 basis points of margin expansion is included in there, and there a few slides that I am going to use to fill back the [onion] on that, the 20 to 50. The mid-point on that is 35 basis points. so I am going to show you a slide that shows how do we get the 35 basis points versus that 175 that we had for this year. When you think about it on an organic basis and pull out acquisitions in foreign exchange, I want to draw your attention to EPS line first. The 9.90 to 10.65 if you look at it, excluding acquisitions, you can see about a $0.04 difference. And so we’re thinking about $0.03 to $0.05 accretion from Fabory next year. So we using $0.04 here just kind of a mid-point of that range.

We talked previously about $0.10 to $0.12 contribution from that acquisition next year, and again the softer economic outlook is really kind of causing us to temper our view of earnings growth in Europe, for the short-term at least. So that’s the difference there, that $0.04, and then when you look at op margin expansion, 50 to 80 basis points. That starts to look on 6% to 10% organic sales growth, starts to look like kind of a normal year and we will show a chart showing some year-by-year what is op margin expansion look like for our company, but when you see organic sales growth of 6 to 10, 50 to 80 basis points margin expansion for us makes a lot of sense.

The thing that we’re excited about is we’re more than doubling down on our growth investments next year. On top of the year, we’re already accelerating growth investments and we’re still delivering what we consider to be kind of normal. So here’s kind of the history, going back at least to 2007, the line at the top is our op margin rate. So, you see it dip a little bit in 2009 and then continue to grow up once through the downturn and then recovery. Each year, the height of the bar is the contribution each year to op margin expansion. The red is GP and the kind of the lighter color is expense improvement -- expense productivity.

So 2009, for example, our sales were down about 12% and expenses didn’t drop as fast. We didn’t want them to drop as fast. So that was some negative productivity and the white bar is bigger than the red. So the net of them is negative. That should drive the line down. As you go up to the right, you can see 2011 huge red, great expansion in our gross profit margin rate, also some expense productivity, and when you look at 2012, the way we put a little bracket there to highlight that without acquisitions, it’s about 30 basis points higher because there was a negative mix with acquisitions. So it’d be about 50 to 80 basis points there, much like 2007, ‘08 and ‘10. So we feel like that year would be much like this and the unusual ones are kind of 2009 and 2011.

And the other thing I think that’s interesting is, there is a big GP rate contribution there when you look at the company, when you pull out acquisitions, though the mix changes. So in fact, what looks like 50 basis points of GP expansion for the company, has posted 25 basis points when you pull out Fabory because Fabory has a very high GP rate. So stable mix on the GP rate, so actually if you can pull it apart, it’s a more similar mix between GP and expense contribution to our op margin expansion next year.

It right now it looks like expense is actually a drag, but that’s because Fabory also has very expense to sales ratio. So when you pull it out, both of them are positive, both of them are contributing in a fairly significant way next year over this year on an organic growth basis.

So I mentioned 20 to 50 basis points expansion for the company and operating margin, the midpoint is 35 and what I want to do simply here is just highlight what the big drivers are because 35 basis points doesn’t seem like a lot and again that’s the midpoint. So 13.2 this year to 13.6 next year, that’s a 35 basis points if you add up the pieces, but some big number is buried within that and so I wanted to kind of peel back the onion here on our next slide to highlight what’s going on because there’s a tremendous amount of productivity in this business that’s funding not only our growth for organic but also covering the negative effect of our acquisition.

So the growth programs we have highlighted, that 75 basis points negative impact is when you think about our $9 billion, it is a fairly significant number, but in fact doesn’t even highlight the amount that we are spending because that’s net of the revenue benefits we are going to get on those initiative.

So this year I mentioned a $60 million to $70 million of incremental spending, next year includes the carryover of that and an additional level of spending that more than doubles that number. So we are going to be over a $100 million of growth investment spending next year and the productivity will exceed that. Productivity drivers include things like product cost versus price that DG talked about in terms of our ability to manage product costs, some of our pricing techniques. We will talk about those a little bit on the next slide. So nice tailwinds as we grow more on e-commerce, that continues to be a really positive story for us every year and then just some of the rationalization we are doing with franchises for example, but also some really good integration and continuous improvement that we are seeing across all of our larger functions around branches, DCs, even how we are managing our marketing costs throughout the company.

And so a lot of productivity funding the growth investments and then acquisitions I have already covered. So this is the one I alluded to before, the 35 basis points this year where do you see it. So here is kind of the places you see it and how does it compare to last year. So the topline is the big one, the price cost leverage, 140 basis points and the thing we have got a number of drivers of it. Product cost, I will leverage as a big one, but a lot of improvements really leveraging SAP.

You know we have been on SAP six years in the US and we’ve so much data and the tools we are bringing on board to understand price elasticity to price our quotes more effectively, to win more business and to also try to win it at a little bit higher margin than we have in past. We have also improved seller incentive plans, so we have added more and more of our sales force through this year in terms of incenting them to not only just grow sales, but on a whole grow the margins that go with that.

The other unusual item I think that’s up in the 140 up there is the favorable mix with in 2010 I think a year DG alluded to before, the sales related to oil spill clean up. Those are at low margins in 2010 because they were drop ship, high volume secrete the needy comp up in that item, I said it actually goes back to 2010.

But a lot of the improvements that drive that 140 are sustained and that goes back to the first bullet on the first page through 2012 and then another 55 basis points on top of it. So you got to remember these are year-over-year changes. So the 146 and there is another 55 on top of that. Okay, these are year-over-year changes. Customer mix is a drag. We are going to continue to grow faster with large corporate accounts, large government accounts.

We are making the investments in TSRs and those sorts of it, even in commerce that will help us grow faster with medium and small, but still there's a lot of momentum with large customers. It’s a great problem to have. We believe that the price cost leverage and the private label that DG talked about certainly helped fund that. And operating expense leverage is also net of all the growth investments, so it’s a positive 45 basis points while still covering all the investments that we talked about.

So cash flow and the balance sheet, so since cash from operations pretty significant improvement from 2007 to 2012. The hashing on the right is really just a range around what we think we will deliver there and I drew a line with the $700 million average over the three years because there is some unusual items in there. So in 2009 coming out in the midst of the downturn, we actually drove record cash as a company which was great for us. It gives us confidence in increasing our dividend and that sort of thing, but while availability remained very high, we actually had some inventory reductions that helps cash flow there.

That came back into 2010, but at the end of 2010 we had our biggest quarter in the fourth quarter with the oil spill sales which created a lot of accounts receivables at the end of the year which we then collected in 2011 which kind of grosses it up officially a little bit. So I think about it in terms of averaging those three years. But again continued improvement there and then, so what are we going to do with that money. 760 to 860 for 2012, about 26% of it we are going to reinvest in CapEx, around $200 million to $225 million a little bit higher this year than this year. Again it’s driven about 70% of it is driven by our DC investments in the US and Canada as well as some IT investments.

So about two-thirds of it is driven by those things, it’s a big step and step function investments there that after 2012 we will wind down a bit. So we think about our CapEx intensity actually declining a little bit over time at least as a percent to maybe even as a dollar basis and certainly in the future we will build out some of our existing DCs and make them bigger, but I don’t know that we will able to building any more million square foot buildings like we are this year or next year.

Share repurchase and acquisition, so that word acquisitions really applies to 2011 as $500 million is the sum of both of those. In 2012 it’s really assumed to all these share repurchase. To the extent, we do acquisitions we might pull back on some of the repurchases or used debt, we will talk about our strategy around that in another slide or two. And then dividends $200 million to $250 million, it implies about a 14$ to 22% increase in dividends next year over this year. Again we expect to increase our dividends at rate faster than our earnings.

Working capital returns, you heard about this from I think both Jim and DG already. DSO line relatively flat which is, it is a challenge when you are growing internationally at much faster rate because days sales outstanding tends to be higher when you get outside the US. Inventory turns dropped in 2009 during the downturn bounced back and are pretty flat when you think about the whole period at around four turns roughly and we are adding a lot of inventory over $350 million of inventory during this timeframe just for normal growth, but also for product line expansion and for building up the DCs, we put a lot of inventory now into Northern California DC. The height of the bars is our working capital turns, so relatively flat over time.

So when you hold your inventory and your asset base, kind of consistent with sales growth, but you drive your earnings at a much faster rate than your sales growth. You get some nice ROIC expansion. So the height of the bar is almost linear as you think about 2009 coming out of downturn up through 2012. Again the hashing on the top of 11 or 12 is really our range around where we think this will come up. The line includes acquisitions. So the height of the bars is organic which I think is consistent to think about apples-to-apples and then the effect of our acquisitions when you gross up your acquisition, gross up the balance sheet, has about a 1% impact negative in 2011 may be 3% to 4% impact in 2012, but still expanding and strong.

So cash and capital strategy, I’ve shown this slide for I think four years now and not too much changes, a little bit here and there. I like to keep showing it. We don’t want to hold a lot of cash, so it’s kind of $200 million to $400 million balance of cash. And we said first three to five years and now for about four years.

So we still feel good about it. So we’re going to still say three to five years. We’ve talked in the past about reinvesting about a third of our cash from operations in CapEx and that percent is really coming down. So we’re changing our view of that. So more like 20% to 30% and you know this year or next year it’s about 26%. So kind of in the middle of that range. And the remaining cash flow is for new growth initiatives and we’re ramping that up, so while our CapEx intensity is declining a bit we see a little bit more expense intensity. You had more sales reps. You had more inventory service people, you invest a lot in e-commerce. Those things are finding their way in through expense. And of course CapEx find its way into depreciation and amortization too, so just a different timing method really.

And share repurchase and of course debt reduction. So I wanted to highlight debt reduction because it’s also part of our philosophy of really using cash for acquisitions and we paid down $50 million of commercial paper in the third quarter and then we’re in the process in the fourth quarter of paying down another $100 million. Effectively by the end of the year, the Fabory acquisition will have been done with cash. We do have debt on the books in euros in Europe for that deal and that’s more for a natural hedge.

And so what we’ve done is paid down some US debt during the course of balance of this year. So by the end of the year, we’ll effectively paid cash for that deal and part of our capital strategy is smaller acquisitions like Fabory, we’re going to use cash for it and larger acquisitions, we’d fund with long-term debt.

We haven’t had the need to do that in over a decade but we still talk about it, it’s important to know that we would spend $1.5 billion to $2 billion and have our AA plus (inaudible) they don’t believe me, but, it’s true. You know we are an AA plus firm and we would drop to strong single A if we came across the right deal, and we are not afraid of that, we just don’t need a lot of it. We like that, we like having what the investment bankers call dry powder.

We put it to great use during the down turn, I think Jim mentioned the effectiveness of buying back stock, when many companies were scrambling to fix their balance sheet, what was referred to as a lazy balance sheet for Grainger became a fortress balance sheet even though we didn’t do anything different; that e bought back a lot of stock in 2009 and 2010 significant amounts, at prices that were very attractive.

So we would like to dry powder for organic growth, for acquisitions and for buying back stock. Although like Jim said, we want to be in every quarter buying back stock and we are. Just a little bit less this year, than the year before, because we put more of that cash into that acquisition year.

Jim showed a few of these slides. This is just another look at it, this is instead of over a long period of time just the last five years, so few different percents, still 18% compounded growth rate increases, our earnings is up during that timeframe about 13% which I have to double check because I thought like it was too low, but when you think about the downturn in 2009, it kind of depresses it. However the year was probably up near 18%. So some years we actually didn’t succeed because we grew our earnings faster than we thought and so our dividend didn’t actually increase faster, but that’s our intent.

And in terms of share reduction about a 17% reduction on a net basis, so that includes dilutive effect of any stock compensation and a 6% to 9% return on our share repurchases in the last five years, so a nice return on that investment.

And then I wanted to talk about a little bit, again looking at the last five years and the five years before, I typically shown this chart on a 10 year basis. I thought it would be interesting, just put it apart because we did borrow some money and we have also generated a lot of cash in the last five years. So $2 billion was deployed in 2002 to 2006 about 60% of it or so was in share repurchase and dividend and about 40% capital. There is basically no line – there is a little line there for acquisitions but it’s small we can’t put the word in there.

But when we look at the last five years, you see the height of the bar is over $4 billion, so a lot more in terms of capital return to shareholders. Over half that difference is because we are operating more effectively, we’re delivering a lot more cash than ever before and I am going to push in to we borrowed a little bit, we took on a little bit of debt. I think our net debt position is may be $200 million in the net cash of borrowings. By the end of the year it might be closer to zero, but significant in terms of share purchase and dividends and the dividend piece getting to be a little bit bigger piece, but we’ve generated so much cash it’s hard to have that piece move. But it is our intent to have dividends to be a little bit bigger piece of what we give back to shareholders relative to share repurchase and of course acquisitions will have a big influence on share repurchase as well.

Lot of numbers here, I just wanted to go through what’s in the box; because we think about total – so different TSR, total shareholder return here and you see 18%, 19% and 18% and the first column is kind of organic. I wanted to show organic in company basically the same TSR and then what did we do the last five years. So what do actuals look like. And so when you look at the first two columns you see sales growth rates are 8% and 12% and that’s the impact of Fabory; if you look at margin expansion, so this is if your op margin rate expands 50 basis points its worth about 6% that sort of thing. Op margin expansion isn’t as great including Fabory because of the negative mix being a low margin business. When you get to earnings it’s about the same 14% and 15% adding dividend and share repurchase and you get to about 18% or 19%.

One of the point I want to make here is we put share repurchase and taxes here, the 2% contribution is part of share repurchase, not a significant impact in the past because of the acquisition you made that shoot up some of the cash, but tax rates are coming down. Our tax rate last year was about 39.1%. This year it’s going to be down about 50 to 60 basis points and next year we expect it to be down another 50 to 60 basis points to about 37.9% next year. And I think in the appendix, we've included what that rate is. I think on the same pages are the slide on days we wanted to give you a comparison for how we look at it each year. So that's contributing as well to that improvement of 2%. Both of the items are kind of below the line, below operating earnings. The effective share repurchases and taxes.

And my last slide is just, our outlook on operating margin longer term and we've defined it as three to five years. Last year, we said 14% to 16% for the company and you can see the breakdown of where that's coming from. This year we are raising it to 15% to 17% in part driven by the strength of the margin expansion we've seen in the US; again three years of margin expansion in one and seeing some more run-way on that is causing us to take that up.

Canada has done extremely well this last year in the last couple of years really. It’s already in the middle of that range, but the reason we’re not expanding that range is we are making some big investments we've talked about the DCs in Canada, talked about Americas SAP. Those are some step function investments over the next few years in Canada that we feel if we could just stand that range that will be great.

And then other businesses we've expanded a little bit. They are growing very rapidly, but you also have the mixed effect of putting Fabory in here which is a kind of a mid-single digit op margin business that will improve the op margin rates overtime very modestly, because we are going to keep adding shops what they call, branches across shops as Court talked about; 15 to 20 more per year over the next few years there. So kind of mitigate their opportunity to expand margins so we think 5% to 8%.

Then you've also got the mixed effect; everything outside the US, smaller I should say lower op margin rates, but growing much faster, so little bit of a negative mixed effect there. But we feel pretty good about 15% to 17% as our longer term op margin expansion.

And I think that’s it, so I’ll turn it back to Jim.

Jim Ryan

Okay (Inaudible)

Question-and-Answer Session

Ryan Merkel - William Blair

Ryan Merkel, William Blair. My first question was on the guidance; could you maybe talk about what’s included in terms of investment spending; give a range?

Ron Jadin

CapEx, we have $200 million to $225 million I think it’s highlighted on the one slide in terms of CapEx. Our working capital is going to grow with revenue, if we can hold our turns flat, we don’t really have anything significant; we don’t have any guidance around acquisition of making that kind of investment anything new so pretty much status quo.

Ryan Merkel - William Blair

Then second question, you talked about closing a lot of branches over the past couple of years. I am wondering how do you limit the loss of same day business and how you think about the cost benefit, closing the branches?

Ron Jadin

I am sorry, say that again.

Ryan Merkel - William Blair

So how do you limit the loss of same day business, once you close a store and then maybe more broadly how are you thinking about the cost benefit of closing the stores?

DG Macpherson

So when we think about the branch network, the branch network is absolutely critical to US business and many of our other businesses today and branches are going to be a very important part of our business model in the future. So we’re not getting out of branch business.

Branch is two things, one is that they provide local stocking for same day availability. If you’re going to have something available within hours it’s got to be in the local market and that’s relative to branches play today and they’ll continue to play.

The other role that branches play is the service destinations. People want to come in and look at product they want to get face-to-face technical support of application systems that have the branches as well.

As Mike had mentioned, increasingly in the future we’ll be having more services at branches. So as we do sell alone in local markets to deliver products as we increase the number of our vendor management and for implementations we’ll have those at the branches. But as the mix of business shifts increasingly to eCommerce we're going to change the mix of investment.

So your question is what do you do about the same day business? We expect to maintain and continue growth in that business. In the future, in US, we’re likely to have fewer branches, but larger. So those larger branches become more of a destination. The bigger they have got more products and through all the testing that we’ve done over the last couple of years, customers are absolutely willing to drive a little further to get to a wider selection of products.

We will also be implementing a variety of difference with just with the alternative in local markets same day delivery to settle in a number of other ways to get product to the customers quickly. So the same day business is important, in addition to smaller or bigger branches, we’ll be serving that same day requirements in a different way.

Deane Dray - Citi

Hi, Deane Dray with Citi. Court brought this up a couple of different times about private label. And my understanding of that business opportunity is it does put you in competition with your suppliers, but there are some attractive margins. So just you through how far can you push the Private Label business model, what’s the tipping point, what are the economics and some of the sensitivities?

DG Macpherson

So today company wide, our Private Label business represents 23% to 24% of our total. We think that business, over time, can get up around 40% of our total. The question about competition with our suppliers, we have many national brand suppliers that actually are making private label for us as well. We get that opportunity to our supplier base. This is the business unlike others, other retail businesses for example, our national brands will always continue to play a strong role with our customer base. So I don’t see us getting to be 60%, 70%, 80% kind of Private Label business.

But there is still great opportunity to get from where we are today in to the 30% to 40% range, and that represents considerable upside over the next couple of years.

Deane Dray - Citi

And just a follow-up, you called out that your -- will be about 350,000 SKUs in the upcoming catalogue. It just pegs the question as to how ruthlessly do you go through that list and we doubt inventory SKUs, they just don’t make economic sense, and can you give any sense of how often that happens and what percent actually gets weeded out anyway?

Jim Ryan

I will ask DD to jump in and then – but the next catalogue is actually going to have almost 450,000 products and the question about do we ever take products out, yes we do. We have got a very disciplined approach in for adding new products, but we have also got a very disciplined approach in taking products out of the product line. The dynamics that I think, is not, may not be obvious, is that the reason that we’re able to go to this kind of aggressive product line expansion is that we built capacity, we’ve built supply chain capacity in advance of demand with both, our branch network and our DC network and we got very sophisticated in how we manage inventory and that’s something that’s very different over the last five years or so. The way we manage and deploy inventory has put us in a position where we can add very slow moving product, their product line by great levels of service than do it economically due to (inaudible). DC, if I may add, I think your question is how much do we put in the line. It’s usually due to tens of thousands each year that are going out through the process. So we are pruning. So the net gain, we’re going to have, I think, 413,000 will be the exact number in the catalog and comes out in February. And the net gain that year will be 60,000 items. The gross gain will be well in excess of that. So we are constantly accreting the line.

Sam Darkatsh - Raymond James

First, a clarification question. Your guidance for next year, does that include incremental share repurchase or just the share repurchases that have already occurred?

Jim Ryan

It includes share repurchases we intend to make next year as well.

Sam Darkatsh - Raymond James

So you intend to make?

Jim Ryan

We assume it’s level loaded throughout the year. And I will tell you what the stock price is.

Sam Darkatsh - Raymond James

And that leads to my second question. Jim, you originally mentioned that acquisition activity is likely going to be picking up, going forward. So when you’re looking at prospectively, a deal of some size. How do you balance that with buying stock back and I look at Fabory as an example. I know you are taking your expectations lower. But that not withstanding, the original expectation was for accretion of about $0.10 to $0.12, but if you had taken that $340 million some odd and bought your stock back, it would have been $0.30 some odd sense of accretion. So how do you balance when you are making acquisition of size of figuring out whether how to allocate the capital.

Jim Ryan

I think about it as you are buying a business that is a going concern versus buying like a machine. I mean share repurchase to me is buying something; it’s a one-time event. When I think about a business that goes on into perpetuity, you need to stand -- I am told that I need to stand up. We think about that and we think of a terminal value, right? I mean there's a lot of value in that business over the long haul.

So we think about the synergies we are already getting in that business and growth over the long-term probably needs to be in the kind of 3.5% to 4.5% range in that company in the future to make it the good acquisition for us. We think that business will grow a lot faster than that, but because of a long-term view of that business, it causes us to make us feel really confident in that kind of an acquisition for us because the purchase pricing, the synergies we are going to get. So we would love to do more of those size, that's quite limited.

As you know, it’s the only acquisition we have in our screen for you at all. So, looking at organic growth business now, we’re thinking about it as a long-term business. So share repurchase really is what we do with the cash that's left and we do a lot of it because we generate a lot of cash. It’s really not a strategy in and of itself, any excess cash that we can give back to shareholders as soon as we can. That goes back to keeping that low cash balance.

Ron Jadin

We've got a lot of discipline around CapEx, and we've been saying consistently that we are setting that at a third of cash and you can see its lately been 25% to 26%, and we've also said that we’re going to grow dividend fast and faster than earnings and share repurchases is what moved.

Sam Darkatsh - Raymond James

And I will like to just sneak one more, I know you are making a lot of investments next year, both in the capital and from a sales person standpoint. If things really do get tough and the economy moderates dramatically, at what point sales growth-wise, do you begin to leverage operating expense or deleverage? How should we look at that?

Ron Jadin

So we give a range of 6 to 10% organic growth and we talked about op margin rate in the 50 to 80. If that 6% drops to 4%, our operating margin rate would hold flat year-over-year, because at that point we would still continue our growth investment as we are today. When you start to get below that, we would probably slow down on some of the shorter term growth investments, but in fact there is a whole lot of other investments we would look at before that. That’s really just a couple of billion dollar of expense to mine the growth investments on to first place we would go in any case.

But if you though about it, the long-term investments around America’s SAP and around DC, those are well underway. Direct Marketing, for example, we would probably pull back on a really bad economy because you can’t get the return on investments. We also have part time label in our branches and flexible label in our DC that we can pull back on, a lot of other cost that we can pull back, like we did in 2009, I guess, I think about how we operated than as an example of what we do on now. In 2009, in the mid-side down turn, we hired a 150 sales people in that downturn. So I think that’s indicative too, as we’re going to take long-term view no matter what, but we will pull back some degree on some of our spending. Below 4% of organic growth, we really haven’t, or we modeled that way we have continue to plan around with but I don’t think I want to get into that at this point.

DG Macpherson

One of the questions that we get lot and I think give this question begin asked about the companies as well. Is you went through a period of getting costs outside of the business during the most recent economy downturn and that happens again. Are you out of options? And the answer for us is no. We are not out of option. We still have the large part-time labor force in the field. We have the ability to get solid variable across that business. We have other discretionary spending. If things really got tough, we can slow down our spending on some of the large projects that we mentioned, the eCommerce project, the America’s SAP project. But we have the ability, through an up cycle and through a down cycles as we’ve shown that we can continue to keep our service levels high and even in the severe downturn, having the strong balance sheet, we’ll be able to keep those service levels high. It is a great opportunity to grab share and that’s what we’ve shown that we’ve been able to do.

Hamzah Mazari - Credit Suisse

Hi, Jim, it’s Hamzah Mazari from Credit Suisse. I’ve got question on your Canadian business. Given your past experiences with SAP, if you could walk through, you know, the risk associated with that conversion, whenever you do go through that, and then what can you drive direct ship to in Canada given the customer profile there?

Jim Ryan

Yes. So the question about the SAP investment in Canada, what are the risks? Remember this SAP implementation, this is an American SAP project. So this is not just for Canada. What we’re building is a system that all of our businesses, the US, Canada, Mexico, Panama, Columbia, Costa Rica, the Caribbean businesses and anything that we choose to add will be running of that same system. Do you remember what I talked about earlier that battle is going to be waged in this business with broad lines suppliers and your ability to get the economies of scale and IT economies and IT systems are one of the places where we go to look for the economies of scale.

This is something that’s unique for Grainger in this industry, of being able to take the system that was already built in the US and apply it to other businesses and have the ability for the few things that are different in most other businesses to be able to make that system work for the local geography.

So getting economies of scale is what we are after. Now as it relates to this implementation what are the risks? Well there’s always risks, when you have large systems project, but the ways that we are able to mitigate those risks is we have got ten years worth of experience under our belt. We are as seasoned and SAP business as you will find. Also the business people in this business have experience with SAP and we are not building a system from scratch.

We are taking a system that’s already been built in the US and we are making it available to the other businesses in the region. So this experience that we have got both in IT and in the business help significantly mitigate that risk. And the reason that we are doing it in addition to getting economies of scale across the region is that in Canada specifically we are really excited about this business.

You see we have gone from a low single digit operating margin business, to a double digit operating margin business and the next step to expand margins is to get more efficiencies in the two places that you look, look for efficiencies in this business. Three places, IT purchase, your supply chain and your IT systems. So we are taking the next step with our supply chain as you saw in with our IT systems that help put that business in a position where it can get more launch in economies of scale.

That’s a long answer to a short question, did I answer your question?

Robert Barry - UBS

I just wanted to start by following up on the comments on price and price cost dynamic. It looks like you are expecting more price next year than this year and I am just wondering what the thinking is behind just given the macro and given the commodities seem to be moderating a bit and then given you are expecting more price for price cost expectation as well as or I guess that imply some significant cost catch up is it or product cost inflation. I was wondering if you could just delve into that little more?

Jim Ryan

So as I mentioned in my remarks price cost this year. We have taken price in advance of some cost. There is some cost catch up that we expect to have and we expect the gap in pricing cost in there and we always expect to have some GAAP because of our scale and our ability to realize leverage, but we price the market and then we get the best cost we can and right now when we look at price actions that our competitors have taken, our price expectations are a little lower to that initially.

Robert Barry - UBS

And then may be just a follow up on the productivity, the 140 basis points of productivity, could you unpack that, what are the big components of that?

Jim Ryan

Well the tailwind for e-commerce is a big one. Price cost inflation is a very big one. So that productivity is across the wholeP&L. So product cost is the biggest cost, that’s the biggest piece of our productivity is managing pricing cost inflation, but then just getting more productivity out of our existing workforce, so e-commerce is one way to do that, a continuous improvement is another what we are seeing in our branches, our DCs and how we market ourselves and how we are getting more skill advantage across our businesses, across our North America and South America in particular, but everywhere. So if not any one thing, it’s a whole myriad of things. And volume leverage right I mean that’s the natural thing.

Terry Darling - Goldman Sachs

A couple of follow-ups on your longer-term targets. First on the revenue, longer-term revenue target which you haven't changed. Court talks about 7 to 10, we will start with that number. You are increasing the growth investments, but you are not moving up the 7 to 10. I am just wondering how you are thinking about that, you are moving higher in that range or is it you are like runs chart on the economy versus share gain, you know self-directed initiatives are going to drive faster growth, but the global economy US slowing on a forward-looking basis or is there another factor that we should be thinking?

Jim Ryan

No it’s more of the latter and that chart that Ron had up there I thought was a real good one. There's still a lot of ambiguity on the economy and if you just look at the industrial production numbers and the wide range of forecast in the industrial production numbers. That's a pretty good indicator for us that there's still a lot of ambiguity. So what you see in our growth numbers is a much richer mix of share gain and some arguably conservative estimates about the economy.

Terry Darling - Goldman Sachs

And then on the longer-term margin target if we just think about the US margin target adjusting for the very strong outperformance in 2011, I don't think you are actually moving up that 50 to 75 basis point target that you talked about. Yet it seems to me the mix is getting much richer in areas that have higher margin. You’ve talked about e-commerce growing faster, private label going to 40%. Why is that number not going higher particularly if you think in 2012, you are going to get similar prices you had in 2011 even though inflation is flattening out.

Jim Ryan

So if you look at our performance over the last two years, well in 2012 and 2011, we have delivered more than a 100 basis points improvement on average per year over that period of time and I think your question is, well why don’t you just do that all time. Our commitment is to deliver at least 50 basis points per year on average and if the question is, it’s more possible? Sure that more is possible. But with the ambiguity of the economy we feel confident in that 50 basis points a year.

Terry Darling - Goldman Sachs

And just lastly can you update us, taking expectations down for Fabory, from just revenues for Fabory next year, what are you thinking at this point? Is it down off of the $90 million or so run rate that we are supposed to see here in the fourth quarter or just slower growth or what are you thinking of that?

Jim Ryan

We expect that business to continue to grow, but we are being more conservative in the growth rate. Now we haven’t owned that business for a long time. So we’re just looking at recently some softening in the last couple of months. But given some of the projections for next year with the European economy, we don’t have lot of future visibility. So there’s nothing else going on in that business that we are concerned about, actually quite the contrary. We have mentioned in one of the presentations was that we have been pleasantly surprised by what we believe we are going to be able to do on the cost side of the business and we think we are going to beat our cost synergy targets, but given what we are seeing in the European economy very recently, we are pulling back our revenue projections, but nothing beyond that.

John Inch - Bank of America

Jim, John Inch, Bank of America. I want to start with Amazon, how do you given that you are the CEO of the largest industrial distributor, how do you use Amazon evolving and if you don’t want to talk specifically about that company, that model perhaps you see it as a threat, as a opportunity, an opportunity for partnerships, may be you could just talk to it because it is clear they want to expand in a big way.

James Ryan

So Amazon, they’re aggressively adding a lot of products in a whole of lot of different categories including ours. We pay close attention to it and we take it very seriously, but any internet-based competitor. Our competitor advantage in addition to the things that Paul described about building a great website and ecommerce capability. Our model has some significant advantage and that is that we have the ability to go to our customer site and help them get cost out of their business.

You saw a couple of the videos here the TSR video and the territory sales rep video and the KeepStock video, you heard some comments from customers like they’re here. They know my business. I can have them manage my inventory and I rely on them to get me what I need when I need it. So I don’t have to worry about it. That’s very difficult to do in just an internet-based model and that is a great advantage that we are being able to be on our customer site, help them manage their inventory. Talk to them about their business, have local branches with a broad collection of product and people that they can talk to. As you saw, we’re going to continue to be aggressive in building out that advantage and we’re excited about competing with any internet-based competitor in that regard.

John Inch - Bank of America

So your answer is very much one of competition, no cooperation or any sort of you know, I don’t know partnership with them at the low end. I mean I understand what you are saying, your high touch point, higher service there, low end, but I don’t know do the two points meet at some point or not necessarily?

Jim Ryan

When you say they, I am not sure who you are talking about?

John Inch - Bank of America

I am sorry Amazon, the Amazon model?

Jim Ryan

We’ve got great confidence in our model. We’ve got great confidence in our internet capability. You saw how fast our internet business is growing. We’ve got great confidence in our business, in our ability to bring in new customers both through the eCommerce channel, the branch channel and increasingly through the sales rep channel. So we’re not looking for extra help at this point. We’ve got great confidence in what we are able to deliver.

John Inch - Bank of America

And my second question is on China, didn’t really have enough data on it, you know, I kind of get the point that you sort of had to go through a learning curve experience, in China you’re just small. Are you at a point where you can start to really feel that business into something more meaningfully given your experience, maybe you can talk a little bit about that, remind us how big it is and another model has changed right, and I think you actually are staying and you want to talk I don’t know but what you are seeing there and just help us a little bit with the strategy, because in theory it should be pretty good that you’ve been there probably for years; what’s the leverage point?

Jim Ryan

I’ll ask Court to jump in here as well. We’ve been and all these years we have and we started with a broad based business model. Our thought and our research told us that that market was ready for a broad based business model. We were wrong.

That market, the industrial side of that market is still not to the point where they are ready to adapt a broad based business model. So what we did is pulled back and we focused on a couple of key product lines, safety, material handling and tools. Great opportunity in that market for those product lines, because those product lines are – the demand for those are growing and the competition for those lines isn’t as developed as some of the other lines.

We made that change to our strategy and our business started to pick up and we are thrilled about that market over the long term. It’s still very new, very unfamiliar to us and we’re running in that market everyday, but we’re very excited about the test that we’re in. Court, would you like to add?

Court Carruthers

Yeah, what I would add to that is I think the theme that I was talking about is a very disciplined approach to these investments and so we’ve got really good traction particularly we can say in safety tools and material handling. We’ve expanded in the last two years, inventory positions are going down the south the engine in the north. We continue to dramatically expand sales coverage and we were getting good traction from that model both from multi-national customers and also small local customers.

We recently just launched our customer transaction capable website; get a lot of learning from Japan to target small customers over the web, so lots of great investments and we’ve also been very mindful of working hard to get that business to breakeven. So making investments but doing it in a scale of way because we’re happy with model and I wouldn’t say perfect, but we’ve had good traction with that and we’re going to keep investing but its going to be in a measured way.

John Inch - Bank of America

I am sorry, what’s the long run profitability; I realize that’s not necessarily how you are managing it because of breadth of China coursing that you should be doing as part of supply chain but do you see it at some point; critical mass with profitability that’s commensurate with Grainger?

Court Carruthers

So it depends on what part of Grainger so I think as it relates to the other international businesses over the long term that’s absolutely possible and we’ve done fantastic; we’re getting gross margins up to a very significant fairly normal level across businesses and we are getting operating expense leverage outside the incremental investments that we are making.

So I would say as Jim said, we’re very passionate about the long term opportunity. I think our view overtime is that becomes a sizeable business that's generating meaningfully to the corporation. But in the short term, we've been very disciplined about growing, investing but get to breakeven as fast as we can as well, which will probably in closing aggressively. Our projection had originally been for next year and there's still potential of doing that next year; and without the economic dependent, yeah.

Holden Lewis - BB&T

Holden Lewis of BB&T. Sort of building on John’s question, I want to take a little bit broader view of sort of the growth markets or the growth in your economic markets. It seems like your biggest flashes in M&A have been in things like Japan and Europe as opposed to your going more aggressively on the cost side with some of the emerging markets.

So I am kind of curious about of the 25% of international how much of that is in the mature slower growing markets of Canada, Europe, Japan and how much in the faster growing markets? And then given the Chinese experience have you seen – have you sort of hold back a little bit in terms of how much or how quickly you want to invest in more and more of these emerging markets?

Jim Ryan

Well, I think if you start taking in our quarter business on $2 billion, Canada is half of that, I mean just very, very round number. So I think what you do is look at the rest of it and clearly Europe and Japan are the biggest sectors of the remainder, so when you think about Europe, I would challenge a little bit to say that that's all sort of slower growth because we do have a significant chunk in Benelux, but also a lot of it based in Central and Eastern Europe which I would argue are high growth.

Our focus has been continuing to invest primarily in Latin America and Asia. We've been pushing aggressively on our small branch expansion footprints throughout Latin America and the Caribbean and/or a number of other markets that we also want to continue to enter.

But I think the learning from China has been a very difficult to Greenfield, a large complicated market. A long runway to profitability, there's lots of investment required, because I think the learning from that is our thoughtfulness in terms of how we enter different markets at a different point in time as opposed to changing our appetite we are doing there. We are still pressing very aggressively in Latin American and Asia on additional expansion.

Court Carruthers

I would like to just add one point to that Jim. So when you think about Japan being a mature market that is true, but for us its not. So our growth in Japan has been 2x or either I should say double digit, strong double digit for over a decade. So to give a model there that’s fairly unique and very valuable to our customers there and so we are taking tremendous share in Japan, so don’t always think that because it’s a mature market then we will grow at that rate.

Holden Lewis - BB&T

And so if I am understanding that right so you are less inclined perhaps to do a big Greenfield exercise in some of these emerging markets; more inclined maybe through to acquisition. So I am curious about this market to continue; is that kind of like funnel where you have a lot of people in the local seller and sort of moving up in smaller numbers if you get the joint venture and acquisition. And if so I am kind of curious how big is the bottom of the funnel and you know how many countries might be coming out at the top of this funnel somewhat imminently you said how that work?

Jim Ryan

So two ways to think about; that would be one way to think about the model and there are also a number of countries that we’ll simply never do more than have a local seller in export office because the potential is not there. There is no question though that as we thought about what are the markets we like to either Greenfield in or expand in through JV or M&A that we are populated those with local sellers to gain market intelligence and so brand awareness and gain competitive intelligence.

So we do see that as being a bit of a scale where you can grow from local seller to potentially trading desk or a reseller to a branch to maybe a larger acquisition, that path definitely is one of the ways that we would get there. So we also may just simply leave it based on market price that we never do more than export office in some of those countries.

Court Carruthers

It’s reasonable to assume that at any point in time into the foreseeable future, we’ll have a portfolio of international businesses that our small ventures in emerging markets that are market centers fairly unfamiliar and larger and more mature markets like we have in Canada.

Our Mexico business, we have been in business in Mexico for about 10 years and you know when I think back 10 years ago and the kinds of discussions we’re having in these meetings about our Mexico business, it was very similar to how we’re talking about China today.

But we’ve been significantly drawing our top-line revenue in Mexico; we’ve been expanding gross margins, we’ve been expanding operating margins and that is our Mexico business we didn’t talk a lot about today, is has been hugely successful. It continues to grow strong double-digits; it today has a very solid 40 to 45 plus gross margin and expanding operating margins. So yeah that’s the kind of portfolio that we look for small businesses that we’re able to grow, able to expand gross margin and able to bring scale to those businesses to expand operating margins.

Greg Molinelli - PRIMECAP

Hi, Greg Molinelli from PRIMECAP. I want to go back to John’s question on the internet build on that. When Paul gave his presentation, he looked for a limit switch on your website. I took the product number and put it into Google and the first result that comes up is for the same switch that you sell for $164, for $100. As more of your business moves on to the internet, why won't this level of price transparency start to hurt your gross margins overtime? Thanks.

Court Carruthers

So, if you are a Grainger customer, you know that you buy at a discount off that list price. And increasingly, we will be able to make that -- make your purchase price more visible to you, through our website, and through the mobile application.

So that’s the challenge for us today, if you don’t’ know that, that you get a discount. So those price comparisons can be not helpful for us. But most customers that buy from Grainger understand that they get a significant discount on that list price. Do you want to add anything to that?

Greg Molinelli - PRIMECAP

Do you believe that your price after discount is the lowest or in line with other people on the Internet or sales price?

Court Carruthers

No -- not always where Grainger’s value is in helping companies get money by saving time. So if you are not putting on a value on your time and you are willing to spent time shopping around to different suppliers whether its on the internet or anywhere else, Grainger is not always going to be the lowest price, I mean, we stock over 400,000 products and you can buy anything that we well somewhere else. In that regard, if you look hard enough you may be able to find a better price somewhere else. But increasingly what we are seeing in hearing from customers is that they have got to find ways to drive productivity improvement into their business. One way is shopping around for the best purchase price. That can actually be very counter productive, if you are putting value on your time.

So what we are after is being the best and helping customers get cost out of their business and that’s not always be going to be just further in space.

Greg Molinelli - PRIMECAP

Just probably question from Mike just on the inventory management and specifically the KeepStock customer account. You mentioned in your presentation that have about 12,000 today and looking to, more or less, triple the size of business by 2015. One of you could just talk a little bit about how you plan in growing that business, whether you have specific sales resources allocated towards driving those goals and then, two, you mentioned the fact that those customers are growing two to three corporate average. Could you just talk a little bit about how that changes the dynamic within those relationships when you add a interim management solution?

Court Carruthers

Sure, so, I think that let’s start to think about first of all, we’ve got over 2,000 sales reps today. When we think about the number of customers that they covered compared to the number of customers that we had utilizing one of our KeepStock applications, big opportunity just to leverage our existing sales force. They are paid on commission. If you’re a seller, if I am a seller, I’ve got one customer growing at two to three times because they are using inventory solutions. I’ve got another that isn’t. My guess is I am going to work really hard to trying to get that other person on one of the inventory management solutions. So if (inaudible) incentive to utilize our existing sales resources to go out and help customers better manage their inventories.

We laid on top the investment that we’re going to make with TSRs who also have the capability to go out and sell inventory management services. We combine our existing sales resources with the new sales resources, we think, and are very comfortable that we can get that 45,000 number fairly easy. As far as our relationship with customers, what we find is that we initially started with a smaller number of products that they utilize on an inventory management solution.

They may find more from us but they don't put all of them on the actual KeepStock solutions as we show up on a regular basis. Items get added over and over and over again. There was a gentleman that you saw in the Swiss hotel. I got the opportunity to visit him two weeks ago. I went down, it was a KeepStock area and up on the board were four items that they had written on a white board, for when the next time the KeepStock service person comes in, they wanted to add to the install. It’s that type of relationship that we see. We’re able to help them reduce their inventory. We’re able to add more and more items as we show up more and more often.

Jim Ryan

I would like to thank everybody for coming out and spending the better part of the day with us. Hopefully you are leaving here with a couple of things. One is, knowing that we are excited about this business. This is a great business with a great brand, a well established foundation, and we believe as unique opportunity for growth. I was talking at the break with someone. There are permanent changes going on in customer behavior in this business, and you think about how difficult it is to get customers to change behavior. That is absolutely going on in this business and in this industry, and this is a business that is built for the kinds of changes that are going on in customer behavior. We have the ability to rapidly expand our product offering for customers that are looking to consolidate their supplier base. We have a great internet capability for customers that are looking to get more productive in their purchasing processes through eCommerce.

We have an outstanding service capability in the fields, in our businesses, in our branch network to be on site and help customers get cost out of their business. This is the company that operates with a high level of discipline. This is a company that there is great stored capital and this is a company within outstanding leadership team and 20,000 people that are absolutely wired on customer service and growing the business around the world. We think this is unique time in our industry. We think this is the unique time for Grainger. And hopefully, you’re seeing we are getting very aggressive about being the benefactor of rapid industry consolidation. Thanks again for your time today.

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