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Lowe's Companies, Inc. (NYSE:LOW)

June 01, 2012 10:00 am ET

Executives

Robert A. Niblock - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Gaither M. Keener - Chief Compliance Officer, Executive Vice President, General Counsel and Secretary

Hannah Kim

Robert F. Hull - Chief Financial Officer and Executive Vice President

Operator

Ladies and Gentlemen, this meeting is about to begin, so please take your seats. Before we begin, please note that throughout this presentation, you will hear forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Management's expectations and opinions reflected in those statements are subject to risks, and the company can give no assurance that they will prove to be correct. Those risks are described in the company's annual meeting press release and in its filings with the Securities and Exchange Commission.

Also during this presentation, management will be using certain non-GAAP financial measures. You can find a reconciliation to the most directly comparable GAAP financial measures and other information about them posted on the Lowe's Investor Relations website under Investor Documents.

And now, please welcome Lowe's Chairman, President and Chief Executive Officer, Mr. Robert Niblock.

Robert A. Niblock

Thank you, and good morning, ladies and gentlemen, and welcome to Lowe's 2012 Annual Shareholders Meeting. It's a pleasure to see you, and on behalf of Lowe's, thank you for your continued commitment and support. To get things started, I'm pleased to announce that your Board of Directors approved 2 motions this morning. First, future executive severance agreements resulting from a change in control of the company will no longer include an excise tax gross-up provision. And second, an increase in Lowe's quarterly dividend was also approved, increasing from $0.14 per share to $0.16 per share, scheduled to be paid on August 8 of this year.

This increase is a result of the dedication and hard work of our employees across the organization, led by our executive management team, which I would like to thank and recognize now. With me on the platform are Chief Financial Officer, Bob Hull; Chief Legal Officer, Gaither Keener; in the front row is Maureen Ausura, Chief Human Resources Officer; Greg Bridgeford, Chief Customer Officer; Mike Brown, Chief Information Officer; Rick Damron, Chief Operating Officer; Bob Gfeller, Customer Experience Design Executive; Brent Kirby, Sales and Service Fulfillment Executive; Dennis Knowles, U.S. Stores Executive; Tom Lamb, Chief Marketing Officer; Mike Mabry, Digital Interfaces Executive; Richard Maltsbarger, Business Development Executive; Brian Peace, Corporate Administration Executive; and Doug Robinson, Head of International Operations and Development.

Now I would like to introduce your Board of Directors. Please hold your applause until all have been recognized. In the front row, on this side, Mr. Raul Alvarez, Mr. Dave Bernauer, Dr. Len Berry, Mr. Peter Browning, Ms. Dawn Hudson, Mr. Bob Johnson, Mr. Marshall Larsen, Mr. Dick Lochridge, Mr. Eric Wiseman, and retiring from our board after 9 years of distinguished service, Mr. Stephen Page.

Unknown Attendee

You need more women.

Robert A. Niblock

We'll work on that. Thank you.

Not with us today because he is presiding over his own company's shareholder and board meetings this week is Mr. Rick Dreiling. So thanks to each of our directors for your attendance and dedicated service to the organization.

At this time, I'd like to introduce Bill Sullivan from the independent accounting firm of Deloitte & Touche. Bill is in the audience, and he is available to answer your questions after the meeting.

Hannah Kim, Vice President for Lowe's, has been appointed inspector of election for this meeting, and will report the voting results in a few minutes. Financial Services agents, Sid Rodrigue and Steve Lamantia from Broadridge, will assist for the tabulation of proxies and ballots. As your proxy card indicated, Mr. Keener and Mr. Hull have been duly appointed as proxies for this meeting.

At this time, I officially call this meeting to order. Mr. Keener, please report on the mailing of the notice of this meeting, the presence of a quorum and other business we will consider today.

Gaither M. Keener

Thank you, Robert. Notice of the Annual Meeting of Shareholders of Lowe's Companies, Inc. has been provided to shareholders of record as of March 30, 2012. The notice and accompanying proxy statement were mailed to shareholders beginning on April 16, 2012. And as of the record date of March 30, 2012, there were 1,198,910,882 shares of common stock outstanding, of which 90% are represented today, either in person or by proxy. Therefore, we have a quorum.

As provided in the notice of the Annual Meeting of Shareholders, the purpose of this meeting is to address 6 items of business: First, elect 11 directors to terms of one year; second, ratify the appointment of Deloitte & Touche as the independent registered public accounting firm for the company for the 2012 fiscal year; third, approve the company's executive compensation program; fourth, approve an amendment to Lowe's Companies' employee stock purchase plan to increase the number of shares authorized for issuance under the plan; fifth, consider and vote upon the shareholder proposal regarding executive stock retention requirements; and sixth, transact such other business as may be properly brought before the Annual Meeting of Shareholders. The shareholder proposal regarding reporting on political spending and executive severance agreements have been withdrawn by their respective proponents.

Thomas McIntyre, representing the Trowel Trades S&P 500 Index Fund, would like to comment on the proponent's decision to withdraw the shareholder proposal on executive severance agreement. Thomas, you may address the shareholders.

Thomas F. McIntyre

Thank you, Mr. Keener. My name is Tom McIntyre, I'm with -- a representative of the International Union of Bricklayers and Allied Craftworkers, as well as the Trowel Trades S&P 500 Index Fund. The Fund would like to thank the board, and especially the leadership of Robert Niblock in their responsiveness to our shareholder proposal on severance agreements. Your decision to include -- to exclude grossed-up payments on excise taxes from future Tier 1 management continuity agreements brings Lowe's in alignment with best practices on severance agreements, and the Fund truly congratulates the company, and I would like to say personally thank you for working together. It was a pleasure. So, thank you.

Robert A. Niblock

Thank you, Mr. McIntyre.

Gaither M. Keener

Thank you, Thomas. John Chevedden is not present to present the proposal regarding executive stock retention requirements. He also failed to comply with the requirements of the Lowe's bylaws, of which, he was given advanced written notice, and with which he has complied at prior annual meetings, that he give notice of his authorization of another person to act for him as proxy to present the proposal at the meeting in writing to the Secretary of Lowe's no less than 3 business days before the date of the meeting.

The Board of Directors has decided nevertheless to waive this 3-day advance notice requirements of the bylaws on this one occasion and allow Darren Patterson [ph], who is present today, and whom he has authorized to do so to present the proposal on his behalf for a vote at the meeting. Mr. Patterson [ph], you may now address the shareholders.

Unknown Shareholder

Thank you, Mr. Keener. Proposal #7, to consider and vote upon the shareholder proposal regarding executive stock retention requirements, John Chevedden of Redondo Beach California sponsored this proposal. Resolved, executives to retain significant stock. Shareholders urge that our executive pay committee adopt the policy requiring that senior executives retain a significant percentage of stock acquired through equity pay programs until one year following the termination of their employment and to report to shareholders regarding this policy before our next annual shareholder meeting.

Shareholders recommend that a percentage of at least 25% of net after-tax stock be required. This policy shall apply to future grants of equity pay and should address the permissibility of transactions, such as hedging transactions, which are not sales, but reduce the risk of loss to executives. This proposal asks for a retention policy starting as soon as possible. Requiring senior executives to hold a significant portion of stock obtained through executive pay plans after employment termination would focus our executives on our company's long-term success, a conference board task force report on executive pay stated that at least hold-to-retirement requirements give executives an ever-growing incentive to focus on long-term stock price performance.

Please encourage our board to respond positively to this proposal, Executives to Retain Significant Stock, Proposal #7.

Gaither M. Keener

Thank you, Darren [ph]. Lowe's Board of Directors recommends a vote against the proposal for the reasons stated on Page 51 of the Lowe's proxy statement. In summary, the board believes that adoption of this proposal is unnecessary because of the combination of the company's rigorous stock ownership guidelines for senior executives and the policy of continued vesting of stock awards following the executive retirement establish a strong [Audio gap] link between the financial interest of both executives and shareholders.

Robert, this completes our shareholder proposal. I return the meeting to you.

Robert A. Niblock

Thank you, Gaither. I now declare the polls open for voting. The proxies have already delivered their ballots to the inspector of election. If you have already delivered a proxy, it is not necessary to vote in person, unless you wish to change your vote. Anyone who desires to vote in person should raise their hand at this time, so that either Hannah or Sid may provide you with a ballot.

I do not see any hands raised. Since all votes have now been cast, I declare the polls to be closed. Hannah, are you prepared to deliver your report?

Hannah Kim

I am. Based upon the shareholders voting, let me note that the nominees to the Board of Directors are elected, with all 11 nominees receiving no less than 91% of the vote. Deloitte & Touche is ratified as the company's independent public accountant, receiving 99% of the vote. Proposal 3, to conduct an advisory vote on executive compensation, has been approved, with 96% of the vote. Proposal 4, regarding the approval of the amendment to the employee stock purchase plan has been approved with 98% of the vote, and our final Proposal #5 regarding executive stock retention requirements has failed with 23% of the vote.

Thank you, Robert.

Robert A. Niblock

Thank you, Hannah. I will now provide insight into our performance in 2011, and highlight some of the successes you can expect in 2012. 2011 was a year of further transformation for Lowe's, really a year of significant change, but also a solid year in terms of performance.

More importantly, 2011 was a year in which we made progress on the journey we've undertaken to create differentiated experiences for customers and employees. New experiences are required because consumers continue to change in the way they shop and the expectations they have for retailers.

Committing to this journey was not a decision we took lightly, but it was the right decision, and one that will help us become -- move closer to becoming the customer's first choice in home improvement. But in order to do that, we must continue to change from within, reorganize our company and think actively differently than we have before.

Transformational change takes time, and we began this journey knowing that the change required to create differentiated experiences is not a one-year process. As a result, 2011 was profoundly important because of the progress we've made, and the things we accomplished to establish a foundation for both the short-term and long-term success of Lowe's.

For 2011, we reported total sales of $50.2 billion, breaking the $50 billion barrier for the first time in our history. And for the fourth quarter, we announced our strongest comparable store sales increase since the first quarter of 2006, resulting in a 24% increase in earnings per share.

Last week, we announced results for the first quarter of 2012, which were consistent with our expectations. Those results included a comparable store sales increase of 2.6% and earnings per share that grew 26.5%. These results were achieved while continuing to make transformational change in pursuit of our strategic mission.

I would like to express my gratitude to our employees for their continued dedication and customer focus.

There are a lot of factors that led to this solid performance. A $900 million technology upgrade in our stores, including the deployment of iPhones and Wi-Fi, further enhancing the in-store customer experience by increasing our number of customer-facing hours by more than 1 million. The expansion of our contact center capabilities in Wilkesboro, North Carolina and the opening of a second contact center in Albuquerque, New Mexico, extending customer service hours and giving us another channel from which to sell.

The acquisition of leading online retailer, ATG, another step towards realizing our vision of offering customers an endless aisle to shop, with more than 3.5 million additional products to choose from. Tremendous sales growth on lowes.com, enhanced by flexible fulfillment capabilities, serving customers that increasingly demonstrate a preference for retailers that enable them to shop whenever and wherever they choose.

Expansion of our mobile office capabilities for our project specialists, enabling them to serve customers more efficiently right in their own homes. A new marketing campaign, a new mindset, really, that frames home improvement as a continuous lifelong journey, and Lowe's as a preferred partner along the way.

The successful launch of MyLowe's, which has become a touch point for more than 7 million customers looking to manage their household and home improvement projects. And a marketing alliance with house.com, enabling customers to draw inspiration for more than 250,000 high-quality interior and exterior photographs and integrate them with their MyLowe's profiles.

In the last 12 months, we've made significant progress on meeting the needs of customers at every stage of the home improvement process, from inspiration and planning to getting supplies, finishing and enjoying. Those efforts have not gone unrecognized. In general, Wall Street has reacted favorably to the journey we've chosen to take. As a result, we've seen our stock price rise nearly 50% from its low in August. But the journey is still far from complete, and we expect our results to continue their upward trend.

Some of those positive results come from a -- consistently demonstrating excellence in things that customers care about, things like our impact on the environment and the communities we serve and things like the retail experience.

The last 12 months have seen success at each of these areas. In 2011, we continued to set standards for retail in the areas of sustainability, earning unparalleled recognition from ENERGY STAR, SmartWay and WaterSense. In 2011, we continued our focus on social responsibility and contributed $32 million to more than 4,000 community and education projects.

As part of our recently announced reorganization, we created a new customer experience group to design and support initiatives that will differentiate us and drive revenue. And our accelerated line reviews will help us rationalize SKUs and reduce inventory acquisition costs, while ensuring the right products are available to customers in-store, with an even wider selection available online.

We'll also continue to grow both domestically and internationally, with store expansions throughout North America, including Canada and Mexico. And our joint venture in Australia is going well, with 13 stores opened since September and another 25 scheduled to open by the end of 2012.

As the consumer continues to change at an unprecedented rate, these initiatives will ultimately create a customer experience that is both omni-channel and relevant throughout every stage of the home improvement process. That's the future we're striving everyday to realize. That's the experience that will make Lowe's the first choice in home improvement.

I'll now turn the meeting over to Bob Hull to discuss Lowe's financial results in more detail.

Robert F. Hull

Thank you, Robert. Good morning, everyone. For my time today, I plan to review our 2011 financial performance, recap our first quarter 2012 results and share how we're using our strong financial position to return capital to shareholders.

For 2011, total sales were $50.2 billion, an increase of 2.9% over 2010. Lowe's fiscal year ends on the Friday closest to the end of January, therefore, 2011 included an extra week in the fourth quarter for a total of 14 weeks and 53 weeks for the year. Sales for the extra week were $766 million and contributed approximately 1.6% of the increase in sales over 2010. While comparable store sales were essentially flat for the year, we saw a sequential improvement in each quarter from negative 3.3% in the first quarter to positive 3.4% in the fourth quarter.

Moving on to earnings before interest and taxes. In 2011, we made some difficult decisions related to underperforming stores and the pipeline of future store openings. Charges associated with these items contributed to an EBIT decline of 76 basis points to 6.5% of sales. Net earnings decreased 8.5% to $1.8 billion, but with the impact of share repurchases, earnings per share increased $0.01 to $1.43.

Moving to 2012, here's a look at our first quarter results. Sales for the first quarter were $13.2 billion, which represents a 7.9% increase over last year's first quarter. As a result of 2011's 53rd week, there's a week shift in fiscal 2012. Essentially, this year's first quarter included one less week of winter and one more week of spring relative to last year. We estimate that the week shift aided first quarter sales by $514 million, which contributed 4.2% of the sales increase. Comparable store sales adjusted to compare identical 13-week periods from 2011 and 2012 were 2.6%, driven by comp transactions.

In the quarter, we had strong expense leverage as a result of the sales growth, offset somewhat by lower gross margin resulting in a 45 basis point increase in EBIT to 7.2% of sales. Net earnings increased 14.3% to $527 million, and earnings per share increased 26.5% to $0.43.

As noted in our first quarter earnings release, we expect earnings per share of $1.73 to $1.83 for fiscal 2012, which represents an increase of 21% to 28% over 2011. We ended 2011 with $7.6 billion in total debt, and in Q1, we issued $2 billion of unsecured bonds, taking advantage of the historically low interest rates. As a result, we had $9.6 billion of debt outstanding at the end of the first quarter.

In September, we have a $550 million maturity and expect to end the year with lease-adjusted debt to earnings before interest, taxes, depreciation, amortization, share-based payments and rent, or EBITDAR, at or below our 2.25x target. This compares to 2.03x at the end of 2011. This higher leverage reflects our decision to prudently increase our borrowings at attractive rates in order to return more cash to shareholders and invest in our business.

For 2011, we generated cash flow from operations of $4.3 billion and free cash flow of $2.5 billion. We shared on our first quarter earnings call that we expect cash flow from operations for 2012 to be approximately $4 billion and cash capital expenditures to be approximately $1.3 billion, resulting in a free cash flow of approximately $2.7 billion.

With our strong balance sheet and cash flows, we maintain a strong credit rating. Our strong financial position allows us to return capital to shareholders through increased dividends and share repurchases. This morning, the board approved a 14.3% increase in the quarterly dividend. Over the past 11 years, our quarterly dividend has increased from $0.01 per share in 2001 to $0.16 per share, a 29% compound annual growth rate over that time period.

In 2011, we repurchased almost 120 million shares or 8.9% of our beginning share count, which amounts to total repurchases of $2.9 billion. And we repurchased an additional $1.75 billion in the first quarter of 2012. This leaves us with $2.75 billion remaining on our share repurchase authorization.

As a shareholder, I know our stock performance is top of mind. For fiscal 2011, our stock was up 8% on the year, which was a little better than the S&P 500's 5% increase, but lower than the S&P Retail Index, which was up 13%. For fiscal year-to-date 2012, our stock is approximately flat, and has increased 11% since this time last year.

As we benefit from the capabilities that we're implementing, we look forward to generating and returning additional value to our shareholders.

Thank you for your interest in Lowe's. I'll now turn the program back to Robert.

Robert A. Niblock

Thank you, Bob. I'll now open the meeting to shareholders with questions. When you registered you were offered a form for the submission of questions. All questions and comments are limited to 3 minutes. Before asking your question, I ask that you step to the microphone and state your name and the organization you represent if you are here on their behalf. I will then either respond to your question or direct an officer or director to respond to your question.

The floor is now open for questions. Yes, sir?

Unknown Shareholder

I have a question. I'm a stockholder, I don't represent anyone but myself. I also am an employee, and have been for 16 years now. My question is why the Tela [ph] corporation allowed the continued [ph] stock into our store, in excess of what it said, by [ph] computer, that we spent millions of dollars for the program, for over and above what we're supposed to have. We've got stuff in our store that's sat there [ph] for 3 years, and we keep getting it.

Robert A. Niblock

Right. Well, we'll certainly have someone look into your direct situation. As you know, we always want to make sure the systems are designed to replenish to the rate of sale, make sure that we have adequate job lot quantities and operate within the min and max standard settings that we have. So if there's an issue in your particular store, we'll certainly follow-up on that issue. We'll give it to you after the meeting, follow-up and see what we can do about our correcting that situation. So thank you for bringing that to our attention.

Other questions or concerns to come before this meeting?

Since I don't see any other questions or concerns for the meeting, I would like to express my thanks again for your ongoing commitment and support and for attending this year's meetings.

Thanks also to our shareholders who submitted their proxy but were unable to attend in person. I hope you'll be able to join us next year at this meeting as well. Thank you, and this meeting is now adjourned.

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