Laura Brown - Senior Vice President, Communications & Investor Relations Bill Chapman - Senior Director of Investor Relations.

Analysts:.

5% in April, 6% in May and 4% in June. Results for the quarter included 2 percentage points from acquisitions net of dispositions and a 1 percentage point reduction from foreign exchange.

Excluding acquisitions and foreign exchange, organic sales increased 4%, driven by 5 percentage points from volume, partially offset by 1 percentage point from the timing of Good Friday. Good Friday fell in April 2014 versus March 2013.

Good Friday is typically a day of slower customer activity in United States, with operations closed in Canada and much of Latin America. Let's move on to sales by segment. We report two business segments, the United States and Canada. Our remaining operations are reported under Other Businesses.

Sales in the United States, which accounted for 78% of total company revenue in the quarter, increased 7%. Results for the quarter included 2 percentage points from acquisitions net of dispositions.

Excluding acquisitions, organic sales increased 5%, driven by 6 percentage points from volume, partially offset by a 1 percentage point decline from the timing of Good Friday. Let's review sales performance by customer end-market in United States. Heavy and light manufacturing, retail, commercial and natural resources were up in the mid-single digits.

Government and reseller were up in the low-single digits. And contractor was down in the low-single digits. Now let's turn our attention to the Canadian business. Sales in Canada represented 10% of total company revenues. For the quarter, sales decreased 9% in US dollars versus the prior year and were down 3% in local currency.

The 3% sales decline consisted of 2 percentage points from the timing of Good Friday and a 1 percentage point decline from volume.

Declines during the quarter in the construction, mining, oil and gas, government, light manufacturing and reseller customer end-markets more than offset growth to customers in the commercial, forestry, utilities, transportation, heavy manufacturing and retail end-markets.

Canada sales results continue to be affected by macroeconomic weakness and softness in natural resources. Let's conclude our discussion of sales for the quarter by looking at the Other Businesses, which represented 12% of total company sales. Sales for this group increased 14% for the 2014 second quarter versus the prior year.

The sales growth consisted of 15 percentage points from volume and price, partially offset by a 2 percentage points decline from unfavorable foreign exchange. The sales increase was primarily due to growth from Zoro and the business in Japan, which more than offset a modest sales decline in Europe.

Early in the quarter, we reported sales results for April and May and shared some information regarding performance in those months. Let's now take a look at June. There were 21 selling days in June of 2014 versus 20 days in the same month of 2013. Daily company sales increased 4% in June of 2014 versus June of '13.

The daily sales increase included 2 percentage points from acquisitions net of dispositions and a 1 percentage point reduction from foreign exchange.

Excluding acquisitions and foreign exchange, organic daily sales increased 3%, driven by 4 percentage points from volume, partially offset by a 1 percentage point decline from lower sales of seasonal products.

In the United States, June daily sales increased 6%, driven by 5 percentage points from volume, 2 percentage points from acquisitions net of dispositions, partially offset by a 1 percentage point decline from lower sales of seasonal products. June customer end-market performance in the United States was as follows.

Heavy and light manufacturing and natural resources were up in the mid-single digits. Retail and commercial were up in the low-single digits. Reseller and government were flat. And contractor was down in the low-single digits. Daily sales in Canada for June decreased 7% in US dollars and were down 2% in local currency.

The 2% decline consisted of a 2 percentage points decline from sales related to floods in Calgary in 2013, a 1 percentage point decline from lower sales of seasonal products and a 1 percentage point decline from the timing of the Canada Day holiday. Canada Day fell on Tuesday July 1st this year.

Many businesses were either closed or had much lower activity on Monday June 30th. In 2013, the holiday fell on Monday July 1st with little or no effect on June sales. The sales decrease was partially offset by a 1 percentage point increase from volume and 1 percentage point increase from price.

Excluding the headwind noted above, daily sales increased 2% in local currency.

The 2% daily sales decrease in local currency in Canada was related to declines in the construction, mining, government, light manufacturing and retail customer end-markets, more than offsetting growth to customers in the commercial, heavy manufacturing, forestry, utilities, transportation and oil and gas end-markets.

Daily sales for our Other Businesses increased 9% in June consisting entirely of volume and price. The daily sales increase primarily due to strong revenue growth from Zoro and the businesses in Japan and Mexico. Daily sales growth during June in Japan dropped to low-double digits due to one less selling day in the month.

Sales growth in the month of July is currently trending ahead of the growth rate reported for June, including a benefit from the favorable timing of the July 4th holiday. In addition, daily sales to date in Canada are growing in the low-single digits in local currency. Now I would like to turn the discussion over to Bill Chapman..

Thanks, Laura. Since we've already analyzed company operating performance, let's talk about performance by reportable segment. In the United States, gross profit margins for the quarter declined 80 basis points due to mix from the acquired businesses and faster growth with lower gross margin customers.

Operating expenses increased 3%, including $19 million in incremental growth-related spending on areas such as new sales representatives, e-commerce and advertising. Operating earnings for the US segment increased 8% in the quarter, driven by the 7% sales growth and positive operating expense leverage, partially offset by lower gross profit margins.

Let's move on to our business in Canada. Operating earnings in Canada declined 48% in the 2014 second quarter and were down 45% in local currency. The earnings decline was primarily driven by lower sales, a lower gross profit margin and negative operating expense leverage.

The gross profit margin in Canada declined about 200 basis points versus the prior year, primarily due to unfavorable foreign exchange from products sourced from the United States, inventory markdowns and higher freight costs. The increase in operating expenses was primarily driven by the IT write-down and non-reoccurring expenses.

The company made the decision to move ahead with a single ERP instance versus multiple instances in North America. As a result, $4 million of capitalized software development costs related to a multiple instance approach were written off and an incremental $1 million was spent on the implementation of the single instance in Canada.

Operating earnings for the Other Businesses were roughly breakeven in the 2014 second quarter versus $13 million in the 2013 second quarter.

Lower performance versus the prior year was primarily driven by the $14 million cost incurred for the retirement plan transition in Europe and the write-off of approximately $2 million of capitalized software development in Mexico. Excluding these two items, the Other Businesses generated $15 million in operating earnings.

Increased earnings from Zoro in Japan were tempered by the businesses in China and Latin America. Below the operating line, other income and expense was a net $2.3 million expense in the 2014 second quarter versus a net $2.6 million expense in the 2013 second quarter. The tax rate of the quarter was 38.2% versus 36.5% in the 2013 quarter.

The 2014 second quarter reflects a higher tax rate due to the effect of the retirement plan transition in Europe. Excluding the retirement plan transition, the effective tax rate for the 2014 second quarter was 37.7%. The 2013 second quarter tax rate reflected a benefit from a resolution of foreign tax matters in that period.

Excluding that benefit, the effective tax rate for the 2013 second quarter was 37.3%. The company projects an effective tax rate for the year 2014 of approximately 37.5% to 37.8% excluding the effect of the retirement plan transition. Lastly, let's take a look at cash flow for the quarter.

Operating cash flow was $161 million versus $210 million in 2013. Cash generation from operations and cash on hand was lower in the 2014 quarter due to higher inventory purchases and higher tax payments versus the prior year. The company yields the cash to invest in the business and return cash to shareholders through share repurchases and dividends.

Capital expenditures for the quarter were $90 million, which included the purchase of land for a new distribution center in New Jersey, versus $40 million in 2013. We paid dividends of $76 million, reflecting the 16% increase in the quarterly dividend announced in April of 2014.

In addition, we bought back 334,000 shares of stock for $85 million and ended the quarter with 9.9 million shares remaining under share repurchase authorization. In total, we returned $161 million to shareholders in the quarter.

As reported in our 2014 second quarter earnings release, we lowered the top end of our 2014 sales guidance and narrowed earnings per share guidance. We now expect 5% to 7% sales growth and earnings per share of $12.20 to $12.60. Let's look more closely at our current expectations. We'll begin with sales.

The new guidance range implies roughly 5% to 9% daily sales growth for the remainder of the year. This outlook anticipates easier comparisons versus the prior year. Let's now discuss gross profit margins. For the full year on an organic basis, we expect gross margins to expand as much as 10 basis points.

On a reported basis, we are forecasting gross margins to be down 20 basis points versus 2013, primarily due to lower gross margins from the mix of acquired businesses. Let's take a closer look at company operating margin expectations. For the full year on an organic basis, we expect 15 basis points to 35 basis points of operating margin expansion.

On a reported basis, we are forecasting fully year operating margin expansion of 10 basis points to 30 basis points. Looking ahead to the back half of the year, while we acquired the E&R business in August of 2013, we didn't begin consolidating the results until the fourth quarter.

And as we discussed earlier, we anticipate overall growth in infrastructure spending at a slower rate primarily based on the timing of projects and a weaker economic outlook. And lastly, we'd like to leave you with one modeling tip.

Please be sure to review the bottom of the income statement for the calculation of net earnings available to common shareholders. Finally, please mark your calendar for the following important dates.

On August 6th at 19:15 Eastern Time, Laura Brown, Senior Vice President, Communications & Investor Relations, will present at the CFA Society of Minnesota Conference in Minneapolis, Minnesota. The presentation will be webcast on the Investor Relations section of our website. On August 13th, we plan to release July sales.

On September 16th at 12:45 Eastern Time, we will present at the Second Annual Morgan Stanley Laguna Conference at Dana Point, California. The presentation will also be webcast on the Investor Relations section of our website. On October 16th, we're scheduled to report third quarter results.

And finally, we will host our Annual Analyst Meeting on November 12th, which will be held at our headquarters in Lake Forest, Illinois. If you have any questions, please do not hesitate to contact Laura Brown at 847-535-0409, Casey Darby at 847-535-0099, or me at 847-535-0881. Thank you for your interest in Grainger..