W.W. Grainger, Inc.

Greetings and welcome to the WW Grainger second quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Irene Holman, Vice President, Investor Relations. Thank you. You may begin.

Good morning. Welcome to Grainger's second quarter 2020 earnings call. With me today are D.J. McPherson, Chairman and CEO, and Tom O'Cray, SVP and CFO. As a reminder, some of our comments today may include forward-looking statements. Actual results may differ materially as a result of various risks and uncertainties, including those detailed in our SEC filings. Reconciliations of any non-GAAP financial measures and their corresponding GAAP measures are found in the tables at the end of this slide presentation and in our Q2 press release, both of which are available on our IR website. This morning's call will focus on adjusted results for the second quarter of 2020, which exclude restructuring and other items that are outlined in our earnings press release. Now I'll turn it over to DG.

Thanks, Irene. Good morning and thank you for joining us today. To say that this quarter was different and challenging would be an understatement. I am very proud of how our leadership and team members have stepped up to the challenge. Whether dealing with the pandemic or with social injustice issues, our team has been fantastic throughout this uncertain time. Let me start off by providing you with an update on our pandemic response and a brief overview of the quarter before turning over to Tom to dive into the details. So starting with an update on the pandemic, the Grainger team continues to work tirelessly to keep the world working during this challenging time. As I outlined on our first quarter call, Grainger is an essential business and our customers count on us to keep their businesses up and running. Our pandemic response is wrapped in three broad priorities. First, serve our customers well through this challenging time. Second, support the needs and safety of our team members. And third, ensure we remain in a strong financial position. I'll provide a quick update on each point. First, our businesses remained open every day to serve our customers. I visited one of our DCs last week and we have implemented several measures to protect the safety of team members and to ensure the continuity of our operations. We also recently reopened our branch showrooms to add to the curbside pickup service we have been operating throughout the pandemic. Our KeepStock team members continue to serve the vast majority of our customers. The exception would be some disruptive businesses where we've had to flip to alternate solutions. Throughout, our team has focused on customer and team member safety, including new protocols, temperature checks, face covering mandates, and social distancing guidelines. This has certainly made operating more difficult, but we believe we have done very well with these changes. On the customer front, business reopenings and related activity continue to vary greatly based on industry and geography. Sales to healthcare, government, and other essential businesses remain strong throughout the quarter. Sales to non-essential and disruptive businesses bottomed in April, and they've rebounded in May and again in June, although they still remain depressed compared to pre-COVID levels. I'll talk about the pattern of revenue in a minute. Our supply chain has operated well throughout the pandemic, although we have seen some lumpiness as we work to match supply with tremendous demand for some pandemic-related items. For most product categories, things have improved, but for some categories, global shortages will make supply a challenge throughout the balance of the year. Our team is working tirelessly to ensure supply for customers, as the pandemic ebbs and flows. As we mentioned before, supporting the needs of our team members is of critical importance, especially during this period of uncertainty. Our team members are essential to serving our customers, and team member health and safety remains a priority. We have been fortunate to have absorbed the pandemic without major layoffs and currently have less than 3% of our workforce still on furlough. We have more team members who will return to work in the next few weeks. Having an experienced, cohesive team will help us accelerate growth through the recovery. In addition, we remain vigilant around safety. Our team members give us great marks for making safety a priority as they support our customers. Finally, we have maintained a tight focus on our financial position throughout this period. On our Q1 call, I discussed our priority to preserve cash, including deferring action on certain capital projects, pausing our share repurchase program, and drawing on our revolving credit facility. We continue to focus on cash preservation and have reduced non-essential SG&A spend by over 75 million sequentially in the quarter. That more than exceeds our 40 to $55 million target set on the previous call. These actions helped us to finish the quarter with approximately 1.9 billion in available liquidity. Since the business performed well in the quarter, we have begun to evaluate repaying part of the revolver and are assessing a potential dividend increase. Depending on the shape of the pandemic, We will see some sequential cost increases related to things like advertising, some travel, and the reinstitution of merit increases. But we remain committed to managing expenses very closely given the uncertain path ahead. To be clear, we are managing costs well, but also investing for the future success of the business. We continue to focus on balancing the long-term health of the company alongside our short-term operational needs. Turning to our quarterly results, the business remained resilient despite this unprecedented period. Our daily sales finished down 1.8% on a constant currency basis in the quarter, underpinned by heightened sales of pandemic-related items that nearly offset a mid-teen decline of non-pandemic-related sales. With the MRO market down 14% to 15% in the quarter, we gained a lot of share fueled by pandemic-related sales, selling to new customers, and improving non-pandemic sales as the quarter progressed. Gross margins were pressured primarily due to pandemic impacts, which Tom will detail in a bit. A meaningful portion of this margin pressure is temporary in nature. What we don't know is how long the pandemic will last. Despite great SG&A performance, we have taken action to keep team members and customers safe that have added some short-term costs. Obviously, we're incurring expense to ensure we create safe workspaces and interact, but also doing things like expediting shipping and allocating product to lower-margin healthcare and government customers. To state the obvious, we have been focused on helping customers and communities as much as possible which sometimes means we have added cost. We produced $230 million of operating cash flow and $189 million of free cash flow. That's a solid result in this environment. Balancing the short term with progress and strategic initiatives has been key. We continue to make progress on our key priorities. We are on plan to re-merchandise an incremental $1.6 billion of our assortment this year. To support further acceleration of these activities, we plan to launch our new product information management system over the next month. We have made great strides in analytics and marketing capabilities, including upgrading internal talent to own more of the marketing activities. Our new customer information tools have enabled us to better match marketing and sales activities with new customers. We launched a new visual search application that is based on machine learning. We are getting great reviews on this solution. We are seeing continued traction with our KeepStock and other embedded customer solutions. We know that customers who have at least one embedded solution, including KeepStock and EDIE Pro, account for roughly 60% of our revenue. So this is an important customer segment. Here we have upgraded our systems and processes to accelerate new installations and improve service on existing solutions. With our endless assortment model, Minotro continued to invest in technology and capacity to fuel their growth, while we have started to see the benefits of last year's investments at Zorro in the U.S. And lastly, we further refined our international high-touch footprint with the completed divestiture of Fabry, and we announced an agreement to divest Granger China, This helps us simplify our footprint and focus our efforts on our core markets. Looking at slide six, I thought it would be important this quarter to show the underlying trends with pandemic and non-pandemic products based on our current categorization of SKUs. Over the last several weeks, I've been participating in virtual market visits with customers that were originally scheduled to be in person. I've talked with dozens of customers in several different industries to get a sense for how things are progressing. It's important to note that even for customers with strong revenue performance, There has been a disruption in normal activities. For example, our hospital system has been heroic in dealing with the pandemic and saving lives, and their pandemic product demand has been enormous. But many of their normal facilities maintenance projects have been put on hold through this time to focus on COVID, which means that even hospitals had lower non-pandemic sales through the last four months. There is a backlog of work that will need to be done in the future, but for now, customers in all industries are focusing on keeping people safe and recovering. In the U.S., we started to see increased pandemic sales in February, and they really picked up in March, where we quickly moved in stock inventory. This trend continued with pandemic-related sales up around 70% in the second quarter, and while the environment remains fluid, this has continued at an accelerated rate into July. The heightened demand came from a multitude of customers across numerous industries, with most of the pandemic products going to healthcare, government, and essential businesses. Through most of March, non-pandemic sales were pretty stable. With the stay-at-home orders, we saw non-pandemic sales fall off significantly in late March, but they have gotten better each month since bottoming out in April. We've seen further improvement in July. The good news is that we have seen a steady improvement in non-pandemic revenue across all customer types. It's still below pre-pandemic levels, but it has improved. While we don't know how this will progress, we do feel good about our ability to help customers weather the storm, regardless of how the pandemic evolves. So with that, I will turn it over to Tom to take us through the quarter's results in detail. Tom.