W.W. Grainger, Inc.

Hello, and welcome to the WW Granger third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Irene Holman, VP Investor Relations. Please go ahead.

Good morning. Welcome to Granger's Third Quarter 2020 Earnings Call. With me are D.J. McPherson, Chairman and CEO, and Tom Okre, SVP and CFO. As a reminder, some of our comments today may be 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 with their corresponding GAAP measures are found in the tables at the end of this slide presentation and in our Q3 press release, both of which are available on our IR website. This morning's call will focus on adjusted results for the third quarter of 2020, which exclude restructuring and other items that are outlined in our earnings release. Now I'll turn it over to DG.

Thanks, Irene. Good morning, and thank you for joining us today. Market conditions remain challenging in the third quarter as the pandemic conditions improved, but continued to weigh on many of our customers. Despite these challenges, Grainger performed well, continuing to demonstrate our resilience and strength. I'm so proud of how Grainger team members have responded to the challenges of 2020, staying relentlessly focused on further deepening relationships with our customers and supporting each other. I've shared with you our Grainger Edge framework, which includes our purpose, aspiration, strategy, and the principles that define the behaviors we expect from all team members. These principles, including starting with the customer, acting with intent, and competing with urgency, provide clarity and focus as we continue to execute on our purpose to keep the world working. And we'll continue to leverage the greater edge in all that we do throughout this pandemic and beyond. So let me start off with a brief business update and an overview of our third quarter performance before turning it over to Tom to dive into the details. On the business side, we continue to serve our customers well, support the needs and safety of our team members, and ensure we remain in a strong financial position. A quick update on each point. Grainger has operated effectively throughout the pandemic, first in support of essential businesses and now in serving all businesses. Each of our customers has a unique story on how they have been impacted by and managed through the pandemic. We have been there for all of them. Sales to healthcare, government, and e-commerce businesses remain strong in the quarter, and we saw improving trends with manufacturing and commercial customers. I'll address the pattern of revenue in a moment. Our world-class integrated supply chain organization, which supports both our North American high-touch businesses and our Zorro endless assortment platform, has helped find and secure products to meet customer demand. We have successfully worked down our backlog of orders for most pandemic-related products, including masks, and continue to work with suppliers to catch up on the few categories that remain scarce, including some gloves and hand sanitizers. The team remains laser focused on maintaining our high level of customer service. Customer feedback has been strong and improving throughout the pandemic. For our team members, we continue to take steps to support not only their safety, but their overall well-being during this uncertain time. To date, we have managed the challenges of 2020 without major layoffs and currently have roughly 1% of our workforce still on furlough. Importantly, we've maintained a strong financial position. We've been diligent in controlling costs, while balancing the need to continue to serve our customers, support our team members, and invest where it matters most. Our strong performance over the last two quarters together with our solid cost containment have enabled us to relax a number of our short-term cash preservation actions. We exited the quarter with approximately $2.1 billion in available liquidity. We continue to make strong progress on our strategic growth priorities during the short-term uncertainty. We have continued to execute our transform merchandising process to drive significant user experience improvements to Grainger.com, including our search and visualization capabilities and enriched product descriptions and content. By the end of 2020, we expect to have re-merchandised $2.8 billion in product through this new process, including $1.6 billion in the year alone. We intend to further accelerate these efforts moving forward as a result of our new product information management system that launched in the third quarter. Customer feedback on our website has improved significantly over the past six quarters. Marketing has been a large contributor of our U.S. share gain over the last few years. We have improved effectiveness in both media advertising and paid search and plan to further invest in marketing given these strong returns. We continue to deepen relationships with our customers through our large customer multi-site growth initiative, enhancements to our keep stock offering, and improvements to our sales strategy and effectiveness. We know that when we embed one or more of our service offerings with our customers, we foster deeper and longer-lasting relationships. Over 60% of our U.S. revenue is generated from customers with one or more embedded solutions. And lastly, within our endless assortment model, we are executing the successful Monotro playbook at Zorro here in the U.S. and are making strides in marketing effectiveness, customer analytics, and SKU additions. This year alone, we have added 1.5 million SKUs to Zorro, pushing its assortment to roughly 5 million products. Turning to our quarterly performance, we produced strong operating results in the third quarter. Organic daily sales finished up 4.6% in the quarter, underpinned by growth in our U.S. high-touch business and continued impressive performance of our endless assortment model. In the U.S., we realized strong outgrowth to the broader MRO market as a whole, which was down 5% to 6% in the quarter. Our gains were supported by pandemic-related demand, sales to new customers, and improved sales of non-pandemic product as we started to see some stabilizing trends in underlying business activity. Overall business activity still trails pre-pandemic levels as some customers remain disrupted by COVID. The endless assortment model continues to deliver with 20% growth in the third quarter while also generating meaningfully improved margins. We remain very excited about the future of this business as we continue to adopt learnings from Minotro to drive growth and profitability. At the total company level, we expanded adjusted operating margins by 90 basis points as gross margins stabilized sequentially, and we demonstrated strong cost control. Tom will detail this in a bit. The business continues to produce a durable cash flow stream with operating cash flow of $311 million and free cash flow of $252 million. Looking at slide six, I thought it would be important to again show this chart to highlight the underlying trends with pandemic and non-pandemic products based on our current categorization of SKUs. Our characterization goes beyond traditional safety products to include product categories with substantial volume increases during the pandemic. Plexiglass barriers will be an example. As you can see, while sales of pandemic-related products have decreased since May, continued demand for key products, including masks, gloves, and cleaning supplies, has kept pandemic sales elevated year over year. This heightened demand has continued to come from a multitude of new and existing customers across numerous industries as businesses reopen and adjust to the new operating protocols. On the non-pandemic side, sales have improved since bottoming out in April, with non-pandemic sales now down about 7% year over year. This improvement has been seen across most industries, with some of the obvious industries remaining the furthest below their pre-pandemic levels. These include airlines, hotels, and cruise lines. Based on month-to-day performance, we forecast October sales to finish up around 2% for the U.S. segment on continued trends in pandemic and non-pandemic performance. Predicting the recovery over the next few quarters is very challenging. The path of the virus will have a big impact on whether the recent improvements continue, level off, or reverse. But we feel well-positioned to compete in any environment that comes our way. With that, I will turn it over to Tom to talk us through the quarter's results in detail. Tom.