W.W. Grainger, Inc.

Greetings and welcome to the WW Granger fourth quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the presentation. If anyone should require operator assistance during this conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to our host, Irene Holman, Vice President of Investor Relations. Thank you. You may begin.

Good morning. Welcome to Grainger's fourth quarter and full year 2020 earnings call. With me are D.J. McPherson, Chairman and CEO, and Deidre Merriweather, Senior Vice President 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 FCC 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 Q4 earnings release, both of which are available on our IR website. This morning's call will focus on adjusted results for the fourth 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. I'm excited that our new CFO, Dee Merriweather, is here with me. Dee brings a wealth of financial and operational expertise and a deep understanding of Grainger's business that will serve us well. She has been with Grainger for eight years in finance, pricing, and sales leadership roles. It's great to have her as our new CFO. For the call today, I'd like to provide an overview of 2020, highlighting accomplishments and challenges, and Clearly, much of the year has been shaped by that pandemic, but I'll also highlight our progress on key strategic initiatives. Then I'll turn it over to Dee to review the details of our fourth quarter results. I'll close by discussing how we will resegment the business to more closely reflect how we think about the company, and we'll also touch on our high-level opportunities and priorities for both the high-touch and endless assortment businesses. 2020 was obviously one of the most challenging and intense years in history. Through it all, we demonstrated agility, resilience, and a steadfast focus on supporting our customers and team members. At the start of the pandemic, we laid out three basic priorities to serve our customers well, support our team members, and ensure we remain strong financially. I can confidently say we've been able to accomplish all three, and I'm proud of how the team has continued to execute on our purpose to keep the world working by living our principles every day. Over the last year, we persevered through the pandemic while continuing to deliver an exceptional customer experience. We've deepened relationships with existing customers and developed new relationships, many of which have returned for multiple purchases. We helped our customers secure product, manage their inventory, and solve their problems as we further embedded KeepStock and our other solutions in their facilities. Grainger was sometimes the only vendor our customers allowed on their sites to support their operations, a testament to our deep customer relationships. Another priority was to support our team members. We operated with the perspective that the pandemic would be challenging and longer in duration than we wanted, but that it would eventually end. As such, we maintained a stable workforce, deployed personnel to safely and effectively serve customers, and supported team members to ensure their safety and well-being. The pandemic is first and foremost a humanitarian crisis, and supporting our team members has remained a huge priority. Finally, we have remained very strong financially, generating over 1.1 billion in operating cash flow in this difficult year. As it became clear that our business model would be resilient throughout the pandemic, we reverted from a temporary focus on cash preservation to our longer-term strategic priority of growing the business profitably. The Grainger team has been active in serving our communities through this time of need. We have great team members who value giving back to others. As a company, We provided monetary and product donations to organizations like the Red Cross and the Children First Fund to support the pandemic response. The key leadership challenge this year was balancing our pandemic response while continuing to build the company for the future. Throughout, we remained focused on executing against our strategic initiatives. Within our high-touch solutions model, we improved the way customers find the products they need. We know this is core to our growth. In 2020, we launched our product information management system, which provides the foundation for our merchandising efforts. We now have over $2.8 billion of our product assortment re-merchandised, $1.6 billion completed in 2020 alone. We also made enhancements to our search functionality and mobile app, resulting in a better user experience. We added features like search by image, where you can take a picture of the product you're looking for and get accurate matches to relevant items quickly and easily. We took a significant step forward with our marketing capabilities in 2020. We brought more capabilities in-house to develop the competitive advantage of industry-specific knowledge. These efforts helped us gain share and increase customer acquisition with the Grainger brand. We developed new capabilities to support onsite inventory management, including vending solutions and technology, allowing us to remotely upgrade or alter installations to better serve customers during the pandemic. We also opened a new distribution center in Louisville earlier this year, now our largest facility with the capacity to stock 700,000 products in a strategic geographic location. We leveraged the building to test product expansion on a set of new categories with very strong results. We also made strong progress with our endless assortment businesses. Zorro continued to expand its product portfolio, adding 2.5 million items in 2020 to bring the total SKUs to over 6 million. Zorro also improved its marketing capabilities, resulting in improved ROI and higher customer repeat rates. They are leveraging the Minotro playbook to improve the fundamental growth and profitability of the business. Minotro continued its exceptional growth and profitability performance. All in all, a great year for the MLS assortment team. Now, before I review our 2020 results, I think it's helpful to step back and take a look at the impact the pandemic has had on our operating performance. From a revenue perspective, we started to see a shift to pandemic-related products starting in mid-February of last year. In late March, as pandemic product demand surged, we saw a significant decline in other non-pandemic product as lockdowns took hold. Since that point, we have seen continued strong sales of pandemic products, which has ebbed and flowed based on the virus, including another surge in the fourth quarter, which mirrored the increase in case counts. Non-pandemic products are slowly coming back, and while not yet at pre-pandemic levels, they have improved quite a bit from April lows. We expect the pandemic to continue to impact revenue through at least the first half of 2021 and then start to moderate as vaccinations take hold. Dee will detail our forward-looking thoughts in a bit. The pandemic has also had a big impact on gross profit driven by two main factors. First, we were impacted by product and customer mix. Pandemic products are generally lower margin, and we sold large quantities to healthcare and government customers, which typically received more favorable pricing. This was exasperated early on as we initially prioritized product allocation to those most in need, like health systems and those in the front lines. So sell-through margins have been negatively affected by these mixed impacts. The second driver is that we have been aggressive in supporting our customers by trying to anticipate the needs they might have. As a result, we placed large orders for certain products in Q2 of last year. As we have gone through the pandemic surges, the supply-demand picture has changed rapidly for some products. and we had to revalue our inventory to reflect this reality. The vast majority of our purchases have worked well, a few have not. We have reverted to our normal purchasing processes and will continue to monitor market dynamics as the situation unfolds. The impact on GP is easier to understand sequentially. Our GP dropped significantly in Q2 and has been impacted the remainder of the year. Moving forward, we expect USGP to improve sequentially and to exit 2021 as high or higher than we started in Q1 2020. Finally, as we look at SG&A, overall net costs were lower despite some increased costs for enhanced safety and cleaning protocols and workforce disruptions. The team was able to tightly control costs while also continuing to invest for the long term. Despite these unique and challenging circumstances, we were still able to deliver strong overall performance in 2020. A few of the highlights, we delivered organic constant currency daily sales growth of 3.5% at the total company level driven by our above market growth of 800 basis points in the U.S., due in part to pandemic-related sales. Also, we achieved over 18% daily sales growth in the MLS assortment businesses. We delivered operating margin of 11.2%, reflecting strong SG&A leverage, which helped to offset the previously mentioned pandemic-fueled GP headwinds. We generated over $1.1 billion in operating cash flow, while returning $939 million to shareholders through dividends and buybacks. And we remained disciplined in our capital deployment, maintaining strong adjusted ROIC of over 28% for the company, In order to focus on our core high-touch and endless assortment businesses, we divested Fabry in China, two non-core businesses abroad. Overall, I am confident in the direction we are heading and very excited about the future. We have gained significant share and built strong capabilities. We are in a very good position to deliver strong performance this year and for years to come as the pandemic loses its grip. With that, I will turn it over to Dee to take us through the fourth quarter results. Dee?