W.W. Grainger, Inc.

Greetings and welcome to the Granger first quarter 2021 earnings conference call. At this time all participants are in a listen only mode. A 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. Please note 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 first quarter 2021 earnings call. With me are D.G. McPherson, Chairman and CEO, and Dee Merriweather, Senior Vice President 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 Q1 earnings release, both of which are available on our IR website. This morning's call will focus on adjusted results, 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 I'll provide a brief overview of our first quarter results, key initiatives, and encouraging signs for our business as the economy recovers. Of note, this will be our first quarter with results aligned to our two new reportable segments. Also, as Monotaro, our majority owned subsidiary, is a publicly traded company on the Tokyo Stock Exchange, we have now aligned the timing of our earnings releases. I am very proud of the way the Grainger team has continued to serve our customers through the recovery and has addressed new challenges as they arise. We are supporting many customers through vaccination deployment, including pharmacies and other large sites. Recently, we partnered with the State University Medical Center, the National Guard, and the Department of Health to support a MAX vaccination site. We outfitted the site with important pandemic-related products like safety equipment, as well as more traditional MRL product needed to support the operation. like power and extension cords, lighting, and traffic cones. As it ramped up, this site has been able to facilitate thousands of vaccinations a day. We're seeing vaccination distribution progressing around the world, albeit at different speeds. In the US, as more of the population gets vaccinated, we're seeing many customers return to the normal operations and purchasing patterns. This is evident as our non-pandemic sales continue to return to normal levels and as sales in most end markets grow sequentially. In the UK, we're seeing business activity rise. In Canada, slower vaccine distribution and potential shutdowns are slowing the business recovery. We're also seeing a modestly slower recovery in Japan. No matter what stage of the recovery our customers are in, our relationships with them are very strong given our support of their operations over the past year. Part of being there for our customers meant having the products they needed when they needed it. To bring this to life, at this time last year when customers needed hand sanitizer, we sold them 55-gallon drums and they were filling their own containers. As supply constraints eased, customers reverted back to purchasing more normal PPE SKUs and far fewer 55-gallon drums. As I've said before, we took calculated risks in procuring pandemic products and reasonable alternatives, especially in the second quarter of 2020. As the pandemic progressed and market dynamics changed, we had to revalue some of our inventory in Q4 and again in Q1. We anticipate further price deterioration on some of these non-core alternative pandemic products. While our profitability on these products, including all potential write-downs, was below normal, supporting our customers by taking these risks was the right thing to do. We improved relationships with our existing customers, developed new repeat business, and delivered strong incremental growth at lower but still profitable margins. On last quarter's call, we shared our first quarter expectations. As it relates to revenue in the first quarter, all of our businesses surpassed our outlook. We expected first quarter company GP to be down 150 to 200 basis points versus prior year. and our actual results fell within this stated range. Excluding the inventory adjustments, our USGP was up versus prior year, giving us further confidence in the path forward. Based on our strong results in improving economic trends, we are providing full year guidance, which we will discuss in a few minutes. Within our high touch solution segment, we continue to make progress on our key initiatives across geographies. The US is seeing positive signs of economic recovery with growth of non-pandemic sales in virtually all segments. The exception is healthcare, which has very high pandemic-fueled comps. Gross margins are returning to pre-pandemic levels in the U.S., net of inventory adjustments. In Canada, the path to recovery is slower as they struggle to get the virus under control. Despite this, Grainger Canada achieved its revenue and margin targets in the first quarter. The endless assortment segment grew over 27% as we execute the playbook and gain momentum with our strategy. The team continues to add SKUs beyond traditional MRO products, which helps grow web traffic. Our continued marketing efforts and more targeted discounting strategies are working well and driving operating margin expansion at Zorro. Also, we are gaining real traction with new customer acquisition app Zorro Minotro. Finally, I'm excited to announce that Minotro has opened its newest distribution center in Ibaraki, Japan, which will allow the business to stock additional high-demand products locally. Shifting to the financial results, we achieved organic daily sales growth of 5.9% for the total company on a constant currency basis. In the US, we started to lap the volatility of 2020, and in the first quarter of 2021, we drove approximately 250 basis points of market outgrowth. To normalize for all the volatility, we looked at a two-year average share gain, which we believe is a more reasonable measure of outgrowth. Using this, we averaged 475 basis points of annual market outgrowth from 2019 to 2021. We anticipate showing both measures going forward. Endless assortment had strong performance in the quarter with 27.4% daily sales growth. For the total company, we delivered operating margin of 11.6% with 210 basis points and adjusted SG&A leverage more than offsetting the anticipated GP pressure from pandemic inventory adjustments. To be clear, we expect to sell through the remainder of these non-core pandemic products and complete any potential market-driven inventory adjustments by the end of Q2. Finally, we generated $294 million in operating cash flow, returned $256 million to shareholders who dividend in buybacks, and maintained strong ROIC of 30.3%. All in all, we are very pleased with this performance and our trajectory. And with that, I'll turn it over to Dee to take us through our first quarter results. Dee.