W.W. Grainger, Inc.

Greetings and welcome to WW Granger's second quarter 2021 earnings conference call. At this time, all participants are in a listen only mode. A question and answer session will follow the full presentation. If anyone should require operator assistance during the 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, VP of Investor Relations. Thank you. You may begin.

Good morning. Welcome to Grainger's second quarter 2021 earnings call. With me are D.G. McPherson, Chairman and CEO, and D. Mary Weather, 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 with their corresponding GAAP measures are found in the tables at the end of this presentation and in our Q2 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 an overview of our second quarter results and progress toward our goals as the economy recovers. Before we get into details on the quarter, I'd like to spend a moment highlighting our Grainger Edge framework. Two years ago, we launched this framework that defines who we are, why we exist, and where we're going. It covers our purpose, aspiration, strategy, and the principles that drive our actions. It all starts with our purpose. We keep the world working. We shared this with all team members across the company in 2019. While the concepts weren't new and many were already part of our operational DNA, the framework provided clarity in who we are and what we do, as well as a common language for our team members. The Grainger Edge has guided us through the pandemic and I'm proud of how the Grainger team has continued to embrace it. It's also been a strong foundation for how we serve our customers and helped us through the challenges of the last 18 months. Speaking of challenges, 2021 has provided plenty. The year has been characterized by strong demand, but a very challenging supply chain environment. From material shortages, labor shortages, and transportation challenges have been the norm, particularly in the second quarter. These challenges are industry-wide. And while we're not immune to them, we are uniquely positioned to leverage our scale and navigate through these ongoing difficulties. Importantly, this year, the supply chain has become a competitive sport. And while we have had obstacles and things are messier than normal, Our customer research suggests we are navigating the obstacles well and providing very strong relative service during this time. We are actively leveraging our network. For example, for a customer located in New York, we would typically fulfill their entire order from our Northeast TC. Due to supply constraints or product delays, now part of the order may only be available in Louisville. In this case, the order may be fulfilled from Louisville, adding an extra day and incremental cost to the order. but we are able to leverage our network to provide and protect our great service. We are also leveraging our branches for more shipping in this environment. In addition, we have accelerated the ramp of our Louisville DC, which has helped alleviate capacity constraints. This building is a great asset for Grainger and will continue to ramp capacity through the next 18 months. The good news is that we still have very high availability in our network, even if the product comes from an alternate location. I've had the opportunity to be in the field quite a bit this past quarter, and have been excited to spend time with customers and hear their feedback. I'm hearing consistently that while we may be delivering a bit differently than the past, we are serving our customers better than the competition. We have validated this through feedback on our recent customer surveys, and the vast majority said we were doing better than other distributors right now. We are also investing in non-pandemic inventory and partnering closely with our suppliers to work through any supply constraints, inbound lead time challenges, and any potential cost increases. Additionally, shortage in the labor market have had a significant impact for all companies this year. In response, we have increased our wages to attract and retain talent, especially in our distribution centers. We've implemented robust training programs to onboard new team members and train existing team members to work throughout our buildings. We have made great progress in closing staffing gaps and will continue to do so over the third quarter. Finally, transportation has been very challenging. That is clearly linked to the product and labor shortages. We have always prioritized optimal routes and cost efficiencies. Over the last few months, we have partnered with our carriers in new ways to ensure we are meeting customer expectations. We have also added new partners to our carrier mix to handle our volume and provide us flexibility. It's important to note that the overall freight market is volatile and uncertain. While we are confident in our current plans to manage these challenges, there are a lot of moving pieces and constraints across all modes, parcel, LTL, and ocean freight. For example, the ocean freight market has been uncertain as the pandemic surges again in Asia and container costs fluctuate. We are ready to respond to any of these dynamics. We expect the supply chain challenges to last through the end of the year and likely well into next year. I have no doubt as we continue to live the Granger Edge and follow our principles, we'll not only get through these challenges, but we'll deliver strong results and take market share. Turning to our financial highlights, the bottom line is that our performance has been in line with our expectations and what we communicated on our last earnings call. The only exception to this has been gross profit impacted primarily by the changes in May to the CDC mask guidelines halfway through the quarter. Heading into the second quarter, all external factors were pointing to a reopening in the U.S. around or sometime after the 4th of July, giving us a full quarter to sell through as much of our remaining pandemic inventory as possible. Based on our internal scenario planning, we thought that potential adjustments in Q2 would fall somewhere between $45 and $50 million. But we couldn't predict precisely how far the demand curve would fall or when. Then when the CDC mask guidance changed in mid-May, we saw our demand for pandemic products, especially masks, decline rapidly. As a result of the sudden weakening in demand, we had more pandemic inventory remaining than expected, and we took a $63 million adjustment, about $15 million more than our internal scenario planning. We believe this completes any material pandemic related inventory adjustments. Without this incremental change, GP would have been roughly flat sequentially. We understand the CDC has just changed guidance again this week. While the situation is fluid, we do not expect any material change in our outlook as a result of this change. Shifting to the other financial results, we achieved strong organic daily sales growth of 15% for the company on a constant currency basis within our guided range. When compared to 2019, Q2 was up about 14% on a daily organic basis, a positive indicator of our strong performance and recovery beyond the pandemic. Our high-touch solutions North America segment grew 12.7% on a daily constant currency basis. In the U.S., we lacked the most extreme volatility of 2020. Looking at the two-year average in the second quarter of 2021, we drove approximately 275 basis points of average market outgrowth. We remain very confident in our ability to grow 300 to 400 basis points faster than the market on an ongoing basis. We expect the volatility of 2020 and 2021 to average out and get back to normal heading into 2022. Our Canadian business drove positive operating earnings growth for the quarter and managed expenses well. We are seeing continued momentum in targeted end markets, especially heavy manufacturing and higher education as schools prepare to reopen in the fall. And we continue to diversify the business beyond natural resources. The almost assortment model had another impressive quarter with 23.9% daily sales growth on a constant currency basis, fueled by strong customer acquisition. Lastly, we generated $269 million in operating cash flow and achieved strong ROIC of 29.2%. Turning to our quarterly results for the company, I've discussed most of what's on this slide, but I wanted to point out two additional items. First, our SG&A was $790 million, in line with the guided range provided on our first quarter calls. As expected, we increased SG&A for the quarter as we continue to invest in marketing and in our people through increased variable compensation and wage rates in the DCs. This resulted in total company operating margin of 10.4%, down 70 basis points compared to the prior year. Excluding the impact of the 15 million incremental inventory adjustment, GP would have been roughly flat sequentially and operating margin would have been 10.9%. Resulting EPS would have been around $4.50. With that, I will turn it over to Dee to take us through more detail on our two segments. Dee?