W.W. Grainger, Inc.

Greetings, and welcome to the WW Granger fourth 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Irene Holman, Vice President of Investor Relations. You may proceed.

Good morning, and welcome to Grainger's fourth quarter and full year 2021 earnings call. With me are D.J. 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 details 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 Q4 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 release. We will also share results related to Monotaro. Please remember that Monotaro is a public company and follows Japanese GAAP, which differs from U.S. GAAP and is reported in our results one month in arrears. As a result, the numbers disclosed will differ somewhat from Monotaro's public statements. Now I'll turn it over to DG.

Thanks, Irene. Good morning and thank you for joining us. Today I'm going to provide an overview of our full year highlights and fourth quarter results. And I'll begin as we always do with the Grainger Edge, our strategic framework that defines who we are, why we exist, and where we're going, as well as how we'll get there using our operating principles. This framework has been foundational for our team to work through another challenging year with resilience and strength. We remain relentlessly focused on our customers and building the company for the future. I am tremendously proud of what we've achieved and want to thank our team members for their commitment, as well as our suppliers and transportation partners for their shared passion to support our customers throughout the year. It is always a privilege to help customers keep their people safe and their operations running, and even more so over the last two years. While 2021 was our second year navigating the impacts of the pandemic, it certainly brought its own unique challenges. Labor and material shortages strained supply chains throughout the industry. We demonstrated our agility and leveraged our supply chain scale to deliver strong service. Our customer satisfaction remained high, and in my regular interactions with customers, I continue to hear appreciation for our ability to deliver over the last two years. We invested in inventory, which enabled us to improve our availability and meet growing demand, especially in the back half of the year. We've also invested in our team members with increased wages to make sure that our DCs are staffed and able to get orders out the door. I can confidently say that the Grainger team navigated these challenges extremely well and put us in a good position as we enter 2022. While we've continued to focus on customers' needs, I'm pleased with the team's progress on our strategic initiatives that we know drive short and long-term growth. Our merchandising team reviewed 1.5 billion of the assortment last year, continuing to make it easier for customers to navigate our website and find the products they need quickly. That brings our total re-merchandise assortment to 4.4 billion, which helps our customers choose products with confidence. We've also increased our marketing investments, especially in areas like paid search, digital and radio ads, which have driven share gain and improved our brand recognition. We're excited by these results and the traction we've gained with both large and mid-sized customers. Since the beginning of the pandemic, our KeepStock teams have served customers onsite, supporting their inventory management needs and offering valuable insights to help them save time and money. This, in conjunction with our eProcurement services, has continued to make it easier for customers to do business with Grainger. Around 60% of U.S. revenue now comes from customers with multiple solutions that embed us in their operations. Our technology investments have been critical in supporting these efforts. Over the last few years, we've developed new product information, publishing, customer information, and marketing support systems. We continue to improve our technology capabilities to help us win in the market. Our endless assortment segment continues to grow as we've made progress on our strategic initiatives. Zorro US achieved its full-year SKU count goal, adding over 2.5 million schools this year alone, which brings the total assortment to 8.7 million SKUs. We've expanded into new customer segments and new categories, driving both new and repeat business. And in 2021, Minotra opened the Ibaraki DC in Japan, allowing them to stock high demand items locally, with plans for another DC near Osaka, Japan in 2022. And finally, we are making strong progress on ESG. 2022 will be our 11th year publishing a corporate responsibility report. We've elevated its importance in our organization through our ESG Leadership Council, which I chair. In 2021, we reviewed and updated our materiality matrix to ensure our ESG priorities are aligned with customer needs and to those of our stakeholders. And we continue to make progress across our ESG pillars, reducing greenhouse gas emissions and driving diversity equity and inclusion initiatives, improving supplier diversity, and helping customers meet their ESG goals. All in all, 2021 was a strong year, which positions us well moving forward. Turning to financial highlights, we achieved the full year expectations that we set earlier in the year. Demand was very strong, enabling us to finish the year at $13 billion in sales at the high end of our guided range. Organic daily sales growth was 12.7% for the year, 12.4% on an organic constant currency basis. Our results were driven by strong performance in both segments. Most notably, high-touch solutions in North America had exceptional growth at 10.8% on a daily constant currency basis. In the U.S., we outgrew the market by 100 basis points for the full year 2021, above where we expect it to be, and outgrew the market by 450 basis points on a two-year average. We faced our fair share of gross margin challenges throughout the year, primarily tied to inventory. We were able to recover well to end the year at 36.2%, resulting from our ability to manage price-cost spread and improve product mix. We delivered 11.9% operating margin and increased to 65 basis points over the prior year. And lastly, we returned over a billion dollars to shareholders through dividends and share repurchases and delivered a strong ROIC of 31.9%. We met the challenges of the year head on and delivered on our commitments for the full year. Turning to our quarterly results for the company, the story is similar with strong results to share. Daily sales exceeded our expectations and were up 16%, 16.9% on a constant currency basis, driven by double-digit growth in both segments with robust demand. Gross profit margin was 37.3%, 240 basis points above the prior year and in line with our expectations. We will go into more detail, but at a high level because we follow the LIFO method of accounting, our results include an adjustment to reflect the building of core product inventory at higher costs in the fourth quarter, which allowed us to finish the year with a strong inventory position. Our SG&A as a percentage of sales was 24.9%, flat to prior year. When comparing to 2019, which is a more relevant comparison point, our SG&A leverage improved over 200 basis points in the quarter. SG&A was $836 million, driven by higher variable compensation as a result of our strong top-line growth. We also saw elevated hourly wages and increased healthcare expenses and continued to invest in marketing. We gained operating margin leverage of 240 basis points over prior year, a result of the gross margin improvement. Finally, our resulting EPS was $5.44 for the quarter, up 48.6%, versus the fourth quarter of 2020. And with that, I will turn it over to Dee to take us through more detail on the quarter and our expectations for 2022. Dee?