W.W. Grainger, Inc.

Greetings, ladies and gentlemen, and welcome to the WW Granger second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow a formal 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, Kyle Bland, Vice President of of Investor Relations. Thank you. You may begin.

Good morning. Welcome to Grainger's second quarter 2022 earnings call. With me are D.J. 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 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 our second quarter 2022 results, which are consistent on both a reported and adjusted basis for the respected quarterly periods presented. 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, Kyle. Good morning, and thank you for joining us. Today, I'll provide an overview of our second quarter performance and pass it to D to walk through the financials. Before I get to the quarter, I'd like to start with our Grainger Edge Framework, which guides our strategy and behaviors across the company and with our customer and supplier partners. Over the last several years, this has been critical to our response to COVID and our efforts to gain share. Importantly, these principles that you see here form the basis of what we expect of each other. Team members have embraced these principles to build better customer solutions, focus on what matters, and move faster to deliver value. They are more than words on a page. They are how we work together to support our customers and team members. One example of the Grainger Edge helping guide our efforts is around ESG. Our principles of starting with the customer Investing in our success and doing the right thing heavily influence our approach. At Grainger, we operate sustainably and with a long-term approach to critical issues. Our ESG approach, which we have reported on now for 11 years, is tightly integrated into the Grainger Edge and increasingly tied to our daily operations. In our recently published 2022 ESG report, we discussed how we are organizing our environmental, social, and governance practices, as well as our four near-term priorities. which is where we believe we could make the most impact. These near-term focus areas are diversity, equity, and inclusion, making sure that Grainger is a place where each team member feels welcome and able to give their best work. Energy and emissions, we continue to make great progress on improving our carbon footprint, and we have significant plans moving forward. Customer sustainability solutions, helping customers reduce energy and water consumption. And finally, supplier diversity, which helps us identify and support great supplier partners propel the business. Our team members have brought and will continue to bring these priorities into their work with our customers, helping them to achieve their ESG goals and creating even more value. As highlighted in the 2022 ESG report, we have recently worked with the State University to retrofit parking garage lighting, creating over $200,000 in annual energy savings, assisted a CPG company as they build out their supplier diversity program, and partnered with the Nationwide Hospital System in identifying a roofing vendor to install bio-based materials on roughly 500,000 square feet of rooftop, which will reduce greenhouse emissions by 39 million pounds over a 40-year period. These are just a few examples of ESG in action, and I am incredibly proud of how our teams are continuing to live our principles each day as they work with our customers, suppliers, and each other to further our efforts in this area. I hope you will take some time to review our full 2022 ESG report, which can be found on GraingerESG.com. Turning now to our second quarter results, we had another strong quarter with sales growth of 19.6% or 22% on a daily constant currency basis. Our results were driven by strong performance in both segments. This included 1,000 basis points of market outgrowth in our U.S. high-touch business fueled by continued solid execution on our strategic initiatives and strong returns on our inventory and supply chain investments. Total company gross profit finished the quarter at 37.6%, expanding 255 basis points over the prior year's second quarter. The largest driver of our expansion in the quarter was lapping the prior year pandemic-related inventory adjustment. Even when excluding that adjustment, however, we were still up around 60 basis points year over year, with both segments contributing to the favorable results. We delivered 13.9% operating margin and increased to 350 basis points over the prior year's second quarter. This is primarily a result of the improved gross margin performance as well as our ability to continue to drive SG&A leverage on the top line growth. In the quarter, we delivered adjusted ROIC of 40.5%, a significant increase over the 29.2% generated in the second quarter of last year. We also returned $219 million to shareholders through share repurchases and dividends. It was an excellent quarter all around. As a result of the strong performance and the continued momentum we are seeing through July, we are raising our full year 2022 guidance, which Dee will discuss in more detail. And with that, I'll pass it over to Dee.

Thanks, DG. Starting in slide eight, we covered revenue and margins at a total company level, but I'd like to highlight a few other key points. Our total company SG&A as percent of sales was 23.7%, a 95 basis point improvement over the prior year second quarter, as we drove leverage from our top-line performance. We continue to invest in our strategic initiatives, but remain committed to not adding unnecessary costs to the business. And our resulting EPS in the quarter was $7.19 of 68% versus the second quarter of 2021. Turning to our high-tech solution segment for the second quarter, We continue to see strong results with daily sales of 22.2% compared to the second quarter of 2021. We saw broad-based double-digit growth across all geographies and over 20% growth in both midsize and large customers in the U.S. In the U.S., we continue to see strong double-digit volume growth and price realization of around 11%, all helping fuel 23.1% daily sales growth. Canadian daily sales were also strong of 11.1% or 15.5% in local days and local currency. It's been a long journey and we are proud of the traction the Canadian team has gained with their now fifth consecutive quarter of profitability. For the segment, DP margins finished the quarter at 39.7% of 275 basis points versus the prior year, driven primarily by lapping of a $63 million pandemic product inventory adjustment in the prior year period. Excluding this inventory adjustment, we achieved gross margin expansion of over 25 basis points as favorable product mix and largely neutral price-cost spread were partially offset by heightened freight costs. As we manage through this highly inflationary period, while there will be quarter-to-quarter fluctuations due to timing, our goal is to remain price competitive while achieving price cost neutrality. Increased SG&A spend was driven primarily by higher variable compensation expense as well as continued investments in marketing, payroll, and benefits to support growth. Even with the increased investment, we delivered 150 basis points of SG&A leverage year-over-year, and when combined with strong gross margin recovery, Q2 operating margin of 15.6% was up 425 basis points versus the prior year period. Overall, the performance in our high-tech solutions business remains strong as our powerful value proposition continues to resonate with customers. Looking at market outgrowth on slide 10, we estimate that the US MRO market, including both volume and price inflation, grew between 12.5 and 13.5%, indicating that we achieved roughly 1,000 basis points of market outgrowth in the quarter. While we know that our advantage supply chain contributes to our success, we also continue to see strong growth with our strategic investments. We are excited about the returns that we are seeing on these investments, most notably with our re-merchandising and our data-driven marketing programs. Our continued success gives us confidence in our ability to consistently achieve 300 to 400 basis points of annual market outgrowth on an ongoing basis and through the cycle. Moving to our endless assortment segment, reported and daily sales increased 11.4%, up 21.1% on a daily constant currency basis after normalizing for significant impact of the depreciating Japanese yen. In local currency and local days, Monotaro achieved 21.9% growth and Zorro U.S. daily sales were up 23.2%. The segment growth continues to be driven by new customer acquisition at both Zorro and Monotaro and enterprise and repeat customer growth at Monotaro. an impressive quarter of growth across the segment. Growth margin expanded 100 basis points versus the second quarter 2021 and was primarily driven by freight efficiencies as average order values increased at both Zorro and Monacharo as both continued to focus on B2B customers. As planned, segment operating margin declined 25 basis points in the quarter, consistent with the forced First quarter, this decline was primarily a result of the new D.C. at Monotauro, coupled with continued investment in technology, marketing, and payroll costs to support growth at Zorro. Despite the increased investment, Zorro operating margins still improved 85 basis points over the second quarter of 2021 on strong GP improvements. As a reminder, the increased costs at Monotauro will continue for the remainder of 2022 as they transition to their new Inagawa DC. We anticipate that the business will return to more normal operating margins in 2023. In addition, we also continue to see positive results with our key Endless Assortment operating metrics. On slide 12, you can see total registered users across Monotauro and Zorro combined are up 18% over the prior year period. On the right, we show the continued growth of Zorro's SKU portfolio. We are targeting about 2 million SKU additions in 2022 and will likely exceed that given our progress after the first six months. At the end of the second quarter, we have around 10.2 million active SKUs on the website. Now, looking to the back half of the year, With another very strong quarter and with July total company daily sales of 19% or 21% in constant currency, we are raising our 2022 full-year outlook. While we acknowledge that the broader market conditions remain uncertain, we have not seen a slowdown in demand in our business and continue to hear positive sentiment from our customers further supporting our revised outlook. Our updated outlook for the full year 2022 includes expected daily sales growth between 14.5% and 16.5%, an EPS between $27.25 and $28.75, a 41% increase year-over-year at the midpoint. We've also updated our supplemental guidance in the appendix. which reflects improved segment operating margins and narrow ranges for all other metrics. While it is not typical for us to change our guidance this frequently, our objective is to provide our most up-to-date view with each earning cycle. Given the strong revenue and profitability performance to date, we felt it was necessary to update our guidance metric again this quarter. With that, I will turn it back to DG for some closing remarks.