W.W. Grainger, Inc.

Greetings and welcome to the WW Granger third quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief 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. It is now my pleasure to introduce your host, Kyle Bland, Vice President of Investor Relations. Thank you. You may begin.

Good morning. Welcome to Grainger's third quarter 2023 earnings call. With me are D.J. McPherson, Chairman and CEO, and D. 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 Q3 earnings release, both of which are available on our IR website. This morning's call will focus on our third quarter 2023 results, which are consistent on both a reported and adjusted basis for all periods presented. We will also share results related to Monotauro. 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 third quarter performance and then pass it to D to walk through our results in detail. As I typically do, I'd like to start today's call with some reflections on how our Grainger Edge framework continues to drive our success. Unlike last year, our results in 2023 have not benefited from outsized macro tailwinds, and we don't expect this to change for the remainder of the year, as MRO market volume growth remains slightly negative. This means we must emphasize the value we bring through our customer experience and supply chain network to drive profitable share gains. I've recently had the opportunity to spend time with several manufacturing and government customers in California. While diverse in their operations, it was clear that our advantage supply chain, strong digital capabilities, and ability to solve complex problems is adding value for these customers. All of this is helping us to continue to gain share. Before we get into the results, I want to share a few examples of how our team members continually live our principles and improve the communities where we operate. Last month, our team members assembled more than 4,000 buckets to help natural disaster victims across the U.S. These buckets were strategically placed in regions vulnerable to hurricanes and flooding to ensure residents are prepared to quickly respond when a crisis hits. And for the second year in a row, Grainger has been recognized as one of Fortune's best places to work for women. This recognition is based on team member responses to key questions based on trust, respect, credibility, fairness, pride, and camaraderie. We know that when team members feel heard and recognized, we unlock the full potential of our team and the full potential of our business. Now let's dive into the quarter. On slide five, you can see we had another strong quarter as demand stayed reasonably steady as we continue to provide strong service and deliver tangible value to our customers. We finished the quarter with sales growth of 6.7% or 8.7% on a daily constant currency basis. Results again were driven by positive performance in both segments, most notably within the high-touch solution segment where we continue to drive profitable share gain. Total company operating margin was 15.9%, an increase of 60 basis points over the prior year, as improved gross margin performance driven by continued freight and supply chain efficiencies, along with favorable product mix, largely fell to the bottom line. Combine this with our strong top-line performance, and we delivered another quarter of robust EPS growth, record operating cash flow, and strong ROIC of over 44%. We also returned a total of $287 million to Grainger shareholders in the quarter through dividends and share repurchases. In the high-tech solution segment, we are advancing our five key growth engines as we continue to leverage our technology and data assets to unlock further value for customers. We remain focused on extending our service advantage and officially broke ground on our previously announced distribution center outside of Portland, which we expect will help enhance our service performance in the Pacific Northwest. Within the endless assortment business, While we continue to see a softer demand environment, we remain focused on acquiring new customers and improving repeat purchase rates across the segment, driving long-term profitable growth. Overall, 2023 is shaping up to be another great year as we follow the Granger edge, make progress on our strategy, and drive value for customers. We remain on track to deliver over 20% earnings growth for shareholders. And with that, I'll pass it to Dee to go through the details.

Thanks, D.G. On slide seven, you can see the high-level results for the total company, including strong sales growth of 8.7% on a daily constant currency basis, driven by growth across both segments. This is a relatively stable growth rate compared to the second quarter, even as price contribution declines as we wrap inflation past in the prior year period. Total company operating margin was up 60 basis points, primarily due to expanded growth margin and high touch, which more than offset lower EA growth margin and slight SG&AD leverage across the business. In total, we delivered diluted EPS for the quarter of $9.43, which was up over 14% versus the third quarter of 2022. Moving on to segment-level results, the high-tech solution segment continues to perform well, with sales up 8.5%, and daily constant currency, underpinned by growth across all geographies. Volume accelerated sequentially and contributed six percentage points of growth, exceeding price contribution for the first time in five quarters. In the U.S., we continue to drive year-over-year growth in all customer end segments, with government and transportation growing the fastest. Canadian daily sales were strong, up 9.1% in local days and local currency. For the segment, gross profit margin finished the quarter at 41.7%, up 110 basis points versus the prior year. We continue to benefit from improved product availability, which drove freight and supply chain efficiencies in the quarter. Product mix also remained a tailwind. partially driven by an outsized number of project-related value-added services in the current year period, a level which we don't expect to repeat going forward. As expected, price-cost spread was negative as the timing favorability captured in 2022 continues to unwind. This price-cost trend will continue in the fourth quarter, and we anticipate finishing nearly neutral on a two-year stack for the full year 2022 and 2023 combined. At the operating line, we saw improvement of 70 basis points year-over-year as GP favorability was partially offset by continued marketing and headcount investments to drive long-term growth. SG&A leverage was further impacted by one less selling day in the current year period. Overall, it was another strong quarter for the high-tech solutions North American segment. Looking at market outgrowth on slide 9, we estimate that the U.S. MRO market grew between 2.5% and 3.5%. indicating that we achieved roughly 550 basis points of outgrowth for the high-tech solution U.S. business in the quarter. Performance remains above our annual target to outgrow the market by 400 to 500 basis points, driven by consistent execution across our five growth engines. We continue to remain confident in our ability to achieve our annual outgrowth target through any economic cycle. Moving to our endless assortment segment, sales increased 4.3% or 9.2% on a daily constant currency basis, which adjusts for the impact of the depreciated Japanese yen. Zero U.S. was up 1.2%, while Monotaro achieved 12.6% growth in local days, local currency. At the business level, While we're seeing some signs of macro-related softness at Monotaro, the business still drove strong growth with new and enterprise customers and remains focused on growing repeat business with its core B2B customers. At Zorro, results reflect a continuation of headwinds discussed last quarter with tough prior year comps, declines with non-core B2C volumes, and a slowing macro environment all contributing to to more muted top-line growth. Non-core B2C customer performance was down nearly 20% year-over-year as we continue to focus our growth efforts on stickier B2B customers. Core B2B customer growth remains in the high single digits for the quarter and continues to reflect a slower macro for small businesses and in markets where Zorro is more skewed. We expect these pressures to persist for at least the balance of the year. From a profitability perspective, growth margin for the segment declined 20 basis points versus the prior year, as monetarial favorability was offset by year-over-year declines at Zorro. Monetarial results reflect continued great efficiencies and strong price realization in the quarter, while the Zorro decline was driven by negative product mix and the impact of unfavorable timing from prior year price increases. These gross margin headwinds, coupled with the continued demand generation investments and softer Zorro top line, drove a 70 basis points decline in operating margins for the segment. On slide 11, we continue to propel the Endless Assortment Flywheel as we add new users and grow our SKU count. Total registered users were up 15% in total across the segment, and we continued to grow our assortment at Zorro, having added roughly 600,000 SKUs in the quarter, pushing the portfolio total to over 12.8 million products offered. Now, looking forward to the rest of the year, You can see that we've narrowed our guidance ranges for the full year 2023. The new outlook includes total company daily sales growth between 8.5 and 9.5 percent, and an EPS range between $36 and $36.60. These updated figures imply a Q4 daily sales growth between 4.5 and 8.5 percent, which includes 4 percent month-to-date growth in October, which is in line with our expectations and reflects a tougher comparison given hurricane-related sales in the prior year. This month-to-date growth is roughly 100 basis points higher in constant currency. From a margin perspective, we are raising the lower end of our ranges and now expect operating margin for the full year to be between 15.6% and 15.7%. a record year for the total company. The new range implies fourth quarter operating margin will be lower sequentially as we anticipate product mix to normalize with fewer value-added service engagements and SG&A margin to deliver in line with typical seasonality in the fourth quarter. Supplemental guidance covering cash flow and share repurchase expectations, which have also been increased, can be found in the appendix of the presentation. All told, we're poised to achieve superior results that include historic highs for sales, profitability, and cash flow, further strengthening of our track record of delivering strong returns for Grainger shareholders. With that, I'll turn it back to DG for closing remarks.