W.W. Grainger, Inc.

Greetings. Welcome to the WW Granger fourth quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. The 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'll now turn the conference over to Kyle Blant, Vice President of Investor Relations. Thank you. You may begin.

Good morning. Welcome to Grainger's fourth quarter and full year 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 that are subject to various risks and uncertainties. Additional information regarding factors that could cause actual results to differ materially is included in the company's most recent Form 8K and periodic reports filed with the SEC. This morning's call will focus on our adjusted earnings for the fourth quarter of full year 2023, which excludes the loss on the divestiture of our E&R industrial sales subsidiary. We have also included a daily organic constant currency growth metric to normalize for the impact on revenue. Definitions and full reconciliations of these non-GAAP financial measures with their corresponding GAAP measures are found in the tables at the end of this presentation and in our earnings release, both of which are available on our IRN website. We'll 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 from Monotaro's public statements. Now I'll turn it over to DG.

Thanks, Kyle. Good morning, and thanks for joining the call. In 2023, the Grainger team continued to drive our strategy forward by remaining focused on what matters most, providing our customers with a great experience and exceptional service. The customers we serve play a vital role in keeping their businesses and institutions running, and everything we do is focused on making their jobs easier. We made meaningful progress this year in building new capabilities in both segments to help our customers and team members support the work they do. We've done this by investing in technology, our supply chain network, and our high-touch growth engines to ensure we can provide the best experiences possible. As a result of this focus, we delivered record sales and earnings for the year. I'm incredibly proud of the progress we've made and want to take a few minutes to highlight some of this progress in more detail. The Grainger High Touch Solutions model has undergone a digital transformation over the past several years with strategic investments in our infrastructure, talent, and the development of custom capabilities to support our customers. We have built key technology infrastructure capabilities focused on two main domains that affect customer experience. One, knowing our products better than anyone else, and two, knowing our customers better than anyone else. These endeavors include the development of homegrown software assets around product information management, or PIM, and customer information management, or KIM, which allow us to store, codify, and scale our data assets. These investments may seem simple and obvious, but in the MRO industry context, product and customer information is very challenging. We offer millions of products with many technical attributes unique to each product category, and then deliver these products to millions of customers across a wide range of industries. We have made great progress here, but the exciting part is that we still have a long way to go. We have invested in additional technology talent that could partner with our MRO subject matter experts to bring Grainger's industry know-how to life. This partnership of talent is yielding significant benefits and helping us generate high-quality proprietary data insights through PIM and KIM. These insights are fueling our growth engines and helping us drive share. For example, our ability to capture detailed product attributes allows us to bid on more relevant keywords that could ultimately yield higher returns on our marketing spend. In addition, having this detailed product information coupled with customized workflows and processes means we're able to work with more granularity to gain confidence that our products are competitively priced, and we can do that at scale. Harnessing what we know about our customers' business operations through KIM alongside our detailed product data allows us to better match products to customers, saving them time and increasing confidence in their purchase. These are just a few examples where we have leveraged our data investments in an ecosystem where talent and technology work together to drive great outcomes. This work is serving as a great foundation for the value we deliver through our high-tech strategic growth engines. Starting with merchandising, we've reviewed roughly 80% of the overall product portfolio at least once and plan to finish collectively reviewing the entire assortment by the time we close out 2024. We continue to see strong revenue lift equating to several hundred basis points per re-merchandise category. Our second and third passes through the assortment have a broader lens than the first pass as we continue to leverage learnings, evolve our PIM capabilities, as we add other relevant areas to our review process. We are seeing strong results from this evergreen initiative, which we believe sets us up well to continue to drive share gain through this work stream in the future. Shifting to marketing, we continue to make progress through this initiative. This year, we've put a particular emphasis on leveraging PIM and expanding top-of-funnel marketing efforts to TV and streaming channels to increase brand awareness. We've seen positive results in many areas and plan to continue to increase investment and attractive returns going forward. Our sales force remains an important demand generator for Grainger. As mentioned in Investor Day, we're piloting the use of our enhanced KIM data to redraw seller territories to better serve under-penetrated customer locations. With this for the first time in several years, we've added about 200 salespeople to the organization over the last year and a half. It takes anywhere from 18 to 24 months for these new TIM members to ramp to a profitable level. But with the results we've seen so far, we are on the right path and expect this initiative to contribute to outgrowth over the next few years. To ensure that our sales force is most effective, we're investing in tools and technology which leverage information from Tim and Kim to provide insights to our sellers at scale to help them better plan their day-to-day interactions with customers. We are piloting several different capabilities here in 2024. Lastly, with our enhanced customer information, we are finding additional opportunities to embed our solutions and reinforce the value we bring to customers. This includes bolstering our value-added services offering and advancing our inventory management capabilities to improve keep stock processes and technology, both of which increase stickiness with customers, improve our productivity, and drive share. This has been a multi-year journey which is creating a significant competitive advantage for our business. As we lay on further enhancements and leverage machine learning and AI capabilities, we will continue to power our growth engines, drive share, and deliver customer value. Moving to the endless assortment model, despite more muted top line growth in 2023, the proven flywheel continues to propel forward. Monotaro continues to execute well. They've seen strong growth with enterprise customers, continue to expand with small and mid-sized customers, and are gaining operating leverage as they ramp into their distribution center in Agawa. In January, I had the opportunity to visit Monotaro and was able to see the progress in Agawa, which has been supported by a tight partnership between our U.S. supply chain organization and our Japanese counterparts. The Zorro team has progressed on their strategy, expanding their assortment, attracting new customers, and improving B2B customer retention. While repeat rates improved in 2023, the team continues to focus on this evergreen initiative. This includes presenting and personalizing our most advantaged assortment, assessing our price competitiveness, and proactively communicating delivery times to highlight where we are advantaged. For many of these efforts, the team continues to work with their monitor peers to share best practices as they work together to move the business forward. Now let's turn to Grainger's Advantage Supply Chain. We've made great progress to return service back to near normal levels following the unprecedented global supply chain disruption that our industry experienced over the last few years. We continue to hear that Grainger's product availability and our next day order complete shipping capabilities greatly set us apart from our competitors, allowing us to show up well and win with customers. As I mentioned at our 2022 Investor Day, we set out to accelerate our investment in capacity, automation, and sustainability initiatives to further strengthen our service advantage. We are well on that path as we add new square footage to the network, including the following. Three new bulk warehouses, including a 525,000 square foot facility in Pineville, North Carolina, that's scheduled to open later this year. A 535,000 square foot distribution center currently under construction in Gresham, Oregon, which is on track to open in 2025. And as shared earlier this week, a new 1.2 million square foot distribution center near Houston, Texas. With the addition of these facilities, we're adding 3.5 million square feet to our supply chain network in total. representing more than a 35% increase from where we began 2023. These latest investments will only strengthen our promise to customers who count on us to provide next-day complete orders to keep their operations running and people safe. Finally, I think it's important to reinforce how the Grainger Edge is truly the key to all of the success that I just mentioned. Every day, our purpose, we keep the world working, motivates us to do our best for customers, communities, and each other. That commitment has driven a culture we are very proud of, and one that's continually being noticed externally. Recently, Grainger ranked third out of 400 of America's largest companies in the American Opportunity Index for our commitment to developing internal talent to drive business performance and individual growth. The index primarily focuses on the experience of workers in non-college degree roles and a company's ability to offer them growth and development no matter their career path. Additionally, Grainger was named Glassdoor's 2024 Best Places to Work. Glassdoor has more than 50 million unique monthly visitors, and this recognition is particularly special as it's the first time Grainger was named to Glassdoor's U.S. Large Employer List. Both of these awards are based on third-party facts or proprietary career databases, not surveys, so they eliminate subjectivity and serve as a testament to the ways that Grainger Edge has strengthened our team member experience and employer brand. Lastly, before switching to the financials, I want to take a second to announce an update to our 2030 sustainability target. Our target approved by the board early in the fourth quarter of 2023 seeks to reduce absolute scope 1 and 2 emissions by 50% from a 2018 baseline, up from the previous 30% target. This new goal aligns with the level required to reduce scope 1 and 2 emissions to limit global temperature rise to 1.5 degrees Celsius. Environmental stewardship, which has long been a standing focus for Grainger, remains a key component of our culture and is embedded with the Grainger edge in everything we do. To be clear, our investments in sustainability are profitable as our team has been very resourceful at finding ways to improve our emissions while also supporting results. Turning to slide 9, we finished the year with over $16.5 billion in sales, up 8.6% on a daily basis or 9.5% in daily organic constant currency amidst the normalizing demand environment. Growth for the year is highlighted by our high-touch solutions U.S. business, which continued to gain profitable share, finishing the year with 525 basis points of market outgrowth, exceeding our annual target of 400 to 500 basis points. Alongside the strong top line, the team also did a great job of managing profitability through the year, with operating margins up 130 basis points in 2023, finishing the year at 15.7%. Together, these strong results fueled record earnings, ROIC, and cash flow. For the year, adjusted EPS was up over 23% to $36.67 per share. ROIC finished at 42.8%, and operating cash flow was over $2 billion, which allowed us to return $1.2 billion to shareholders through dividends and share repurchases. Overall, these strong results for 2023 are the byproduct of a lot of hard work from our entire team, and I am very proud of what we've been able to accomplish. As we embark on another year, regardless of what market we face, we are well-positioned to continue our momentum and expect to drive great results for our stakeholders in 2024 and beyond. With that, I will turn it over to Dee.