W.W. Grainger, Inc.

Greetings. Welcome to WW Granger second quarter 2024 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. Please note this conference is being recorded. I will now turn the conference over to Kyle Bland, Vice President of Investor Relations. Thank you. You may begin.

Good morning. Welcome to Grainger's second quarter earnings call. With me are D.J. McPherson, Chairman and CEO, and Dean 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 other periodic reports filed with the SEC. This morning's call will focus on the adjusted results for the second quarter of 2024, which exclude $16 million of pre-tax restructuring costs incurred in the quarter. Please remember that we have also included a daily organic constant currency sales growth metric within these materials to normalize for the divestiture of our E&R industrial sales subsidiary, which was sold at the end of 2023. Definitions and full reconciliations of this and any other 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 IR website. 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 from Monotaro's public statements. Now, I'll turn it over to DG. Thanks, Kyle. Good morning, and thank you for joining the call. As we pass the midpoint of 2024, I'm proud of the way the team continues to show up for our customers, providing a flawless experience on each transaction. Our team members are consistently living the principles outlined by the Granger Edge, and in doing so, we become a trusted partner for our customers, creating tangible value each day. One of the best examples of the value that we create for our customers is by simplifying their purchasing processes. Complicated and high-cost purchasing processes are common in our space, wasting our customers' time and money. Fortunately, we are well equipped to help customers solve this challenge by assisting them in choosing the right digital solution, setting up necessary workflows and approvals, and providing systems training to maximize the benefits. Recently, during negotiations on a multi-year agreement, one of our national account managers identified opportunities where our team could help the customer meet their process improvement goals, most notably in streamlining their procurement systems. Engage our internal EDI ePro team who work with the customer to connect their purchasing platform to Grainger. Together, Through enterprise-wide integration and training, we were able to move nearly all of the customers' MRO transactions to a digital channel, helping them to consolidate orders, lower PO processing costs, and driving several hundred thousand dollars in annual savings. These process improvements are part of a broader engagement with this customer, where we also help them reduce inventory levels and drive product standardization, further saving them time and money. This example is just one of many where our team works to understand the customer's operations, tailor our solutions to meet their needs, and drive lower costs. Moving on to our second quarter performance, we delivered another solid quarter of results amidst a slow yet generally stable demand environment. Total company reported sales were up 3.1% or 5.1% on a daily organic constant currency basis with positive contributions from both segments. In the high-tech solution segment, we remained focused on our growth engines and delivered tangible value for our customers, resulting in another quarter of solid performance. Within the endless assortment business, our focus on gaining new customers and increasing repeat purchase rates is paying off and we continue to make progress with these initiatives. From a profitability standpoint, total company operating margin of 15.4% remained strong, but as anticipated, was down 40 basis points versus prior year. EPS finished the quarter at $9.76, up 5.2% versus the prior year. Beyond the P&L, we achieved ROIC of 42.6%, and operating cash flow remained healthy in the quarter, allowing us to return a total of $345 million to Grainger shareholders through dividends and share repurchases. Overall, the business continues to perform well as we stay focused on the customer and the things that matter. While 2024 is playing out largely as expected, further yen devaluation and continued pockets of demand sobs in the U.S. remain as headlines. With this, we've trimmed the top end of our earnings guidance range, which Dee will discuss in a bit. Now I'll turn it over to Dee.

Thank you, Gigi. Turning to slide seven, you can see the high-level second quarter results for the total company including 5.1% growth on a daily organic constant currency basis. The quarter played out largely as anticipated, despite the persistent demand softness DG mentioned. Operating margins were down 40 basis points year over year, generally following normal seasonal trends. Gross margins were flat year over year as a number of items offset within the period, and SG&A delevered 40 basis points as we ramp our demand generation investment. In total, we delivered diluted EPF for the quarter of $9.76, up 5.2% or 48 cents over the prior year period. Moving on to segment level results, the high-tech solutions segment continues to perform well with sales up 3.1% on a reported basis or 3.7% on a daily organic constant currency basis. Results were driven by strong volume growth and moderate price contribution across all geographies in the period. In the U.S. specifically, nearly all customer end markets were up year over year with warehousing, contractors, and healthcare customers having the largest gains. For the segment, gross profit margin finished the quarter at 41.7%, flat versus the prior year. In the quarter, we experienced an unfavorable lap of roughly 40 basis points from the non-recurring rebate benefit captured in Q2 of 2023, which was offset by several small tailwinds in the current year period. When excluding the unfavorable lap of non-recurring rebate, price cost was roughly neutral in the quarter. SG&A delevered 40 basis points in Q2, as DC capacity came online and we continued to invest in demand generating activities like marketing and seller headcount. Annual merit increases that went live in April were offset by productivity action and lower variable compensation expense within the period. Overall, it was a solid quarter of growth and profitability for the high touch solutions business. Looking at market outgrowth on slide nine, we estimate that the U.S. MRO market, including volume and price, grew in the quarter between 2.5 and 3%, with price contributing nearly all of the growth. Within our high-tech solutions U.S. business, growing at 3.6% organically, our mathematical market outgrowth in the quarter was roughly 100 basis points in total. This includes approximately 300 basis points of volume outgrowth contribution netted against the continued price headwinds when comparing our price contribution to PPI. As we've said before, there is no perfect way to measure the MRO market, and we're currently in a cycle where the headline PPI and IP metrics don't completely reflect what we're seeing in the MRO-specific space. With the differences in product and customer mix, these disconnects happen from time to time and cause short-term noise within our external market share gain calculation. Given the current dislocation we're seeing this year, it's unlikely we will mathematically achieve our market outgrowth target in 2024. However, we have several different ways, including both internal and external data points, to understand our relative performance and know we're performing quite well in the current environment. History would suggest that this dislocation will normalize over a multi-year period, and we believe this metric remains useful in tracking our relative performance over time. we're still generating strong returns on our demand-generating investments, which gives us confidence that over the long term, we will continue to outload the market by 400 to 500 basis points annually on average. Now turning to the endless assortment segment. Sales increased 3.3% or 11.7% on a daily cash and currency basis, which is just for the impact of the depreciated Japanese yen. Zorro U.S. was up 8.7%, with Monotaro achieving 13.2% in local days, local currency. At a business level, Zorro saw improved growth from core B2B customers who were up mid-teens in the quarter. Performance was driven by B2B customer acquisition and improved repeat purchase rates, which were aided by service enhancements to increase same-day shipping and better communicate delivery dates. Headwinds from the continued unwind of non-core business, including B2C and B2C-like volumes, started to dissipate in the quarter, but remained down low double digits year over year. We expect these B2C headwinds to continue to subside as the year progresses. At Monotauro, sales were strong from continued growth with enterprise customers coupled with solid acquisition and repeat purchase rates with small and mid-sized businesses. On a reported basis, these results were all offset by continued foreign exchange rate pressures as the yen continues to show incremental weakness against the dollar. On profitability, operating margins for the segment declined 70 basis points to 7.9%. This decline was driven by lower growth margins at Monotaro from product and customer headwinds combined with SG&A deleverage at Zorro as the business ramps marketing investments and rebaselines on lower B2C and C2C-like volumes. As these volumes normalize, this should create a better baseline to relever the business going forward. Overall, for Endless Assortment, we're encouraged by the strong progress in the quarter and are on track to finish the year at or above our original expectations. Now moving to the updated outlook for the remainder of 2024. As DG mentioned at the beginning of the call, we are trimming the top end of most estimates to reflect continued market softness as macroeconomic uncertainties persist in the U.S. With this, we're now expecting total company daily organic constant currency sales to grow between 4 and 6 percent for the full year of 2024. When including the continued deterioration of the Japanese yen, this translates to an updated reported sales range between $17 and $17.3 billion and an EPS range between $38 and $39.50. As you can see on this slide, we flowed these changes through and have also made slight tweaks to the margin outlook based upon how we're performing in the first half. I want to note, while we continue to remain diligent on managing expenses and measuring returns, given the softer top line, our ability to generate leverage is challenged this year as we invest in our growth engines to power long-term share gain. Setting that aside, we remain strongly committed to growing SG&As slower than sales over time and have a track record of doing so. Supplemental guidance ranges, including increased operating cash flow, and share repurchase expectations can be found in the appendix of this presentation. On seasonality, as we move to the second half of the year, we expect relatively normal sequential growth from Q2 to Q3 and into the fourth quarter. There are some puts and takes from a profitability perspective, but we anticipate operating margins and earnings to remain healthy and relatively consistent in third quarter when compared to the second. As we start the third quarter, a number of external factors have impacted our results in July. The sales started to ramp in the final few days of the month. This led preliminary July sales results to finish up roughly 2% on the total company daily organic constant currency basis. Of note, this number will be approximately 100 basis points higher if you normalize for the tough comp cause by an elevated level of project-related service engagement in July of last year. Altogether, at the total company level, we're performing well and are confident in our ability to drive solid growth and strong profitability in the second half of the year. With that, I'll pass it back to DG.