W.W. Grainger, Inc.

Greetings and welcome to the WW Grainger fourth 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 your host, Kyle Bland, Vice President of Investor Relations. Thank you. You may begin.

Good morning. Welcome to Grainger's fourth quarter and full year 2024 earnings call. With me are DJ 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 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 product reports filed with the SEC. This morning's presentation includes non-GAAP financial measures, which include certain adjustments in previous periods as noted in the presentation. There were no adjusting items in the fourth quarter 2024 period. Definitions and full reconciliations over non-GAAP financial measures with their corresponding GAAP measures find 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 discussed will differ from Monotaro's public statements. Now, I'll turn it over to DG.

Thank you, Kyle. Good morning, and thanks for joining the call. In 2024, the Grainger team continued to drive our strategy forward by remaining focused on what matters most, providing our customers with exceptional service and a great experience. On these core issues, we made strong progress this past year. We leveraged our technology, data, and analytical capabilities to drive differentiated value for our customers in both segments. We invested in supply chain capacity to extend our leadership position in MRO fulfillment. And we remained focused on fostering a workplace environment where all team members can build a rewarding career. These efforts allowed us to deliver on our financial commitments for the year and helped us maintain our track record of driving strong return for shareholders. I am proud of the progress we've made and want to take a few minutes to highlight some of these accomplishments in more detail. To start, I'd like to ground us in the understanding that all MRO distributors are trying to solve two basic customer needs. First, customers expect a flawless experience. That means having the products they need, making it simple to find, having a seamless order process, getting it to them quickly, and making it easy to receive and pay. Second, customers expect their MRO partner to deliver tangible value for their business. This goes far beyond selling products and is something that shows up differently for each customer. It could be simplifying a customer's purchasing process, helping them improve inventory management capabilities, finding product substitutes to save them money, or supporting their operational and safety challenges. Our two go-to-market models, High Touch Solutions and Endless Assortment, are built to solve these needs for customers of varying sizes and industries. Our teams and processes are structured to help customers find the products they need, buy it with confidence, and deliver it next day and complete. We do this while minimizing complexity and showcasing our value-added capabilities that are relevant to their context. To do this well and at scale, we continue to build upon our three core foundational competencies. These are leveraging our technology and data capabilities to extend our digital advantage, expanding our supply chain footprint to maintain industry-leading service, and building and cultivating a highly engaged team. Let me briefly touch on each of these. Over the last several years, we have invested heavily to build market-leading data and technology capabilities, including developing proprietary product information and customer information systems. These data assets underpin our five strategic growth engines and fuel our ability to gain share within our high-tech solution segment. In 2024, we made some great progress. Within merchandising, we have completed a first-pass review to our full assortment. This is a tremendous milestone, and I'm proud of the continuous improvement mindset the team has taken to advance and standardize the process with this evergreen initiative. We'll continue to review categories and will likely see more net assortment growth going forward as we add products to meet evolving customer needs. Our marketing team is focused on driving continued strong returns on our ad spend. In 2024, we expanded our top-of-funnel marketing efforts to new channels to increase brand awareness. We also iterated on our digital marketing strategy to best capture in-the-moment demand. Further, we're finding new ways to utilize our PIM and KIM data assets to improve the effectiveness and efficiency of our spend. We have seen positive results in many areas and plan to continue to increase our overall marketing investment again in 2025. We continue to leverage our improved customer data to expand our sales force, adding one new geography and around 70 new sellers in 2024 as part of our sales coverage initiative. We slowed our investment in this space in 2024 and to start this year. but we continue to be pleased with our results and expect to add one or two more geographies later in 2025. Our sales force remains our biggest demand generator, and we are investing in tools and resources to increase their effectiveness and help them better serve our customers. We built and launched a proprietary seller insights tool that integrates with other Grainger platforms to serve up customer-specific insights. This helps our sellers save time and enables more productive customer conversations. And just this week, we are conducting intensive training for our sellers to help them meet their customer needs. Helping our sellers succeed will always be a focus. Within customer solutions, we implemented new homegrown software across our KeepStock platform to enhance our inventory management capabilities, and we are piloting new customer-facing tools which will provide access to enhanced data and insights. These advancements will help improve the user experience and drive procurement cost savings for our customers. All told, there's plenty of runway across our growth engines to continue powering share into the future. The information advantage we build across product and customer information also unlocks our ability to tap into new and emerging technologies to better serve customers and extend our leadership position in the MRO industry. We're leveraging our proprietary data to find new ways to increase revenue, drive efficiencies, and enhance service. We've been developing a variety of different capabilities across the business, including homegrown machine learning, large language models, and data tools where we can add incremental value. We are also piloting off-the-shelf technologies to help streamline back-office processes. To bring this to life, we've included a few examples. In KeepStock, we're leveraging computer vision to streamline our install process. Here, a cell phone camera can extract and codify detailed product information to help reduce errors and better organize the layout for the new install. This saves meaningful time for our KeepStock team members, lowering the install cost while improving the customer experience. Our inventory team has then augmented their planning algorithms with advanced machine learning models to optimize the depth and breadth of products across each market. These new models have been implemented across most of our North American network, driving service level improvements. Going forward, the team sees opportunities across supply chain to further refine our planning capabilities, helping us extend our service lead and optimize asset efficiency. Finally, as mentioned last quarter, we're testing a generative AI model in our call centers, which leverages our proprietary product and customer information to craft well-informed responses to customer chat inquiries. This tool allows us to scale our know-how, and equip our customer service agents with fast, relevant responses to help customers get what they need more quickly and efficiently. We're still in the test phase here, but Ott inspired technical product specialists who found it to be highly accurate while providing near-term, near-immediate response times. Down the road, this tool could be applied to other customer interaction channels. We're also investigating how this underlying technology could support other use cases across the business. We are just scratching the surface on how we can continue to leverage our data and these next-gen tools to develop advantage across the business. I'm encouraged by the progress we've made in 2024 and for what's to come in 2025 and beyond. Moving to endless assortment, we made great progress within the segment and continue to propel the flywheel forward. At Zorro, the team made significant progress on expanding their marketing efforts, growing the assortment, and enhancing the customer experience. This includes leveraging data and analytics to optimize the on-site search algorithm and improve delivery communication and capabilities. The result has been a steady flow of user acquisitions, improved B2B customer retention, and a return to double-digit sales growth as we exited the year. Monotaro continues to execute exceptionally well, driving strong results, including 29% growth with enterprise customers. The business continued to see strong retention rates while deepening our share of wallet with core B2B customers. We are actively sharing learnings across these businesses and are excited to build on our momentum in 2025. Our supply chain is foundational to driving a great customer experience. We have built our supply chain to specifically serve B2B customers with ship next day, complete orders. We've made significant progress on enhancing our service capabilities and expanding our distribution center network. This includes beginning construction on new Houston area DC, continued progress at our new Northwest DC, and further investments in bulk warehouse capacity, including a roughly $80 million facility in Illinois that we purchased at the end of 2024. Across the network, we see opportunity for automation and other advancements, which will help drive further efficiencies and ensure the long-term resilience of our supply chain. As we invest in this space, we remain focused on maintaining our industry-leading service advantage now and into the future. Our last foundational competency is our people. At the core of our successes are more than 26,000 team members who live our purpose-driven culture. Our team members are resolute in fulfilling our purpose, we keep the world working, and living our principles because we know the work we do matters. This ensures we get the best out of our talent, and operate with the highest ethics and integrity. Our company remains an employer of choice, as evidenced by being certified a great place to work across North America and Panama. Additionally, this year we were named the top-ranked company across all industries on the American Opportunity Index, which primarily focuses on the experiences of workers in non-college degree roles and a company's ability to offer them growth and development no matter their career path. These recognitions are a testament to our culture, including our commitment to ensure all team members can have a meaningful and fulfilling career here at Grainger. Lastly, I'd like to thank our team members for the critical role they've played in helping their communities through numerous natural disasters over the past year. This includes ongoing support for customers and local and federal relief agencies across the Los Angeles area as they continue to battle the devastating fires. Now turning to our full-year financials, the demand environment remained sluggish throughout 2024, but we finished the year with over $17.2 billion in sales, up 4.2% on a reported basis, or up 4.7% on a daily organic constant currency basis. Growth for the year included profitable share gain from our high-touch solutions U.S. business, which finished the year with roughly 100 basis points of total market outgrowth, including 325 basis points of outgrowth on a volume basis. In an endless assortment, the segment showed significant top-line improvement with daily constant currency sales up 11.6%. Both Zorro and Monetario continue to win with their core B2B customer base and drive improved repurchases rates, positioning them well for the future. Alongside that solid top line, the team also did a great job delivering continued strong margin performance, all while investing for the future with operating margin finishing at 15.5% for the year. Together, these results fueled strong earnings with adjusted EPS up over 6% to $38.96 per share. ROIC finished at 41.6% and operating cash flows over $2.1 billion, which allowed us to return $1.6 billion to shareholders through dividends and share repurchases. Overall, I'm proud of what we accomplished in 2024. and know we are working on the right initiatives to remain the MRO market leader for years to come. And with that, I will turn it over to Dee to review our fourth quarter results.