Q4 2017 Earnings Call W.W. Grainger, Inc. January 24, 2018 Safe Harbor Statement and Non-GAAP Financial Measures All statements in this communication, other than those relating to historical facts, are "forward-looking statements." These forward-looking statements are not guarantees of future performance and are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from such statements. These statements includ ...

W.W. Grainger, Inc. 2 • Leading distributor of MRO products for businesses • Founded in 1927; more than 90 years of service • 2018 revenues of $11.2 billion • More than 3 million active customers, average customer invoice ~$300 • eCommerce leadership: • Grainger is ranked 11th largest eCommerce retailer in North America by Internet Retailer • First commerce-enabled website in the industry (1996) • Online-only businesses for small customers (MonotaRO 2000; Zoro 2010) • 69% of orders originated through digita ...

Group 1 - W.W. Grainger, Inc. has good growth potential over the coming years due to its initial pricing increase in response to Trump Tariffs, which is expected to boost sales in the upcoming quarters [1] - The company is positioned to benefit from the economic environment and has strategies in place to unlock value and drive upside [1] Group 2 - The analyst has experience in investing and has provided research services to mid-sized hedge funds, focusing on medium-term investing strategies [1] - The analyst's strategy includes investing in growth stories available at reasonable prices, particularly in the industrial, consumer, and technology sectors [1]

Core Insights - W.W. Grainger, Inc. (GWW) is experiencing growth driven by volume increases in the High Touch Solutions segment and customer growth in the Endless Assortment segment [1][4] - The company anticipates continued top-line growth due to volume improvements and pricing actions, alongside effective inventory management and investments in e-commerce [2][8] Segment Performance - The High-Touch Solutions segment is benefiting from volume growth across all geographies and strong price realization, with an improved product mix contributing to gross margin [3][6] - The Endless Assortment segment is supported by customer acquisition and repeat customer growth at MonotaRO, as well as solid performance at Zoro [4] Financial Guidance - GWW expects earnings per share for 2025 to be between $39.00 and $41.50, indicating a 3% growth from 2024 figures, with net sales projected between $17.6 billion and $18.1 billion, reflecting a sales growth of 2.7-5.2% [5] Strategic Initiatives - The company is focused on enhancing customer experience through investments in e-commerce and digital capabilities, aiming for a personalized and efficient customer journey [9] - Strategic actions include improving product mix, reducing freight costs, and navigating supply-chain challenges to enhance margins [8] Market Position - Grainger's shares have increased by 20.6% over the past year, contrasting with a 1% decline in the industry [12]

Core Insights - W.W. Grainger reported $4.31 billion in revenue for Q1 2025, a year-over-year increase of 1.7%, with an EPS of $9.86 compared to $9.62 a year ago [1] - The revenue fell short of the Zacks Consensus Estimate of $4.32 billion, resulting in a surprise of -0.29%, while the EPS exceeded expectations by +4.23% [1] Financial Performance - Total reported growth was 1.7%, compared to an estimated growth of 2.4% by five analysts [4] - Net Sales for High-Touch Solutions N.A. were $3.40 billion, slightly below the $3.43 billion average estimate, representing a year-over-year change of -0.2% [4] - Net Sales for Endless Assortment reached $828 million, exceeding the $810.60 million average estimate, with a year-over-year increase of +10.3% [4] - Net Sales for Other segments were $81 million, slightly above the $80.64 million estimate, reflecting a +2.5% change year-over-year [4] - Operating earnings for Endless Assortment were $72 million, surpassing the average estimate of $68.63 million [4] - Operating earnings for High-Touch Solutions N.A. were $600 million, exceeding the estimated $587.01 million [4] Stock Performance - W.W. Grainger's shares returned +8.2% over the past month, contrasting with a -0.5% change in the Zacks S&P 500 composite [3] - The stock currently holds a Zacks Rank 3 (Hold), indicating potential performance in line with the broader market in the near term [3]

Group 1 - Grainger appointed Melanie Tinto as Senior Vice President and Chief Human Resources Officer, effective April 28, 2025, to oversee HR strategy and operations [1][2] - Tinto's previous experience includes serving as CHRO at WEX, where she transformed HR into a strategic business partner, and held leadership roles at Medtronic, Hewlett-Packard, Walmart, and Bank of America [2][3] - Grainger reported 2024 revenue of $17.2 billion, serving over 4.5 million customers worldwide with a broad range of MRO products and solutions [4] Group 2 - The company emphasizes the importance of supporting and engaging team members through strong leadership and a commitment to its principles [2] - Grainger operates primarily in North America, Japan, and the United Kingdom, offering approximately 2 million MRO products in its High-Touch Solutions segment and over 14 million products through Zoro.com and 24 million through MonotaRO.com [4]

Financial Performance - Net sales for Q1 2025 were $4,306 million, a 1.7% increase from $4,235 million in Q1 2024[10] - Gross profit for Q1 2025 was $1,710 million, up from $1,668 million in Q1 2024, reflecting a gross margin of 39.7%[10] - Net earnings attributable to W.W. Grainger, Inc. for Q1 2025 were $479 million, compared to $478 million in Q1 2024, resulting in a diluted earnings per share of $9.86[10] - Total net sales for the three months ended March 31, 2025, were $4,306 million, an increase of 1.7% compared to $4,235 million in the same period of 2024[63] - Gross profit for the same period was $1,710 million, up $42 million or 3%, with a gross profit margin of 39.7%, an increase of 30 basis points year-over-year[65] - Operating earnings for the three months ended March 31, 2025, were $672 million, a slight increase of $3 million compared to $669 million in 2024[66] - Diluted earnings per share rose to $9.86 for the three months ended March 31, 2025, reflecting a 3% increase from $9.62 in the prior year[67] Cash Flow and Liquidity - Cash and cash equivalents at the end of Q1 2025 were $666 million, a decrease from $1,036 million at the beginning of the year[18] - Net cash provided by operating activities for Q1 2025 was $646 million, slightly down from $661 million in Q1 2024[18] - Total cash provided by operating activities was $646 million for the three months ended March 31, 2025, a decrease from $661 million in 2024, primarily due to unfavorable changes in working capital[84] - Cash and cash equivalents decreased to $666 million as of March 31, 2025, down from $1,036 million as of December 31, 2024, with total available liquidity of approximately $1.9 billion[83] Assets and Liabilities - Total assets decreased to $8,658 million as of March 31, 2025, down from $8,829 million at the end of 2024[16] - Total debt as of March 31, 2025, was $2,281 million, compared to $2,002 million as of December 31, 2024[40] - The Company issued $2.8 billion in unsecured debt (Senior Notes) between 2015 and 2024 to support working capital needs and share repurchases[41] - Total debt as a percent of total capitalization improved to 37.2% as of March 31, 2025, down from 42.9% as of December 31, 2024[88] Segment Performance - Total net sales for the three months ended March 31, 2025, were 100% comprised of High-Touch Solutions N.A. (79%) and Endless Assortment (19%)[33] - The High-Touch Solutions N.A. segment accounted for 31% of total revenue for the three months ended March 31, 2025, consistent with the previous year[33] - The Endless Assortment segment contributed 19% to total revenue for the three months ended March 31, 2025, compared to 18% in the same period of 2024[33] - Net sales for High-Touch Solutions N.A. were $3,397 million for the three months ended March 31, 2025, a decrease of 0.2% compared to $3,405 million in 2024, but a 2% increase on a daily, constant currency basis[69] - Net sales for Endless Assortment increased to $828 million, a rise of $77 million or 10.3%, with a 15% increase on a daily, constant currency basis, driven by repeat business and enterprise customer growth[73] Expenses - Selling, general and administrative expenses increased to $1,038 million, up $39 million or 4% compared to the previous year, primarily due to higher marketing expenses[66] - Selling, general and administrative (SG&A) expenses for High-Touch Solutions N.A. rose to $839 million, an increase of $26 million or 3% due to higher payroll and marketing expenses[71] Shareholder Returns - Cash dividends paid in Q1 2025 were $115 million, an increase from $105 million in Q1 2024[18] - The company plans to continue investing in its business and returning excess cash to shareholders through dividends and share repurchases, funded by cash flows from operations[82] - Grainger's share repurchase program authorized the repurchase of up to 5 million shares, with 277,166 shares purchased in Q1 2025 at an average price of $1,095.30 per share[107] - The total number of shares purchased as part of publicly announced plans was 276,803, leaving 4,103,056 shares available for future repurchases[107] Risk Factors - The company is actively monitoring macroeconomic conditions, including inflationary pressures and supply chain challenges, which may impact operations and financial results[59] - Grainger's management continues to monitor and respond to market pressures and regulatory changes affecting operations[97] - The company faces various risks including inflation, higher product costs, and competitive pricing pressures that could impact future results[97] - Grainger's primary market risk exposures include changes in foreign currency exchange and interest rates, with no material changes reported[100] - There were no material changes in Grainger's internal control over financial reporting for the quarter ended March 31, 2025[102] - The company has not experienced any material changes in risk factors as previously disclosed in its 2024 Form 10-K[106] Governance - Grainger's disclosure controls and procedures were evaluated as effective by the CEO and CFO, ensuring timely and accurate reporting[101] - Grainger's board member Susan Slavik Williams holds approximately 5.7% of the company's outstanding shares and has the right to nominate a director nominee annually[109] - There were no shares withheld to satisfy tax withholding obligations during the reporting period[110]

Core Viewpoint - W.W. Grainger, Inc. is conducting its First Quarter 2025 Earnings Call, focusing on financial results that are consistent on both reported and adjusted bases [4]. Group 1: Company Overview - The earnings call is hosted by Kyle Bland, Vice President of Investor Relations, alongside Donald Macpherson, Chairman and CEO, and Deidra Merriwether, CFO and Senior Vice President [3]. - The call includes discussions on results related to MonotaRO, which is identified as a public company [5]. Group 2: Financial Reporting - The company emphasizes that some comments may include forward-looking statements subject to various risks and uncertainties [4]. - Definitions and reconciliations of non-GAAP financial measures with corresponding GAAP measures are available in the presentation and earnings release on the investor relations website [5].

Core Insights - W.W. Grainger, Inc. reported Q1 2025 earnings per share of $9.86, exceeding the Zacks Consensus Estimate of $9.46, with a year-over-year improvement of 2% [1] - Quarterly revenues increased by 1.7% year over year to $4.31 billion, although it fell short of the Zacks Consensus Estimate of $4.33 billion [1] - Daily sales rose by 3.3% compared to the prior-year quarter, surpassing the predicted increase of 2.7% [1] Segment Performance - The High-Touch Solutions N.A. segment's daily sales grew by 1.3% year over year, driven by volume growth and a favorable product mix, compared to a predicted growth of 1.7% [2] - The Endless Assortment segment saw a significant daily sales increase of 12%, attributed to strong performance at MonotaRO and Zoro, exceeding the predicted growth of 6.7% [2] Financial Metrics - Cost of sales rose by 1.1% year over year to $2.6 billion, while gross profit increased by 2.5% to $1.71 billion, resulting in a gross margin of 39.7%, up from 39.4% in the prior year [3] - Operating income rose by 0.4% year over year to $672 million, with an operating margin of 15.6%, slightly down from 15.8% in the previous year [3] Cash Flow and Balance Sheet - Cash and cash equivalents decreased to $0.67 billion from $1.04 billion at the end of 2024, with cash flow from operating activities at $646 million, down from $661 million year over year [4] - Long-term debt remained stable at $2.28 billion as of March 31, 2025, and the company returned $380 million to shareholders through dividends and share buybacks in Q1 [4] 2025 Outlook - The company maintains its 2025 net sales forecast between $17.6 billion and $18.1 billion, with expected sales growth of 2.7-5.2% and daily sales growth of 4-6.5% [5] - Earnings per share are projected to be in the range of $39.00 to $41.50 [5] Stock Performance - Over the past year, Grainger's shares have increased by 11.8%, contrasting with an 8.5% decline in the industry [6] Peer Performance - MSC Industrial Direct reported adjusted earnings per share of 72 cents, beating estimates but showing a 39% year-over-year decline, with revenues down 4.7% [9][10] - Hillenbrand, Inc. reported adjusted earnings per share of 60 cents, also beating estimates but with a 21% year-over-year decline in earnings, and revenues down 8.8% [10][11]

Financial Data and Key Metrics Changes - Total company reported sales for Q1 2025 were $4.3 billion, up 1.7% or 4.4% on a daily constant currency basis [9][11] - Operating margins for the company remained healthy at 15.6%, down 20 basis points compared to 2024 [11] - Diluted EPS for the quarter was $9.86, up $0.24 or 2.5% compared to the prior year period [11] - Operating cash flow was $646 million, allowing the company to return $380 million to shareholders through dividends and share repurchases [10] Business Line Data and Key Metrics Changes - High Touch Solutions segment sales were down 0.2% on a reported basis but up 1.9% on a daily constant currency basis, driven by volume growth and modest price contribution [12] - Gross profit margin for the High Touch segment finished at 42.4%, up 60 basis points year-over-year [13] - Endless assortment sales increased 10.3% or 15.3% on a daily constant currency basis, with Zoro and MonotaRO both showing strong growth [18][19] Market Data and Key Metrics Changes - The implied growth for the U.S. MRO market volume was 1% to 1.5% in Q1, with the High Touch Solutions U.S. business driving 1.3% volume growth [15] - Internal models suggest that the MRO market volume actually declined in the low single digits during Q1, indicating several hundred basis points of outgrowth [17] - Preliminary April sales were up approximately 5.5% on a daily constant currency basis [28] Company Strategy and Development Direction - The company remains focused on navigating the unpredictable external environment while ensuring transparency with customers and adhering to core pricing tenets [8][27] - The company is pivoting to annual disclosure of outgrowth metrics to reduce quarter-to-quarter noise and focus on growth drivers [18] - The company is committed to achieving price-cost neutrality over time while managing the impacts of tariffs [26][58] Management's Comments on Operating Environment and Future Outlook - Management noted that despite a muted demand environment, the company delivered solid growth and profitability in line with expectations [9][10] - Management expressed confidence in the team's ability to remain agile in a dynamic environment and navigate tariff-related challenges [8][27] - The company reaffirmed its 2025 guidance, expecting year-over-year sales growth to improve slightly in Q2 [27][28] Other Important Information - The company announced a 10% increase in its quarterly dividend, marking the 54th consecutive year of expected dividend increases [10] - Management highlighted several recognitions received by the company, including being named one of the World's Most Admired Companies and the World's Most Ethical Companies [31] Q&A Session Summary Question: Zoro's performance and SG&A leverage - Management indicated that the improvement in Zoro's performance is primarily due to sustainable revenue growth and improved repeat rates [33][34] Question: Achieving 20% consolidated contribution margin - Management confirmed that if demand does not degrade significantly with increased prices, a lower rate of growth could still achieve the desired contribution margin [35] Question: Sourcing flexibility amid tariff headwinds - Management stated that they have worked to understand alternative sourcing options, but some categories remain challenging due to reliance on China [41][42] Question: Customer feedback on macro outlook - Management noted that they have not seen a slowdown in business and that customers are embedding modest tariffs into their operations without significant concern [48][50] Question: Price increase requests from suppliers - Management mentioned that supplier price increase requests have varied widely, and it will take time for these to flow through to the P&L [122]