Grainger(US:GWW)2021-07-30 18:40Financial Data and Key Metrics Changes - The company achieved strong organic daily sales growth of 15% on a constant currency basis, with Q2 2021 sales up approximately 14% compared to 2019 [23][24] - Gross profit was impacted by a $63 million inventory adjustment due to a sudden decline in demand for pandemic products, resulting in a total company operating margin of 10.4%, down 70 basis points year-over-year [19][28] - Operating cash flow generated was $269 million, with a strong return on invested capital (ROIC) of 29.2% [26] Business Line Data and Key Metrics Changes - The High-Touch Solutions North America segment grew 12.7% on a daily constant currency basis, with gross profit finishing at 36.9%, down 125 basis points year-over-year [23][30] - The Endless Assortment segment saw impressive daily sales growth of 23.9% on a constant currency basis, driven by strong customer acquisition [43] - The Canadian business reported positive operating earnings growth and managed expenses effectively, with continued momentum in targeted end markets [25] Market Data and Key Metrics Changes - The U.S. MRO market grew between 18.5% and 19.5%, while the U.S. High-Touch business grew 12.4%, resulting in a two-year average market outgrowth of approximately 275 basis points [36][71] - Pandemic product sales declined approximately 28% versus 2020 but increased 27% compared to 2019, indicating a shift back to non-pandemic sales growth [32][34] Company Strategy and Development Direction - The company is focused on leveraging its scale to navigate supply chain challenges and is actively investing in non-pandemic inventory [8][14] - The Grainger Edge framework continues to guide the company's operations and customer service strategies, emphasizing the importance of digital solutions and inventory management [6][115] - The company aims to maintain price/cost neutrality while managing supplier relationships to mitigate cost increases [41][86] Management's Comments on Operating Environment and Future Outlook - Management expects supply chain challenges to persist through the end of the year and likely into next year, but remains confident in the company's ability to deliver strong results and gain market share [18][50] - The company anticipates revenue growth of 10% to 11% on a daily organic basis for Q3, with gross profit expected to improve by 100 to 120 basis points year-over-year [49][91] - Management highlighted the importance of adapting to customer needs for digital solutions and inventory management as key trends moving forward [115] Other Important Information - Grainger was certified as a Great Place to Work, reflecting the company's commitment to team member experience [54] - The company has set a new goal to reduce absolute Scope 1 and 2 greenhouse gas emissions by 30% by 2030, continuing its focus on sustainability [56] Q&A Session All Questions and Answers Question: Inquiry on large customer contracts and price-cost trends - Management explained that about 70% of the business is with large customers, allowing for the passing on of price increases, although timing may not always align perfectly with cost increases [61][62] Question: Clarification on guidance and expectations for the second half - Management maintained guidance but indicated that gross profit operating margin and EPS may trend towards the lower end of the range due to inventory adjustments and wage increases [65][66] Question: Outlook for gross margins and competition - Management expressed confidence in maintaining gross profit margins and achieving share gains, despite the competitive environment [70][71] Question: Discussion on inventory and potential sales - Management acknowledged the uncertainty surrounding inventory sales but noted the potential for increased mask sales in the short term due to changing guidelines [74][76] Question: Insights on freight costs and customer conversations - Management reported that conversations with customers regarding freight costs have been positive, and they are working to recoup increased costs while ensuring service quality [83][84] Question: Update on SG&A and structural savings - Management indicated that while SG&A is expected to increase, they are working on mitigating factors to improve leverage over time [121][122] Question: Discussion on customer interactions and market changes - Management noted that customers are increasingly focused on digital solutions and inventory management, reflecting changes in purchasing behavior post-COVID [115][116]