The W.W. Grainger Second Quarter 2023 Earnings Conference Call has begun with Kyle Bland, Vice President of Investor Relations, and D.G. Macpherson, Chairman and CEO, introducing the call and Dee Merriwether, Senior Vice President and CFO, providing financials. The call will focus on second quarter 2023 results, including MonotaRO, and discuss Grainger's ESG report. D.G. Macpherson will provide an overview of Grainger's performance and Dee will provide the financials, with all results consistent on both a reported and adjusted basis.

Grainger has long been a leader in ESG and has laid out four near-term ESG focus areas. They are helping customers achieve their goals by offering sustainability services such as the installation of solar panels to reduce emissions. They also partner with diverse suppliers and are making progress in energy and emissions.

Grainger has achieved a 26% reduction in global absolute Scope 1 and Scope 2 emissions and has been recognized by Fortune and other organizations for its work in diversity, equity and inclusion. In the quarter, Grainger delivered daily sales growth of 9% or 10.1% on a daily constant currency basis and improved gross margin performance due to supply chain efficiencies and lower freight and container costs. This led to substantial EPS growth, robust operating cash flow and continued ROIC of over 40%, and Grainger returned a combined $265 million to shareholders in the quarter through dividends and share repurchases.

D.G. and Dee Merriwether reported strong daily sales growth of 10.1% for the total company in the first half of 2023. They are continuing to make progress against their strategic initiatives, such as advancing proprietary product and customer information management systems, constructing a new 500,000 square foot distribution center outside of Portland, Oregon, and implementing three smaller bulk-style distribution centers in Pennsylvania, Texas and North Carolina. These investments will enable them to keep up with customer demand and provide a best-in-class experience with next-day complete fulfillment across the United States.

In the second quarter of 2022, the company saw strong results from its High-Touch segment, with daily sales up 9.9%. Total company operating margin was up 190 basis points, and diluted EPS was up 29%. In the U.S., there were pockets of softness, but growth was strong in other areas such as government and healthcare. In Canada, the economy remains stable and daily sales were up 7%. GP margin finished the quarter at 41.7%, up 200 basis points versus the prior year. Product availability levels remained high, resulting in fewer packages and shorter distance shipments. Price/cost spread was slightly negative after adjusting for non-recurring supplier rebate benefit.

In the second quarter of 2022, the High-Touch North American segment saw an improvement of 230 basis points year-over-year, while the Endless Assortment segment saw sales increase 4.5% or 10.1% on a daily constant currency basis. The U.S. MRO market grew between 4.5% and 5%, indicating that High-Touch North American achieved roughly 525 basis points of outgrowth in the quarter. MonotaRO continued to execute well and is driving solid year-over-year revenue growth, while Zoro's core B2B business saw a slowdown in demand and the non-core B2C business was down in the mid-teens year-over-year.

The company has been growing in the high single-digits with core customers, however macro-related factors are impacting demand due to their focus on smaller businesses. Despite this, Zoro has seen positive results with their Endless Assortment operating metrics, such as total registered users and SKU portfolio growth. Moving forward, the local leadership team is focusing on driving repeat profitable growth with core B2B customers and making continued investments in marketing. Gross margin has expanded due to freight efficiencies and strong price realization, however operating margins have declined slightly due to slower-than-expected top line growth.

The company is raising its full year 2023 outlook, with daily sales growth of 8.5-11%. July has started strong, with sales up 8% on a daily constant currency basis. Gross profit and operating margin rates remain unchanged, but operating margins are expected to decline in the back half of the year due to supplier rebates and price/cost favorability. The revised EPS range has been raised to $35-36.75, and supplemental guidance covering cash flow and share repurchase can be found in the appendix of the deck.

Dee Macpherson provided insight on Zoro's top line trends in the quarter, noting a high single digit increase in B2B sales, but a weakening in the B2B market. She explained that Zoro does not participate in the fastest growing segments of the Grainger model, and that it serves small businesses more than Grainger does. D.G. Macpherson then opened the line up for questions.

D.G. Macpherson explained that Zoro has seen an increase in repeat rate, but they still have work to do to continue to increase it. He also discussed their plans to break ground in a couple of weeks on a new distribution center in Oregon, which should provide more SKUs in the market, better service, and lower transportation costs. Finally, he answered a question from Ryan Merkel about gross margins in the second half, suggesting that 39% is the right metric.

Dee Merriwether and Ryan Merkel discussed the sustainability of gross margin in High-Touch, with Merriwether noting that cost inflation and their ability to price to the market have allowed them to do well. However, she noted that things remain fluid and they will take a look at their outlook in the future and provide an update. For Endless Assortment, there are various factors that affect the gross margin.

Dee Merriwether and D.G. Macpherson discuss the factors that are causing gross margin to remain stable, such as supply chain and freight efficiencies, transportation costs, and one-time rebates. They note that the transportation costs may fluctuate, but the supply chain efficiencies are back to pre-pandemic levels and should stay that way. They are confident that the High-Touch margins will remain in the 40-ish range until 2025.

Dee Merriwether explains that the U.S. team works hard to remain price competitive, looking for opportunities to optimize price with customers. She states that remaining price/cost competitive is key to buoying growth, and that price/cost was slightly negative in the quarter, but is expected to become negative as the year progresses due to the favorable price from last year.

Dee Merriwether explains that the price/cost changes in the second half of the year are not expected to continue long-term and that the company does not expect it to be negative over a two-year period. D.G. Macpherson then addresses a question from Christopher Glynn about the long-term growth expectations for Endless Assortment, noting that Zoro is rationalizing customer mix and MonotaRO has strategies in place to adjust customer demographics.

D.G. Macpherson and Dee Merriwether discussed the outlook for gross margin and SG&A spend rate in the second quarter. They noted that the MonotaRO business in Japan has continued to perform well and that the issues with Zoro are likely temporary. The two also addressed the question of whether suppliers are talking about midyear price increases, noting that they are working with their supplier base to get back to normal inflation cadence and have already embedded expected cost inflation into their guidance.

D.G. Macpherson is discussing the inflation and inventory levels with Jake Levinson. Macpherson states that almost all of the inflation seen this year is from last year and they are managing wasteful inventory. He believes that the elongated supplier lead times have mostly come down and they can be back to where they were historically from an inventory perspective.

Dee Merriwether and Patrick Baumann discussed changes in pricing and inventory levels. Merriwether stated that they have made some pricing changes earlier in the year, but do not see a need for further adjustments in the U.S. She also mentioned that Zoro operates differently and has its own pricing algorithm and team to remain competitive. Baumann asked about inventory, to which Merriwether replied that the improved cash guidance was due to the top line improvement at High-Touch.

At the end of the conference call, D.G. Macpherson thanked the participants and reported that the year has been playing out as expected with no surprises. He expressed confidence in the company's performance, share gain, and profitability, and believes they are well positioned for a strong second half.

This summary was generated with AI and may contain some inaccuracies.