The W.W. Grainger Third Quarter 2023 Earnings Conference Call began with the Operator introducing the host, Kyle Bland, and reminding participants that the call was being recorded. Kyle then introduced D.G. Macpherson, Chairman and CEO, and Dee Merriwether, Vice President and CFO. The call focused on the company's third quarter results, which were consistent on both a reported and adjusted basis. Results for MonotaRO, a public company that follows Japanese GAAP, were also shared. D.G. Macpherson reflected on how the Grainger Edge framework has driven the company's success, and mentioned that their results in 2023 have not been as strong as the previous year due to negative MRO market volume growth.

In order to drive profitable share gain, we must focus on emphasizing the value we bring through our customer experience and supply chain network. Our recent interactions with manufacturing and government customers in California have shown that our supply chain, digital capabilities, and problem-solving abilities are adding value for them. Our team members also continue to deliver our principles and make positive impacts in the communities where we operate. In addition, we had another strong quarter with 6.7% sales growth, driven by positive performance in both segments, particularly in the High-Touch Solutions segment where we are gaining profitable share.

In the third quarter, the company's total operating margin increased by 60 basis points, driven by improved gross margin performance and strong top line growth. The company also returned a significant amount of money to shareholders and is focused on leveraging technology and data to drive growth in the High-Touch Solutions segment. The company remains on track to deliver over 20% earnings growth for shareholders in 2023. In the third quarter, the company saw strong sales growth of 8.7%, driven by growth in both segments, and a relatively stable growth rate compared to the previous quarter.

The company's total operating margin increased due to improved gross margin in the High-Touch segment, resulting in a 14% increase in diluted EPS. The segment saw sales growth in all geographies, with volume driving most of the growth. Gross profit margin also improved due to product availability and product mix, although price/cost spread was negative. The segment also made marketing and headcount investments, leading to a 70 basis points improvement in operating line.

The U.S. MRO market saw growth between 2.5% and 3.5%, with the High-Touch Solutions U.S. business achieving 550 basis points of outgrowth. The Endless Assortment segment saw a 4.3% increase in sales, with Zoro U.S. up 1.2% and MonotaRO up 12.6% in local currency. MonotaRO is seeing some macro-related softness, but is still driving strong growth with new and enterprise customers. Zoro is facing headwinds from noncore B2C volume and a slowing macro environment, resulting in more muted top line growth. Gross margin for the segment declined 20 basis points due to MonotaRO favorability being offset by declines at Zoro.

In the sixth paragraph, the MonotaRO results were strong due to freight efficiencies and price increases, while Zoro saw a decline due to negative product mix and timing issues. The segment's operating margins decreased by 70 basis points due to these factors and investments in demand generation. The company continues to grow its user base and SKU count. The full-year guidance has been narrowed, with expected daily sales growth between 8.5% and 9.5% and an EPS range of $36 to $36.60. Operating margin is expected to be between 15.6% and 15.7%, a record for the company. Fourth quarter operating margin is expected to decrease due to product mix and SG&A deleveraging. Cash flow and share repurchase expectations have also been increased.

The company is pleased with their full year results, which include strong sales, profitability, and cash flow. They have a track record of delivering strong returns for shareholders. The CEO reflects on the progress they have made since their Investor Day last fall and how they are trending towards their 2025 targets. They will continue to focus on maximizing earnings by delivering strong top line growth, maintaining healthy gross margins, and gaining expense leverage. The first question in the Q&A portion of the call is about the company's high gross margins and how they are above the expected level outlined at the Investor Day.

The company has seen significant improvements in product availability and margins in the first quarter, leading to better-than-expected performance. This is due to a combination of factors, including timing of costs and price neutrality, as well as efficient supply chain management. The government and transportation sectors have been performing well, with new contracts and strong demand in the aerospace industry driving growth. However, month-to-date growth in October has slowed compared to September.

The market remains stable and the company has seen growth in October, but comparisons to last year's sales due to Hurricane Ian make it appear worse than it is. The company is cycling a tougher comp from last year, but still feels confident in their revenue guidance for the quarter. The volume in the market has been near 0 all year, so all growth has been from share gain.

The company has seen an increase in revenue in the first three quarters compared to last year, but this was expected and there are no concerns. They are not ready to revise their long-term gross margin target for the High-Touch segment, but there are some favorable factors that have contributed to the current margin. They do not expect these factors to continue into the fourth quarter, and there may be some adjustments in rebates and price/cost. They are still performing well above their 2025 margin targets.

The speaker asks Dee Merriwether about operating leverage, and Dee responds by saying that they expect the High-Touch model to remain stable and continue to grow. He also mentions that their balance sheet is strong and they do not see a need for further leverage at this time. The next question is about the price/cost dynamics of High-Touch Solutions, specifically asking about the price in the quarter.

The company is expecting a neutral impact on price and cost margins in 2024 and is targeting price cost neutrality over time. There is not a lot of product cost pressure expected for the new year. MonotaRO grew to 13% in the quarter, but the Japanese market has been weak due to inflation. There is confidence in the team's ability to continue delivering strong growth, but there may be some debate about whether it will reach 20%. Zoro has been impacted by competitors going negative and the overall market.

The speaker discusses the current state of the core B2B sales, which are up high single digits but not at the desired level. They attribute this to factors such as a decline in consumer business. The team is working on improving repeat business from customers, which will be key for long-term growth. A question is then asked about Zoro, and the speaker explains that they are implementing strategies to both acquire and retain customers. They are also focusing on improving the High-Touch side through product and customer information tools.

The speaker discusses the use of tools and capabilities in Salesforce, specifically in relation to customer and product information systems. These tools have been a major driver of growth and will continue to be so in the future. There is still room for improvement in leveraging customer information for sales and marketing efforts. The speaker also mentions a sequential change in gross margin from Q3 to Q4, with a 60 bps increase due to favorable project-related revenue.

The company expects a 40 basis point headwind due to one-time benefits, but believes they will be able to maintain stable gross margins. Zoro does not have differentiated pricing for B2B and B2C. In 2024, there are no expected cost increases or pressures, but the company has not provided further details on cost and price projections for that year.

The company is not facing significant cost pressures and will continue to invest in the business. They expect to see leverage in SG&A over time. The company is working on improving customer acquisition and repeat purchases on their Zoro platform.

During the earnings call, the company's CEO D.G. Macpherson was asked about the potential growth in their business and how they are addressing cyclical challenges. He stated that they are conducting tests in the fourth quarter and will communicate their findings. The issue of customer destocking was also brought up, but Macpherson assured that it is not a concern for their business. He also mentioned that customers typically do not have overstock of their products and that their value proposition is to help them manage their inventory. In terms of brand building, the company has been increasing efforts in advertising through TV and radio, and Macpherson was asked about measuring the returns on these efforts.

The company has seen success in marketing and measures its returns through A/B testing. They have a precise understanding of what is working and what is not. In Q3, project-related value-added services provided a 60 basis point boost to high such gross margin. These services help solve customers' problems and are an ongoing revenue stream, but there were a larger number of one-time projects in Q2 and Q3. These projects include things like lighting retrofits, roofing projects, and safety certifications.

During a financial report, a question was asked about the boost in High-Touch gross margin in Q3. The response confirmed a 60 basis point increase and then shifted to discussing Grainger's value-added services. The CEO clarified that while these services are important, they are not the main focus of the company, which primarily focuses on simplifying the purchasing process and managing inventory for customers. However, they do offer additional services such as safety audits when requested. The CEO also mentioned that there were some large projects in Q3 that may not be repeated in the future.

In a recent earnings call, the company discussed their business model of providing products to customers and maintaining inventory. They also addressed concerns about gross margin and pricing, stating that there will be a 40 basis point decrease in gross margin in 2023 due to product cost pressure. However, they expect to see bottom line margin expansion in 2024 as SG&A inflation slows. The company also mentioned that their Q4 results may have been affected by timing and a LIFO benefit from the previous year.

The speaker discusses their company's framework and goals, including outgrowing the market in the U.S. and investing in long-term growth while also gaining leverage. They mention their focus on improving customer experience and operating efficiently, and their goal of driving double-digit EPS growth. The speaker thanks the listeners for joining and expresses confidence in the company's performance.

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