Q4 2021 W W Grainger Inc Earnings Call

February 3, 2022

Greetings and welcome to the W. W. Grainger fourth quarter 2021 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. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Irene Holman Vice President of Investor Relations. You may proceed.

Good morning, and welcome to Grainger fourth quarter and full-year 2021 earnings call. With me are D.G Macpherson, Chairman and CEO and Dean Merriwether, Senior Vice President and CFO. As a reminder, some of our comments today may include forward-looking statements actual results may differ materially.

As a result of various risks and uncertainties, including those detailed in our SEC filings reconciliations of any non-GAAP financial measures with their corresponding GAAP measures are found in the tables at the end of this presentation and in our Q4 earnings release, both of which are available on our IR website.

That's good.

This morning's call will focus on adjusted results, which exclude restructuring and other items that are outlined in our release.

We will also share results related to [monitor]. Please remember that minotaur with a public company and follows Japanese GAAP, which differs from US GAAP and as reported in our result, one month in arrears as a result, the numbers disclosed will differ somewhat from monitoring public statements.

Now I'll turn it over to D. G.

Thanks, Irene. Good morning, and thank you for joining us. Today I'm going to provide an overview of our full year highlights and fourth quarter results. And I'll begin as we always do with the Grainger edge, our strategic framework that defines who we are why we exist and where we're going as well as how we'll get there using our operating principles.

This framework has been foundational for our team to work through another challenging year with resilience and strength.

We remain relentlessly focused on our customers and building the company for the future.

I am tremendously proud of what we've achieved and want to thank our team members for their commitment as well as our suppliers and transportation partners for their shared passion to support our customers throughout the year. It is always a privilege to help customers get their people safe and their operations running and even more so over the last few years.

2021 was our second year navigating the impacts of the pandemic. It certainly brought its own unique challenges labor material shortages strained supply chain throughout the industry.

We demonstrated our agility and leveraged our supply chain scale to deliver strong service.

Our customer satisfaction remains high and in my regular interactions with customers I continue to hear appreciation for our ability to deliver over the last two years.

We invested in inventory, which enabled us to improve our availability and meet growing demand, especially in the back half of the year.

We've also invested in our team members with the increased wages to make sure that [inaudible] enables get orders out the door.

I can confidently say that the Grainger team navigated these challenges extremely well and put us in a good position as we enter 2022.

While we continue to focus on customers' needs, I'm pleased with the team's progress on our strategic initiatives that we know drive short and long term growth.

Our merchandizing team reviewed $1.5 billion of the assortment last year.

To make it easier for customers to navigate our website and find the products they need quickly.

That brings our total re merchandise assortment to $4.4 billion.

Which helps our customers choose products with confidence.

We've also increased our marketing investments, especially in areas like paid search and digital and radio ads, which have driven share gains and improved our brand recognition.

We're excited by these results and the traction we've gained with both large and midsize customers.

Since the beginning of the pandemic, our keep stock teams or serve customers on-site supporting their inventory management needs and offering valuable insights to help them save time and money distinct.

This in conjunction with our procurement services has continued to make it easier for customers to do business with Grainger. Around 60% of the US revenue now comes from customers with multiple solutions that embed us in their operations.

Our technology investments have been critical in supporting these efforts. Over the last few years, we've developed new product information publishing customer information and marketing support systems.

We continue to improve our technology capabilities to help us win in the market.

Our endless assortment segment continues to grow as we made progress on our strategic initiatives.

Zoro US achieved its full-year SKU count go adding over 2.5 million schools this year alone.

Which brings a total assortment to 8.7 million SKUS.

We've expanded into new customer segments, and new categories, driving both new and repeat business. And a 2021 and Natura opened the Iraqi DC in Japan, allowing them to stock high demand items locally.

With plans for another DC [inaudible] Japan in 2022.

And finally, we are making strong progress on ESG 2022 will be our 11th year publishing a corporate responsibility report.

With elevated its importance in our organization through our ESG leadership Council, which I chair. In 2021, we reviewed and updated our materiality matrix to ensure ESG priorities are aligned with customer needs.

And those of our stakeholders.

And we continue to make progress across our ESG pillars, reducing greenhouse gas emissions and driving diversity equity and inclusion initiatives improving supplier diversity and helping customers meet their ESG goals. All in all, 2021 was a strong year, which positions us well moving forward.

Turning to our financial highlights. We achieved the full expectations that we set earlier in the year.

Demand was very strong enabling us to finish the year at $13 billion in sales at the high end of our guided range.

Organic daily sales growth was 12.7% for the year, 12.4% on an organic constant currency basis.

Our results were driven by strong performance in both segments, most notably high touch solutions in North America had exceptional growth of 10.8% on a daily constant currency basis.

In the US. We outgrew the market by 100 basis points for the full year 2021 above where we expect it to be and outgrew the market by 450 basis points on a two-year average.

We faced our fair share of gross margin challenges throughout the year, primarily tied to inventory.

We were able to recover well to end the year at 36.2%, resulting from our ability to manage price cost spread and improved product mix.

We delivered 11.9% operating margin an increase of 65 basis points over the prior year.

And lastly, we returned over $1 billion to shareholders through dividends and share repurchases and delivered a strong ROIC of 31.9%.

We met the challenges of the year head on and delivered on our commitments for the full year.

Turning to our quarterly results for the company. The story is similar with strong results to share.

[inaudible] sales exceeded our expectations and were up 16%, 16.9% on a constant currency basis, driven by double-digit growth in both segments with robust demand.

Gross profit margin was 37.3%, 240 basis points above the prior year and in line with our expectations.

We will go into more detail, but at a high level because we follow the LIFO method of accounting. Our results included an adjustment to reflect the building with core product inventory at higher costs in the fourth quarter, which allowed us to finish the year with a strong inventory position.

Our SG&A as a percentage of sales was 24.9% flat to prior year when comparing to 2019, which is a more relevant comparison point, our SG&A leverage improved over 200 basis points in the quarter.

SG&A was $836 million driven by higher variable compensation as a result of our strong topline growth.

We also saw elevated hourly wages and increased health care expenses and continued to invest in marketing.

Turning to operating margin leverage at 240 basis points over prior year result of the gross margin improvement.

Finally, our resulting EPS was $5.44 for the quarter up 48.6% versus the fourth quarter of 2020 and with that, I will turn it over to D to take us through more detail on the quarter and our expectations for 2022.

Thank you, D.G.

Turning to our high Tech solutions segment. For the fourth quarter. We continued to see strong results with daily sales up 16.5% compared to the fourth quarter of two in each month.

And up 21.5% compared to the fourth quarter of 2019.

In the US. We saw continued strong growth of our core non pandemic category.

And as a result of our growth investments, we're seeing continued growth with both large and midsized customers at 16%.

And.

And 25% respectively.

The US business [inaudible] had strong price realization in the quarter.

We're encouraged about how Canada and Mexico finished the year with positive daily sales growth in the fourth quarter.

In Canada, the business saw year over [inaudible] growth was 11 of its 14 industry, most notably in our targeted inside like manufacturing and higher education.

The Navy and daily sales were up 12.2% or 6.8% in local days in local currency.

For the segment, GP finished the quarter at 39.6% up 250 basis points versus the prior year, a very strong quarter for our high Tech solutions segment.

We once again achieved price cost spread slightly above neutral and our pandemic product make returned to near pre pandemic levels, both driving positive improvement in gross profit.

At the operating margin line, we saw an improvement of 230 basis points.

Year over year. Overall, a solid quarter for high Tech solution.

I'd like to go onto a bit more detail specifically on our US GP run rate.

During the quarter, we achieved a gross rate of 40%.

We're encouraged by these results and the GP sand utilization achieved in the first quarter.

The pandemic product mix and pricing actions in our ability to navigate supply chain challenges what does this achievement and will be the foundation for our GP expectations in 2022.

As you're aware, Grainger follows the LIFO accounting method, which required us to revalue the majority of which were sold during the year based upon the most.

Ranger follows the LIFO accounting method, which required us to revalue the majority of which were sold during the year based upon the most.

Purchase price.

At the end of every year, we calculate our LIFO adjustment based upon our ending inventory balance.

This year, we increased our inventory down significantly in the fourth quarter to set us up for 2022.

In our most recent purchases were higher costs due to inflation.

As a result, our LIFO adjustment was larger than we've historically seen.

You'll see this adjustment disclosed in our 10-K, and it's important to remember.

Noncash LIFO accounting impact and not a reflection of our operational performance.

Moving to slide 11.

During the quarter, our core marketing gimmick product sales were up 28% over the prior-year fourth quarter.

Compared to 2019, [sales growth] are quite strong at approximately 17%.

In addition, our pandemic product sales were down year over year.

We remain elevated up around 41% over 2019.

As it relates to mix.

Our pandemic products totaled 21% of sales in the fourth quarter very close to our prepaid mix.

We're excited that our product mix is stabilizing as customers return to more normal operations.

In total, our US high touch solutions business was up 17% versus the fourth quarter 2020.

And up 22% as compared to the fourth quarter of 2019.

Looking at market outgrowth up quite well.

We estimate that the US market grew between 10 and 11%.

And we achieved 650 basis point share outgrow fourth quarter, largely driven by returns on our key strategic initiatives.

For the full year is slightly above our expectations, we achieved approximately 100 basis points of outgrowth.

To normalize the volatility over the past two years, we will continue to calculate it and show that to your average which was about 600 basis points over the market for the fourth quarter of 2021.

We remain committed to our US share gain goal of 300 to 400 basis points outgrown on an ongoing basis.

Moving to our endless assortment segment.

Daily sales increased 15.2% or 26% on a constant currency basis, driven by continued strength in our new customer acquisition at both Zoro and Monotaro and can you grow with enterprise customers in Japan.

When we account for local days in local currency, Monotaro daily sales grew 22%.

GP expanded 60 basis points year over year as a result operating margin for the segment finished at 45 basis points.

Over the prior year, primarily due to improved gross profit margin.

Operating margin improved as a result of freight efficiency.

Typically from continued focus on B2B customers.

Monotaro operating margin was down slightly compared to the prior year, primarily due to lower gross margin as a result of their product mix in the quarter.

Please note the slight covering both Zoro and Monotaro of [each performance] is in the apendix.

Well it isn't the opinion.

In addition, we also continue to see positive results in our operating metrics.

Registered users were up 16% over the fourth quarter prior year and on the right. We show the continued growth of the Zoro SKU portfolio with great progress this year.

Overall, we continue to be impressed by the results of our endless assortment segment as we grow with the right customers.

Moving into 2022 guidance.

For the total company, we expect revenue between 14.1 and $14.5 billion.

With daily sales growth between 7.5 and 10.5% driven by strong top-line performance in both segments.

It's worth noting it was also one more selling day in 2022.

Within our high tech solutions segment.

We expect daily sales growth between 6.5 and 9.5%.

For the US, we anticipate growth between 7 and 10%. 300 basis points above the estimated MRO market of 4% to 7%.

Well between seven and 10%.

300 basis points above the estimated MRO market of 4% to 7%.

We expect our share gains to be driven.

Primarily by growing volume as a result of our strategic initiatives.

And that will continue to price to the market.

In Canada, we expect to see mid single digit top line growth and we continue to diversify our customer base.

In the [inaudible] assortments, we anticipate daily sales to grow roughly 14% or 18.5% in local currency and local base.

On a local basis.

This growth is anticipated to be in high teens, reflecting further SKU expansion and the continued health is on acquiring and retaining high-value customers.

Monitoring with local currency growth rates in the high teens as well and they continue to grow with both small and enterprise customers.

From a profitability perspective total company GP is expected to be between $36.8 and 37.3%.

Up between 50 and 100 basis points in 2022.

Consistent with 2021, we expect a similar LIFO accounting adjustment as we continue to see cost inflation and build inventory.

We have factored into our guidance this impact.

The gross profit margin expansion is driven primarily by the high touch solutions segment as GP stabilizes near pre-pandemic level and as we continue to target price cost neutrality.

Some of this assortment gross profit is expected to be essentially flat as GP expansion at Zoro was offset by a modest GP decline at Monotaro.

Total company operating margins are expected to be between 12.5 and 13.1%.

And expand between 65 and 125 basis points versus 2021.

These top-line and profitability targets as well as continued execution of our share repurchase program are expected to produce earnings per share of between 23.50, and 25.50, equate into growth between 18.5 and 28.5%.

Both segments are expected to deliver high ROIC.

Continuing on slide 17.

In addition to total company guidance, we wanted to provide operating margins by segment, along with our plans for capital allocation.

For high tech solution, we expect operating margins between 14.4 and 15%.

Up between 130 and 190 basis points versus the prior year, driven primarily by gross margin expansion.

SG&A leverage is expected to be modestly primarily due to continued investment in growth initiatives.

Anticipated health care expenses and higher wages.

And [inaudible] assortment operating margins are expected to be between 7.5 and 8.2%.

This is primarily driven by Monotaro as they continue to invest in DC capacity.

Zoro continues to increase operating margins in line with our previous expectations.

[inaudible] represented and other is expected to further reduce the operating losses.

We anticipate closing the year with operating margins down negative 6%.

Our Cromwell improvement plan behind our original expectations, driven primarily by business closures in the UK and the slowdown in the aerospace industry one of their primary end markets.

We remain confident in our ability to improve performance as during the pandemic, they have been able to grow with new customers and maintain high levels of service.

The results will primarily be dependent on the speed of recovery across different customer end markets.

From a cash flow perspective.

We expect operating cash flow to be between 1.1 and 1.3 billion.

Our capital expenditures outlook for the year is between 275 and $325 million.

This includes DC investments in North America, and Japan.

ESG investments to improve sustainability of our facility, cheap stock and IT enhancement in the US and a normal level.

Of maintenance capital.

We expect the balance of our cash to be used upon our quarterly dividend and to continue share repurchases.

For 2022 we are expecting between 600 and 800 million of share repurchases, which continues to reflect our confidence in successfully executing our strategy and in our growth initiatives.

We're optimistic for a more normal year with reasonable sequential trends.

As a result, we are now resuming more standard guidance practices.

Similar to our approach before the pandemic, our guidance will be limited annual expectations, and we will provide commentary and updates to our full-year ranges as [inaudible].

With that, I will turn it back to D.G.

For closing remarks.

Thank you D. Before I open it up for questions, I want to really reiterate my appreciation for the Grainger team and our partnership with our customers and suppliers in this challenging year.

We all hoped that 2021 would bring more normalcy in fact, good the team remains steadfast in our purpose of keeping the world working and in turn achieved outstanding results for the year, both financially and operationally.

In the coming year, we will continue to focus on serving our customers better than anyone else.

Profitably growing market share and making Grainger a great place to work. We have three core priorities. First, execute on our growth drivers to provide customers with a flawless experience and tangible value to help them operate safely and effectively.

Second, drive operational excellence and productivity in all that we do to support our growth investments and third, strengthen our culture and focus on talent development all levels of the organization.

We will execute these efforts with our long term environmental social and governance objectives in mind.

Finally, I'm excited to announce that we'll be hosting an analyst day in the fall of this year, we will be focused on providing more details on our strategic initiatives and longer-term outlook.

With that, we will open the line up for questions.

Okay.

At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue.

You may press star two if he would like to remove your question from the queue. For participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys. One moment, please while we poll for questions.

Our first question is from Nigel Coe with Wolfe Research. Please proceed with your question.

Hey, guys. This is [inaudible] on for Nigel Coe.

Congrats on the blockbuster quarter is amazing.

Thank you.

Good morning. So my question was really on like, you know, the 2022 guide you've kind of put [for HTS US] [inaudible]

Thank you Peter.

How much of that do you really see volume versus the 3% price [inaudible] in that particular segment?

So just to be clear. Thanks for that question and that's a good clarification point and I can turn it over to you for specific but in general we talk about share gain we're talking all about volume. So our philosophy is to price to market and then we expect to get volume share gain and that's how we think about it when we talk about it.

Yeah, so as it relates to the components of the US market.

We anticipate low single-digit volume growth in a about 45% right, which results in a market of about 4% to 7%.

And then we expect to grow 300 basis points above the [market].

Which gets you to a high touch US guide between 7 to 10% growth.

Guy.

Seven.

Well.

Okay, got it, that's all for me.

Thank you.

Our next question comes from Chris Snyder with UBS. Please proceed with your question.

Thank you. So I just want to follow up on the US up 2% outgrowth guidance. So you know certainly a positive level you know when we compare to the long term.

Outgrowths, that the company's achieved but we're just below, I believe a 21 came in at 4.5% outflow from a two year and in Q4, you guys exited very strong at over 6%.

Was there anything specific.

that is kind of pushing that guidance down [to 3% in '22?]

Yeah. You know, we expect 300, we're really confident and at a minimum. We're really confident in the first half outlook.

You know, we expect 300 mm, we're really confident and at a minimum.

Really top of it and the first half.

And we anticipate.

To the price inflation there so the second half remains.

really hard to predict for us and so based upon having better visibility, we feel pretty confident in the outlook that we stated.

Right.

And I know that as things change.

[inaudible] to talk about that and talk about changes in the future and how they impact our results.

Talk about that and talk about changes to impact.

In fact, our results.

I appreciate that.

And as a follow up I wanted to talk about Zoro margins you know previously the company has communicated.

A pathway to getting zoro grew high single digit margins over three years.

But over the last couple of quarters, Zoro gross margin has really surprised and impressed to the upside. Does that change the operating margin outlook for Zoro? And if you could just kind of refresh us on what's the latest expectations for there. Thank you.

Yes.

Yeah, I guess I can start with that one. We have not changed our expectations for Zoro operating margin. We still are on the same path we talked about.

You know we have gotten strong gross profit improvement in the business. Some of that, most of that is is squarely focused on quality growth. So making sure we are acquiring business customers that have long term positive value and really focusing our efforts there which means we've gotten out of some lower quality growth avenues.

What we've had in the past and that that has shown a pop, that pop is get are going to stick, but you're not going to see similar growth in the gross profit line like we've seen that has been very specifically towards actions to improve the quality of our growth and we think we're on a good path now, but we're still on the same operating margin.

Our next question is from Deane Dray with RBC. Please proceed with your question.

Thank you and good morning, everyone. Good morning.

Look, I fully respect that you guys are not a manufacturer and that's part that's a big advantage in this environment for sure, but you do have some manufacturing exposure with your private label, just any update there or how you've been holding up in terms of supply chain issues there.

Yeah. It's a great question. So you know, there's a lot of chaos in the supply chain for sure.

It has been very costly to get containers out of out of Asia. We have been prioritizing what we can get and I think we've done a nice job of navigating the things that we can control.

I think the other thing I would point to is we've done a really nice job of crossing items to more locally sourced items to help support customers.

During this time and I think our ability to improve our product information has helped us navigate this. You know we are starting to see some loosening are coming from Asia now in and we do expect things to get at least modestly better through the next couple of quarters.

And so it's been a challenge. I think it has been a constant theme if you're working in the supply chain certainly the last year. Our team has done a great job at navigating and I think relatively we're doing well, but it's challenging for sure.

Yeah. It really does look like you're holding up well so congrats there.

And then second question, maybe some color on the Capex plans, it's an uptick from last year, a pretty noticeably we've heard some company, who said look they couldn't because of supply chain issues. They couldn't do as much in the way of projects. There were delays. There. So is this a catch-up and maybe.

Some color on where that money is being spent.

Yeah, I'll turn it over to [inaudible] I mean, so it's not really.

Really a catch up I'd say, our CAPEX is almost always in supply chain investments and in technology and that will continue to be the case. I'll turn it over to D to talk about specifics.

Yeah, just a little bit more of that to add to that D.G. I agree, really not a catch up we're really focused on maintenance capital in the DC. The D.C is a good running [card].

It is hard.

As you can expect we'll try to keep up with demand.

And so we're making sure that we're spending the right amount of capital there. In addition to that, you hear us continue to talk about continued capacity investment and in Japan. So that is a portion of that as well.

We mentioned you know our focus on ESG. So that's about 10% of our capital spend going into next year. So really just getting back to normal.

Normal level of capital as we come out of [inaudible].

Of capital as we come out of it in Calgary.

Yeah.

Our next question is from David Manthey with Baird. Please proceed with your question.

Thank you and good morning, everyone.

Do you, could you share with us the amount of LIFO adjustment and just to be clear is that.

Out of the LIFO adjustment and just to be clear is that.

Is it still in the adjusted results you present here in the slides or is that factored out.

So yes, the LIFO adjustment is in the adjusted result, and just want to remind everyone again.

This is a non-cash accounting entry. It really is not reflective of the operational performance. And so this year at the end of the year, because we invested heavily [into our] inventory.

Set us up well for the start of this year that coupled with cost inflation.

It's the result of a larger adjustment than normal and that adjustment which you'll see in the 10-K. It was more than two times, what it's historically been.

So you'll see it net of tax around $49 million.

Net of tax around $49 million.

Okay. And I was under the impression that our Grainger historically at least was something like 30% FIFO and in part of your business as well and I'm just wondering was there any kind of an offset from FIFO to offset some of that LIFO gain. Or not explicitly in that number you just mentioned D, but just.

And I was under the impression that our Granger historically at least was something like 30% FIFO and in part of your business as well and I'm. Just wondering was there any kind of an offset from from FIFO to offset some of that LIFO gain or not explicitly in that number you just mentioned D. But just.

Operationally, if you have some business on FIFO that might've benefited from the inflation.

So you're correct, it's about 25% of that is factored into our numbers really didn't get a benefit.

No.

From that this year, we don't expect to on a go-forward basis.

Unless inflation changes material.

Our next question comes from Ryan Merkel with William Blair. Please proceed with your question.

Good morning, and thanks for all the details on guidance.

My first question was on gross margin for '22. Could you just unpack it a little bit more? 4Q was exiting at 37.3 but the low end of guidance for '22 is 36.8. Is that the LIFO impact or just what are the puts and takes?

So if I just start back with.

The US G P, it'd probably be a good place to start there.

You know, our goal was to exit the year you now in line with pre-pandemic levels or high touch US me. So we achieved that around 40, we will expect a high touch US GP to stabilize into 2022, but we're also.

Expecting a little bit more normal seasonality for our plan this year.

For our plan this year.

We do expect to continue to manage price cost spread into 2022.

And then you know, we'll have a little bit of compression potentially from EA even though.

The high touch business is growing much faster than it has historically been. It's still a little lighter than the EA business. So that causes a little bit of compression for us.

Got it. Okay. That's helpful. And then pandemic sales flat in January you know it's been negative. So the trend is looking good. I'm just wondering on the outlook there because I think you said it's still 40% above 19, just wonder is there any giveback as things sort of normalize or what's your feelings there?

Oh no.

No, I don't think that, you know. I think we're about where we expect to be.

You look at our January results sequentially, we're still up a little bit on pandemic sales.

But so we have a little ways to go that we hope will help us.

In our current outlook, we've embedded that. That we get back to normal levels in 2022.

So we've embedded that in our planning in our guide.

Our next question comes from Christopher Glynn with Oppenheimer. Please proceed with your question.

Thanks. Good morning, everyone.

<unk>.

Looking at the six points compound to your market outperformance in the fourth quarter.

Fourth quarter.

You know, as everyone's talking about supply chain got worse and tighter in the corner. Are you a net beneficiary of that dynamic?

Everyone else is more bothered by just strictly from a volume perspective.

Well, I think there's a number of factors that go into that. We think we probably had some of that benefit in the sense that we have products that others probably don't have. And we've been able to navigate the challenges well and I've talked about it before but you know almost every customer call I have now talks about finding alternatives.

That are in stock as opposed to waiting to get received from Asia, and we are aggressively helping our customers find solutions to keep them up and running.

And I think that all of that and our scale in the inventory pools we have help. We did build inventory in the back half of the year pretty significantly.

That has been a help as well. So I'd say we're a net beneficiary. I think it's also helped us develop stronger relationships with our customers because we've been able to serve them during this time.

That makes sense. And then how do you assess the risk if any of, you know, that 4Q volume strength?

The risk if any of you know that for Q volume strength.

You know with being a net beneficiary on how you process the transition to the expected '22 volume growth.

Well, I think D you talked about this a little bit before. We have a lot more clarity about what we'd expect in the first half of the year. Just on compares week, we would expect the first half of the year to be stronger in terms of revenue growth.

That said, you know, we look at run rate volumes, and we understand how our initiatives impact volume and work we're confident in at this point and what we've talked about from a range and feel pretty good about the year in terms of our ability to grow.

Our next question is from Hamzah [Zuri] with Jefferies. Please proceed with your question.

Good.

Good morning. Thank you.

My first question would just be just coming back to our medium customer strategy. You know we saw the growth numbers were pretty good but could you maybe just remind us, you know, well where you are in the process of gaining market share with medium customers and is that number.

Could that number be similar to your large customer wallet share over time, just any thoughts on where that's trending.

Yeah. So just as a reminder for everybody I think we've talked about this before at our peak, we had about $2 billion worth of midsize customer sales. We went down to about 800 million. We have recovered a portion of that but we still have a long ways to go.

And our share with midsize customers still smaller we are getting smarter in terms of our ability to acquire and develop relationships with midsized customers.

You know, it's hard to argue that we'd ever get to the wallet share in any reasonable time horizon that we have a large customers. We do think we can grow it faster than we grow large customers for years to come so we're pretty confident in the in the growth path that we expect.

Got it got it and just my follow up question and I'll turn it over is just as you'd think about monitor or you know you you had strong enterprise customer growth is is there an opportunity for enterprise customers, a saar or is the market just different where you know you service that through the sort of the high touch.

Brian just any thoughts there would be great too. Thank you.

Yeah, and I think it's a it's a really good question. The short answer is the competitive market is very very different and in Japan.

The market typically goes through wholesalers too.

Local distributors to customers versus what we have in the U S with the big distributors that serve customers of all kinds of services today, and so we don't see an opportunity for zoro, Dan or enterprise customer business, we see that squarely on the shoulders of the Grainger brand in the high Tech solutions and the competitive environment makes that.

That that are very different in the U S and so that that's our growth out there.

Our next question comes from Josh <unk> with Morgan Stanley . Please proceed with your question.

Hi, good morning.

Morning, So just just to follow up on some of the market share dynamics.

Do you know if you could talk about how kind of supply chain inconsistency has.

As helped Grainger I I got to imagine that for maybe your smallest competitors. Those guys are still having a hard time getting product in or maybe the most likely to you know to use price as sort of a competitive weapon.

How do you think.

Share gains sort of attributable to that have trended here kind of through the second half and you know what do you. What do you expect as we kind of continue in this tighter supply chain environment at least through the first half of this year.

Yeah, I mean, I think I think through the last two years, we have done well in terms of navigating the supply chain at first it was pandemic product and dish. This past year. It was mostly non pandemic product.

Where we have been able to find solutions.

And work with our customers and our suppliers to figure out how to how to get the right solutions for our customers I don't see that changing at all in the first half of the year I think we're gonna be constrained and I know, we're constrained now and will continue to be constrained as it is an industry. So I think the the things we've been working on figuring out how to help customers find the right solutions in a.

The world will continue to be beneficial and.

And certainly you know we we don't really know how every distributor is doing but you know having inventory pools, we have having the information we have having the data having the deep customer relationships all helps us help our customers navigate through these really challenging times.

Got it that's helpful. And then just from an end market perspective, what percentage of the portfolio. If any because I know you have some important customer groups and you know maybe some hospitality.

Eric You know airlines things like that.

Below pre pandemic levels.

I'm not sure if I've got the exact numbers.

It's I would say most industries are above pre pandemic levels for us now I'm pretty much all manufacturing would be there might be some sub sub segments, you mentioned aerospace and the U K Europe Aerospace has been challenged for sure.

And then there are certainly industries that we supported like cruise lines and hotels and airlines that are still below it's a small portion of our total and we continue to support those customers well and expect to continue to support those customers, but I think it's sort of a we don't we aren't talking as if the large portion of our customer base.

Says is challenged right now we're seeing very strong demand in general and and we know there are sub segments that are still struggling.

We would expect those to recover over the next couple of years.

Our next question comes from Michael Mcginn with Wells Fargo. Please proceed with your question.

Hey, good morning, everybody.

I wanted to go back to the cash flow conversation. It seems like it's a little heavy on working capital or at least the conversion is a little bit below historic level.

Any comments on the timing of the mono Taro D. C loading process also general inventory how are you preparing for pre and post Chinese new year.

Oh do you want me to start D. G. And then maybe you talked about operation. So you know what.

When you look at our operating cash flow for the year are really two two components contributed.

Okay truth to that and neither raise that neither of them isn't really a reason for concern for us.

And so the major factor was really our decision to invest in inventory you know later in the year. So we did have a strong start and the second one was you know we had a very robust sales.

Sales growth in the U S.

Really exceptionally strong and so accounts receivable that are tossed receivable balance increase.

As you know based upon.

What are the most adult patients are they like how did you early in the year. So we're already seeing.

A consistent trend to a sustained in prior years.

A R.

However, you know as long as we continue to drive very small they all are a our balance would be higher than what it has traditionally been and we expect to continue to support.

Uh huh.

Inventory.

I know you had a question.

Inventory relating to Chinese new year, So I'll turn it back to D. G for that.

Yeah, I mean without without going into too. Many details. We we always look at the Chinese new year and tried to get out in front of it.

Part of the inventory build that we had was being able to poll for containers in earlier clearly things are still backed up its coming out of China, you know the Chinese new year.

We're in the midst of it when it comes out it typically takes two to four months for things to get totally back to normal we do expect some ease ease of supply chain. Some some more flow to come in we're starting to see signs that that is likely to occur.

But certainly this year, we are it wasn't just Chinese new year, we're just managing a constrained supply chains and so that was if that was part of it.

Yeah.

Great and then somewhat more of a longer term question with zoro Skus fast approaching the 10 million benchmark can you talk about the the addition, and curation process and are you now able to leverage search on the platform to target potentially high volume value add skus that would benefit or versus using external search dynamics in the past.

And then also maybe the general learnings and mix improvement from last quarter, where I think you mentioned some channels were turned off.

Yeah, Yeah, you know so we we are we expect to have a strong skew. Count addition, this year. The team is working on analytics and works with the team in Japan, as well to understand which customers and which product pairs. We want to go after so we do most of that analytically.

We use some some platform artificial intelligence type tools to help with that but a lot of it's good old fashioned analytics and understanding which target segments. We want to go after small business thing that's going to go after and which products to add we continue to have a lot of success with getting those products again, and having them be a source of growth for for those customer segments.

Our next question is from Pat Baumann with Jpmorgan. Please proceed with your question.

Hi, Good morning, Thanks for taking my questions I wanted to go out the share gain thing and high touch business from a little bit different vantage point can you talk about the revenue growth you saw for the year.

In that segment broken down between like the digital piece, whether that CDI. Our website and then how that compares to kind of the growth rates, you're seeing and keep stock in the branches just curious where.

Where are you seeing the most growth in across those different channels and then how you see that playing out into a into this year.

I'm sorry, just to clarify the question did you say endless assortment or no no no. It's typically high touch just just thinking about the different channels and high touch that that you touch the customer with yeah.

Yeah, Yeah. So we had you know he had strong growth through through.

Almost all the channels I would say to keep stock grew faster than the core business last year continues to be a really core driver of growth in serving customers on site as does our pro which is typically connecting our systems directly to purchasing systems. So we continue to have a lot of large complex customers that happened.

Multiple point because of stickiness and helps the customer manage their purchasing process and their inventory.

We have seen obviously strong growth with digital.

<unk> Dot Com has continued to grow grow very quickly I think if you looked at it with that with midsize customers you'd see digital as the primary source of growth and if you looked at it with large complex customers you'd see more balanced with strong growth and keep stock in April .

Typically cheap.

Understood. So then that would mean that if those are all growing faster than branches are growing slower I guess than the rest.

Yeah, I think over the last two years branches have grown slower than ecommerce that doesn't mean, there aren't growing they've actually had.

Solid growth, but yeah, I think the I think D and that's like you're correct me I think I'm pretty sure that the branch if people go to last year's walk in traffic has been down and the pandemic has probably contributed to that we saw a nice bounce back this year after a pretty significant down in 2020.

That's correct.

Right.

Our next question comes from Steve Barger with Keybanc capital. Please proceed with your question.

Hey, Good morning, guys. This is Ken Newman on for Steve Thanks for taking the question.

Hi, Mark I just wanted to.

I just wanted to circle back on the December Adi's number I think you guys had mentioned it did see a pretty decent size jump up from October and November despite what looks like it might be a slightly more difficult comp.

Can you just talk through what drove that jump and whereas Ats kind of trending now through January .

So yeah. If you go to slide 11, you'll see Oh.

Our January estimate.

15, and that's broken down by the time, they make and non transgenic sales I hope that answers your <unk>.

Trading for January at Washington.

Sure.

Okay.

You know and therefore, you know December sales I think I'd go back to like what D. G has articulated.

You know a lot of customers are finding our product availability to be appealing and we believe that led to a lot of our growth.

Allegedly similar timeframe.

Goodbye.

We're not abandoning products.

Understood.

And then for my follow up I'm, just curious if you can give a little more color on the capacity investments in zoro in Montana and monitor all.

Any color on just the timing of when you expect the margin trends to kind of return back to normalized levels are or how do you view the the ramp of no more normalized ROE I see for those investments.

Yeah, It's a great question so so.

It affects men Otero amaze or always bought having unusual investments at this point and we expect the operating margin to continue to expand for zoro over the next several years.

Mono trop has.

Given the Japanese geographic footprint.

It's not as broad or as big as the U S. Obviously and they have very high volume D. CS, but very few of them and so what you're seeing right now is expansion capacity expansion around Tokyo, and Osaka, which are the two primary places where your new distribution capacity and you're going to see a lot of redundant assets this year, which is.

Why costs go up and and you know you're basically running two buildings and doing the transfer that falloff in 2020 threes in 2023, you'll see more of a normal return to to to SG&A for the mono truck business. It's just that they're I think they're going from a $1 1 million square foot building, a one seven or something like that around the saka. These are very large.

Buildings, and when you're running both of them at the same time, you have a lot of redundant costs during the transition.

Ladies and gentlemen, we've reached the end of the question and answer session and I would like to turn the call back over to D. G. Macpherson for closing remarks.

Alright, well. Thank you I appreciate I appreciate everybody's questions and thanks for the time today, we we obviously feel good about about the way the year ended and are excited about 2022.

We're gonna stay focused on making sure we provide the right solutions to our customers.

And investing in things that I think the thing I'm. Most excited about is we have a lot of things we can still get a lot better at and so it does feel like we are working on the right things and we'll stay committed to making sure that we build the right the right systems and processes to support our customers went for the future. So hope you all stay a stay warm and youre not going.

Hit you hard by the storm and look forward to talking to you soon thank you.

This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.

[music].

Q4 2021 W W Grainger Inc Earnings Call

Request a DemoDemo

GWW

Grainger

Earnings