nyse: gww q2 2020 · note: management believes the presentation of net debt to adjusted ebitda...

NYSE: GWW

Q2 2020Earnings Call

July 23, 2020

Safe Harbor Statement and Non-GAAP Financial Measures

2© 2020 W.W. Grainger, Inc.

All statements in this communication, other than those relating to historical facts, are “forward-looking statements.” Forward-looking statements can generally be identified by their use of terms such as “anticipate,” “estimate,” “believe,” “expect,” “could,” “forecast,” “may,” “intend,” “plan,” “predict,” “project” “will” or “would” and similar terms and phrases, including references to assumptions. 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. Forward-looking statements include, but are not limited to, statements about future strategic plans and future financial and operating results. Important factors that could cause actual results to differ materially from those presented or implied in the forward-looking statements include, without limitation: the unknown duration and the health, economic, operational and financial impacts of the global outbreak of the Coronavirus in 2019 (COVID-19 pandemic) and the actions taken or contemplated by governmental authorities or others in connection with the COVID-19 pandemic on the company’s businesses, its employees, customers and suppliers, including disruption to our operations resulting from employee illnesses, the development and availability of effective treatment or vaccines, the uncertain duration of mandated facility closures of non-essential businesses, stay in shelter health orders or other similar restrictions for customers and suppliers, changes in customers' product needs, suppliers' inability to meet unprecedented demand for COVID-19 related products, the potential for government action to allocate or direct products to certain customers which may cause disruption in relationships with other customers, disruption caused by business responses to the COVID-19 pandemic, including working remote arrangements, which may create increased vulnerability to cybersecurity incidents, including breaches of information systems security, adaptions to the Company’s controls and procedures, including financial reporting processes, required by working remote arrangements, which could impact the design or operating effectiveness of such controls or procedures, and global or regional economic downturns or recessions, which could result in a decline in demand for the company’s products or limit the company’s ability to access capital markets on terms that are attractive or at all; higher product costs or other expenses; a major loss of customers; loss or disruption of sources of supply; increased competitive pricing pressures; failure to develop or implement new technology initiatives or business strategies; failure to adequately protect intellectual property or successfully defend against infringement claims; fluctuations or declines in the company’s gross profit percentage; the company’s responses to market pressures; the outcome of pending and future litigation or governmental or regulatory proceedings, including with respect to wage and hour, anti-bribery and corruption, environmental, advertising, consumer protection, pricing (including disaster or emergency declaration pricing statutes), product liability, safety or compliance, or privacy and cybersecurity matters; investigations, inquiries, audits and changes in laws and regulations; failure to comply with laws, regulations and standards; government contract matters; disruption of information technology or data security systems involving the company or third parties on which the company depends; general industry, economic, market or political conditions; general global economic conditions including tariffs and trade issues and policies; currency exchange rate fluctuations; market volatility, including volatility or price declines of the company’s common stock; commodity price volatility; labor shortages; facilities disruptions or shutdowns; higher fuel costs or disruptions in transportation services; pandemic diseases or viral contagions; natural and other catastrophes; unanticipated and/or extreme weather conditions; loss of key members of management; the company’s ability to operate, integrate and leverage acquired businesses; changes in effective tax rates; changes in credit ratings or outlook; the company’s incurrence of indebtedness and other factors which can be found in our filings with the Securities and Exchange Commission, including our most recent periodic reports filed on Form 10-K and Form 10-Q, which are available on our Investor Relations website. Forward-looking statements are given only as of the date of this communication and we disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.

Additional information relating to certain non-GAAP financial measures referred to in this presentation, including daily sales in constant currency, adjusted gross profit, adjusted gross profit margin, adjusted selling, general and administrative expenses, adjusted selling, general and administrative expenses operating margin, adjusted operating earnings, adjusted segment operating earnings, adjusted operating margin, free cash flow, adjusted return on invested capital, EBITDA, adjusted EBITDA, effective tax rate, adjusted effective tax rate, adjusted net earnings and adjusted diluted earnings per share, is available in the appendix to this presentation and our most recent earnings release.

© 2020 W.W. Grainger, Inc.

DG MacphersonChairman & CEO

3


Pandemic Update

Opening Remarks

We have served our customers well through this challenging time

• Most customers continue to operate although status of re-openings varies significantly depending on industry and geography

• Re-opened branch showrooms across U.S. (late June) while adhering to strict safety and social-distancing protocols

• Building inventory in many pandemic-related categories although supply of certain critical products remains limited

Committed to supporting our team members through uncertainty

• Less than 3% of global workforce remains on furlough

• Significant efforts to keep team members safe in the pandemic

Ensure we remain in a strong financial position

• Ended quarter with ~$1.9B of available liquidity(1)

• Achieved >$75M of sequential SG&A savings in Q2’20, above communicated target of $40-$55 million

• Evaluating relaxation of certain cash preservation actions as business activity evolves

Supporting our customers, protecting our workforce, and ensuring continued financial stability

1

2

3

(1) As of June 30, 2020. Includes $1.6B of cash and cash equivalents and $250M of liquidity available under the company’s $1.25B credit facility maturing in 2025.

Q2 2020 Summary

Opening Remarks

5© 2020 W.W. Grainger, Inc. Note: See the appendix for any non-GAAP reconciliations. Numbers may not sum due to rounding.

(1) Fabory transaction closed 6/30/2020. Grainger China deal expected to close in the second half of 2020.

Business remains resilient through unprecedented period

• Daily sales down 1.8% (total company, constant currency basis)

• Outgrew broader U.S. MRO market by ~1,200 bps aided by pandemic-related

sales

• Gross margins remain pressured primarily due to continued COVID-related

headwinds; although partially offset by significant SG&A reductions

• Generated operating cash flow of $232 million; $189 million of free-cash-flow

• Strong progress on key 2020 initiatives in both high touch solutions and

endless assortment models

• Divested Fabory and announced agreement to divest Grainger China (1)

(1) Based on company's current categorization of SKUs for pandemic and non-pandemic products. These exclude specialty brands, intercompany sales and revenue

recognition related adjustments

(2) Data through July 20, 2020

2020 Sales by Product: U.S. Segment


Pandemic-related sales remain elevated through July, while non-pandemic sales continue to recover

Pandemic-related sales (1)

Jan

66%

9%

Feb JunMar Apr May Jul-MTD

23%

89%

62%

86%

67%

Non-pandemic sales (1) Total U.S. Segment

41% 71%

JunJan

1%

AprFeb Mar May Jul-MTD

2%

-6%

-13%

-21%

-17%

-11%

-1% -17%

1%

Jan Feb Mar

-7%

Apr May Jun Jul-MTD

2%

6%

9%

-1%

~4%

5.7% -2.4%

Opening Remarks

(year-over-year change in daily sales)

(2) (2) (2)


Tom OkraySenior Vice President & CFO

7

Note: All numbers on an adjusted basis. See the appendix for any non-GAAP reconciliations. Numbers may not sum due to rounding.

Q2 2020 Adjusted Results: Total Company

Summary Results Commentary


Daily sales decreased 1.9%, 1.8% on a constant

currency basis, due primarily to volume, including

product mix

GP margin rate down 290 bps in Q2 driven by:

• Pandemic-related headwinds

• Business unit mix from growth in endless assortment

SG&A leverage of 100 bps with cost down $43M

across multiple areas of the business

Business Performance

($ in millions)Q2 2020 Q2 2019

% vs. PYFav/(Unfav)

Sales $ 2,837 $ 2,893 (1.9) %

GP 1,016 1,121 (9.4) %

SG&A 701 744 5.9 %

Op Earnings $ 315 $ 377 (16.3) %

EPS $ 3.75 $ 4.64 (19.2) %

(% of sales)Q2 2020 Q2 2019

bps vs. PYFav/(Unfav)

GP Margin 35.8 % 38.7 % (290)

SG&A 24.7 % 25.7 % 100

Op Margin 11.1 % 13.0 % (190)

Daily sales down 2.4% vs. prior year, due primarily

to volume, including product mix

Gross profit margin was down 310 bps driven by:

• Pandemic-related headwinds

− Unfavorable product / customer mix

− Increase in alternative sourcing transactions

and related freight costs

• Cost inflation due primarily to tariff related increases

• Timing of rescheduled and reformatted sales meeting

SG&A leverage of 60 bps with cost down $25M

driven primarily by reduced travel, marketing,

labor related costs and general frugality


Q2 2020 Adjusted Results: U.S. Segment





% vs. PYFav/(Unfav)

Sales $ 2,169 $ 2,222 (2.4) %

GP 795 885 (10.1) %

SG&A 477 502 5.1 %

Op Earnings $ 318 $ 383 (16.7) %

(% of sales)Q2 2020 Q2 2019


GP Margin 36.7 % 39.8 % (310)

SG&A 22.0 % 22.6 % 60

Op Margin 14.7 % 17.2 % (250)

(1) Company estimates using compilation of external market data. Outgrowth measured as U.S. segment daily sales growth less estimated U.S. MRO Market

growth

Q2 2020 Sales Performance: U.S. Segment


U.S. MRO Market (1) ~1% ~0% (1%) - 0% (1.5%) - (1%) (15%) – (14%)

~240 bps

Q2’20Q4’19Q2’19

~285 bps

Q3’19 Q1’20

~120 bps

~700 bps


U.S. Segment outgrew MRO market by estimated 1,200 bps aided by pandemic-related sales

~1,200 bps

Daily sales increased 2.7%, 2.5% on a constant

currency basis

• Endless assortment sales growth of ~16% on a daily

basis

• International high touch businesses severely impacted

by pandemic related shut downs

Gross profit margin headwinds driven primarily by

higher delivery costs at MonotaRO and Fabory

SG&A leverage of 205 bps driven by:

• Cost management actions within international high-

touch businesses

• Significant SG&A leverage in endless assortment


Q2 2020 Adjusted Results: Other Businesses



Note: Endless assortment businesses include Zoro (primarily in U.S.) and MonotaRO (in Japan). International high-touch portfolio comprised of other small businesses in United Kingdom and Mexico.


($ in millions)

Q2 2020 Q2 2019% vs. PYFav/(Unfav)

Sales $ 680 $ 663 2.7 %

GP 188 192 (2.3) %

SG&A 157 165 5.8 %

Op Earnings $ 31 $ 27 18.9 %

(% of sales)

Q2 2020 Q2 2019bps vs. PY

Fav/(Unfav)

GP Margin 27.6 % 29.0 % (140)

SG&A 22.8 % 24.9 % 205

Op Margin 4.7 % 4.1 % 65


Q2 2020 Adjusted Results: Canada Segment



Daily sales down 21.7%, 19% on a constant

currency basis

• Volume (including product mix) down 17.5%

• Price / customer mix headwinds of 1.5%

Gross profit margin down 145 bps driven by:

• Aggressive pricing actions, pandemic-related mix

headwinds and lower vendor rebates

• Partially offset by lower freight

SG&A gained leverage of 60 bps on $12M of cost

reductions



% vs. PYFav/(Unfav)

Sales $ 107 $ 135 (21.7) %

GP 33 44 (25.2) %

SG&A 35 47 23.1 %

Op Earnings $ (2) $ (3) (31.0) %

(% of sales)Q2 2020 Q2 2019


GP Margin 31.0 % 32.4 % (145)

SG&A 33.0 % 33.7 % 60

Op Margin (2.1) % (1.2) % (85)


Closing Remarks

13


Closing Remarks

The Grainger Edge: Our Principles

Start with the customer

Embrace curiosity

Act with intent

Compete with

urgency

Win as one

team

Invest in our

success

Do the right thing

Our Purpose

We relentlessly expand our leadership position

by being the go-to partner for people who build

and run safe, sustainable, and productive

operations.

We Keep the World Working

High-Touch Solutions Model

▪ Advantaged MRO solutions

▪ Differentiated sales and services

▪ Unparalleled customer service

Endless Assortment Model

▪ Expansive product assortment

▪ Innovative customer acquisition and retention capabilities

Our Aspiration

Our Strategy

© 2020 W.W. Grainger, Inc. 15

Q&A Session


Appendix

16


Debt Maturity Schedule (as of June 30, 2020)

$500

$1,000

$20

$1,000

$400

$250 $400

2023 2024

$15

20222020 2021

$1,750 (drawn + undrawn)

2045+2025

$35(drawn + undrawn)

$1,800

Foreign Lines of Credit $1.25bn Revolver due 2025

Undrawn Foreign Lines of Credit(2)

1.85% Senior Notes due 2025

4.20% Senior Notes due 2047Undrawn $1.25bn Revolver due 2025



(1) Excludes current portion of long-term debt ($21M) and other immaterial items.

(2) Foreign Lines of Credit includes debt outstanding under the $35M Chinese Revolvers due 2020. Assumes USD:RMB conversion rate of ~7.07 as of 6/30/20.

Amount Drawn

No significant debt maturities upcoming

($ millions)

Appendix

(1)

• Retail: up High-Thirties

• Wholesale*: down Mid-Single Digits

• Commercial*: down Mid-Twenties

• Transportation*: down Low-Double Digits

• Contractor: down Low-Double Digits

• Government: up High-Teens

• Healthcare: up High-Forties

• Light Manufacturing: down Low-Single Digits

• Heavy Manufacturing: down Low-Twenties

• Natural Resources: down Mid-Twenties

Q2 2020 U.S. Sales By Customer End Market


Appendix

*Wholesale, Commercial and Transportation were previously communicated under the Commercial grouping.

Quarterly Daily Sales


Appendix

* Total company monthly sales performance is based on U.S. sales days. Adjusting for local country sales days, monthly sales performance would be consistent

throughout the quarter.

Company Q2 2020 Daily Sales

MonthConstant Currency

FXImpact

Reported Sales*

April (6.4)% (0.2)% (6.6)%

May 1.7% —% 1.7%

June (0.9)% —% (0.9)%

Q2 Daily Sales (1.8)% (0.1)% (1.9)%

Selling Days

2020 2019 2018

1Q 64 63 64

2Q 64 64 64

3Q 64 64 63

4Q 64 64 64

Full Year 256 255 255

Q2 2020 Daily Sales vs. Q2 2019

Drivers Company United States Canada Other Businesses

Volume / Product Mix (1.5)% (2.1)% (17.5)% 2.5%

Price / Customer Mix (0.3) (0.3) (1.5) —

Foreign Exchange (0.1) — (2.7) 0.2

Change vs. Prior (1.9)% (2.4)% (21.7)% 2.7%

Foreign Exchange 0.1 — 2.7 (0.2)

Constant Currency (1.8)% (2.4)% (19.0)% 2.5%

% of Company Revenue 100% 72% 4% 24%

Q2 2020 GAAP to Non-GAAP Reconciliations (1 of 5)


Appendix

Note: The reconciliations above provides the information necessary to reconcile reported gross profit, reported gross profit margin and reported SG&A to adjusted gross

profit, adjusted gross profit margin and adjusted SG&A, therefore no separate reconciliation is provided.

(in millions of dollars)Three Months Ended June 30, %

2020 2019

Operating earnings reported $ 205 $ 380 (46) %

Restructuring, net branch gains (United States) — 2

Restructuring, net branch gains (Canada) 1 (4)

Restructuring (Unallocated expense) — (1)

Fabory Divestiture (Unallocated expense) 116 —

Fabory Divestiture (Other businesses) (7) —

Subtotal 110 (3)

Operating earnings adjusted $ 315 $ 377 (16) %

(in millions of dollars)Six Months Ended June 30, %

2020 2019

Operating earnings reported 364 $ 743 (51) %

Restructuring, net branch gains (United States) 6 2

Restructuring, net branch gains (Canada) 2 (2)

Restructuring (Unallocated expense) — (1)

Impairment charges (Other businesses) 177 —



Subtotal 294 (1)

Operating earnings adjusted 658 $ 742 (11)%

(in millions of dollars) Three Months Ended June 30,

2020Gross

Profit % 2019Gross

Profit %

Gross profit reported $1,016 35.8 % $1,121 38.7 %

Gross profit adjusted $1,016 35.8 % $1,121 38.7 %

(in millions of dollars) Six Months Ended June 30,

2020Gross

Profit % 2019Gross

Profit %

Gross profit reported 2,137 36.6 % $ 2,216 38.9 %

Restructuring (Canada) — — 1 —

Gross profit adjusted 2,137 36.6 % $ 2,217 38.9 %



Appendix

(1) The tax impact of adjustments is calculated based on the income tax rate in each applicable jurisdiction, subject to deductibility limitations

and the company's ability to realize the associated tax benefits. The lower tax rate effect in the current year quarter was primarily driven by

tax impacts related to the Fabory divestiture.

(in dollars per share)Three Months Ended

June 30, %

2020 2019

Diluted earnings per share reported $ 2.10 $ 4.67 (55) %

Restructuring, net of branch gains (United States) — 0.02

Restructuring, net of branch gains (Canada) 0.01 (0.06)

Restructuring (Unallocated expense) — (0.01)

Fabory Divestiture (Unallocated expense) 2.14 —

Fabory Divestiture (Other businesses) (0.12) —

Total pretax adjustments 2.03 (0.05)

Tax effect (1) (0.38) 0.02

Total, net of tax 1.65 (0.03)

Diluted earnings per share adjusted $ 3.75 $ 4.64 (19) %

(in dollars per share) Six Months Ended June 30, %

2020 2019

Diluted earnings per share reported $ 5.29 $ 9.14 (42) %

Restructuring, net of branch gains (United States) 0.11 0.03

Restructuring, net of branch gains (Canada) 0.03 (0.03)

Restructuring (Unallocated expense) — (0.01)

Impairment charges (Other businesses) 3.26 —

Fabory Divestiture (Unallocated expense) 2.14 —

Fabory Divestiture (Other businesses) (0.12) —

Total pretax adjustments 5.42 (0.01)

Tax effect (1) (2.71) 0.01

Total, net of tax 2.71 —

Diluted earnings per share adjusted $ 8.00 $ 9.14 (12) %

(in millions of dollars) Three Months Ended June 30, %

2020 2019

Net earnings reported $ 114 $ 260 (56) %

Restructuring, net of branch gains (United States) — 1

Restructuring, net of branch gains (Canada) — (3)

Impairment charges (Other businesses) (3) —



Subtotal 90 (2)

Net earnings adjusted $ 204 $ 258 (21) %

(in millions of dollars) Six Months Ended June 30, %

2020 2019

Net earnings reported $ 287 $ 513 (44) %

Restructuring, net of branch gains (United States) 4 1

Restructuring, net of branch gains (Canada) 1 (1)

Impairment charges (Other businesses) 136 —



Tax benefit (Other businesses) (87) —

Subtotal 147 —

Net earnings adjusted $ 434 $ 513 (15) %



Appendix

*The GAAP financial statements are the source for all amounts used in the Return on Invested Capital (ROIC) calculation. ROIC is calculated using operating earnings divided by net working

assets (a 3-point average for the year-to-date). Net working assets are working assets minus working liabilities defined as follows: working assets equal total assets less cash equivalents (3-point

average of $927.6 million), deferred taxes, and investments in unconsolidated entities, plus the LIFO reserve (3-point average of $435.5 million). Working liabilities are the sum of trade payables,

accrued compensation and benefits, accrued contributions to employees' profit sharing plans, and accrued expenses.

ROIC (Reported) ROIC (Adjusted)

Three Months Ended Six Months Ended

(in millions of dollars) March 31, June 30,

2020 2019 2020 2019

Sales

United States $ 2,169 $ 2,222 4,476 $ 4,371

Canada 107 135 236 271

Other Businesses 680 663 1,378 1,296

Intersegment sales (119) (127) (252) (246)

Net sales to external customers$ 2,837 $ 2,893 $ 5,838 $ 5,692

2020

Op. Margin

% 2019

Op. Margin

% 2020

Op. Margin

% 2019

Op.

Margin %

Operating earnings reported

United States$ 318 14.6 % $ 381 17.1 % 658 14.7 % $ 745 17.0 %

Canada (3) (2.4) % 1 1.2 % (6) (2.5)% (4) (1.3)%

Other Businesses38 5.7 % 27 4.1 % (100) (7.2)% 57 4.4 %

Unallocated corporate costs(148) N/A (29) N/A (188) N/A (55) N/A

Operating earnings reported$ 205 7.3 % $ 380 13.1 % $ 364 6.2 % $ 743 13.1 %

ROIC* for Company15.6 % 31.4 %

ROIC* for United States37.5 % 45.3 %

ROIC* for Canada(3.0) % (1.9) %

(in millions of dollars) Three Months Ended June 30,

2020Operating Margin % 2019

Operating Margin %

Segment operating earnings adjusted

United States $ 318 14.7 % $ 383 17.2 %

Canada (2) (2.1) % (3) (1.2) %

Other Businesses 31 4.7 % 27 4.1 %

Unallocated corporate costs (32) N/A (30) N/A

Segment operating earnings adjusted $ 315 11.1 % $ 377 13.0 %

(in millions of dollars) Six Months Ended June 30,

2020Operating Margin % 2019

Operating Margin %

Segment operating earnings adjusted

United States 664 14.8 % $ 747 17.1 %

Canada (4) (1.8) % (6) (2.0) %

Other Businesses 70 5.2 % 57 4.4 %

Unallocated expense (72) N/A (56) N/A

Segment operating earnings adjusted $ 658 11.3 % $ 742 13.0 %

ROIC* for Company 28.2 % 31.4 %

ROIC* for United States 37.8 % 45.4 %

ROIC* for Canada (2.2) % (2.8) %



Appendix

Note: Management believes the presentation of Net Debt to Adjusted EBITDA ratio

provides useful information regarding the Company’s liquidity and leverage. The

ratio is calculated by dividing the Company's Net Debt by the sum of the most recent

four quarters Adjusted EBITDA.

(in millions of dollars) June 30,

2020

Condensed Consolidated Balance Sheet

Short-term debt $ 15

Current maturities of long-term debt 21

Long-term debt 3,301

Less: Cash and cash equivalents 1,603

Net Debt $ 1,734

LTM ending

June 30, 2020

Condensed Consolidated Statement of Earnings

Net earnings $ 675

Income taxes 143

Other expense, net 65

Condensed Consolidated Statement of Cash Flows

Depreciation and amortization 211

EBITDA $ 1,094

Restructuring, net and impairment charges 421

Adjusted EBITDA $ 1,515

Net Debt to Adjusted EBITDA 1.1



Appendix

Note: The tax impact of adjustments is calculated based on the income tax rate in each

applicable jurisdiction, subject to deductibility limitations and the company's ability to realize

the associated tax benefits. The lower tax rate effect in the current year quarter was primarily

driven by tax impacts related to the Fabory divestiture.

(in millions of dollars)

Three Months Ended

June 30, 2020

Operating Cash Flow $ 232

Less: Additions to property, buildings, equipment and intangibles 43

Free Cash Flow $ 189


IR Contacts

25

Irene HolmanVice President, Investor Relations

847.535.0809

Abby SullivanSr. Manager, Investor Relations

847.535.0939

[email protected]

nyse: gww q2 2020 · note: management believes the presentation of net debt to adjusted ebitda...

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