Q1 2018 Earnings Call W.W. Grainger, Inc. April 19, 2018 Safe - PowerPoint PPT Presentation

Q1 2018 Earnings Call W.W. Grainger, Inc. April 19, 2018

Safe Harbor Statement and Non-GAAP Financial Measures All statements in this communication, other than those relating to historical facts, are “forward -looking statements. ” These 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. These 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 expectations include, among others: higher product costs or other expenses; a major loss of customers; loss or disruption of source of supply; increased competitive pricing pressures; failure to develop or implement new technologies; the implementation, timing and success of our strategic pricing initiatives; 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, privacy and cybersecurity matters; investigations, inquiries, audits and changes in laws and regulations; disruption of information technology or data security systems; general industry or market conditions; general global economic conditions; currency exchange rate fluctuations; market volatility; commodity price volatility; labor shortages; facilities disruptions or shutdowns; higher fuel costs or disruptions in transportation services; natural and other catastrophes; unanticipated weather conditions; loss of key members of management; our ability to operate, integrate and leverage acquired businesses; changes in credit ratings; changes in effective tax rates 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 adjusted operating earnings, adjusted segment operating earnings, adjusted net earnings and adjusted diluted earnings per share, is available in the appendix to this presentation and our most recent earnings release. 2

DG Macpherson Chairman and Chief Executive Officer

Q1 2018 Reported Results – Total Company Q1 2018 Q1 2017 % vs. PY ($ in millions) Sales $ 2,766 $ 2,541 9% • Reported results included GP 1,092 1,019 7% restructuring items that had an Op Expense 757 727 4% $8 million charge to operating earnings and a $0.11 negative Op Earnings $ 335 $ 293 14% impact to EPS EPS $ 4.07 $ 2.93 39% • The remaining slides reference adjusted results, which exclude Q1 2018 Q1 2017 bps vs. PY items outlined on page 2 of the (% of sales) earnings release GP Margin 39.5% 40.1% (60) Op Expense 27.4% 28.6% (120) Op Margin 12.1% 11.5% 60 4

Q1 2018 Adjusted Results – Total Company • Sales up 9% vs. prior year Q1 2018 Q1 2017 % vs. PY ($ in millions) • Volume up 8%, seasonal sales up 1%, Sales $ 2,766 $ 2,541 9% offset by 1% decline due to Techni-Tool divestiture GP 1,091 1,019 7% • Price down 1% Op Expense 749 732 2% • FX favorability of 2% Op Earnings $ 343 $ 287 19% • Normalized GP rate declined 30 bps (adjusted EPS $ 4.18 $ 2.88 45% for revenue recognition change and national sales meeting timing, see appendix) Q1 2018 Q1 2017 bps vs. PY (% of sales) • GP rate better than expected driven by U.S. GP Margin 39.5% 40.1% (60) volume mix, price/cost spread and Canada price increases Op Expense 27.1% 28.8% (170) • OpEx rate declined 120 bps (adjusted for Op Margin 12.4% 11.3% 110 revenue recognition change, see appendix) 5 Note: Sales days were the same in Q1 2018 and Q1 2017. Reference slide 26 for GAAP vs. non-GAAP reconciliation.

Q1 2018 Adjusted Results – Other Businesses • Sales up 18% vs. prior year • Price and volume up 12% Q1 2018 Q1 2017 % vs. PY ($ in millions) • FX favorability of 6% Sales $ 588 $ 497 18% • Performance driven by 24% sales Op Earnings $ 38 $ 32 19% growth for single channel businesses, which continue to be a profitable growth driver Q1 2018 Q1 2017 bps vs. PY (% of sales) Op Margin 6.4% 6.3% 10 • International portfolio improving margins Note: Single channel businesses include all Zoro businesses and MonotaRO in Japan. International portfolio includes Cromwell, Fabory, 6 Mexico, other Latin America businesses and China. Reference slide 26 for GAAP vs. non-GAAP reconciliation.

Q1 2018 Adjusted Results – Canada • Sales down 2% vs. prior year, down 6% in local currency • Price up 7% Q1 2018 Q1 2017 % vs. PY (USD in millions) • Volume down 13% Sales $ 182 $ 186 -2% • Op Earnings $ -9 $ -16 41% Local currency operating expenses down 8% due to branch closures and cost reductions Q1 2018 Q1 2017 bps vs. PY (% of sales) • Operating margin better than Op Margin -5.1% -8.4% 330 expected due primarily to a higher GP rate as a result of market-based price increases and cost management 7 Note: Reference slide 26 for GAAP vs. non-GAAP reconciliation.

Q1 2018 Adjusted Results – United States • Sales up 8% vs. prior year • Volume up 9%, intercompany sales up 1%, seasonal sales up 1%, partially offset by 1% decline due to Techni-Tool divestiture Q1 2018 Q1 2017 % vs. PY ($ in millions) • Price down 2% Sales $ 2,108 $ 1,953 8% • Normalized GP rate declined 60 bps (adjusted Op Earnings $ 352 $ 303 16% for revenue recognition change and national sales meeting timing, see appendix) • Operating expenses were up 2% on 9% volume Q1 2018 Q1 2017 bps vs. PY (% of sales) growth (adjusted for revenue recognition Op Margin 16.7% 15.5% 120 change, see appendix) • Operating margin better than expected as expense leverage more than offset GP rate decline 8 Note: Reference slide 26 for GAAP vs. non-GAAP reconciliation.

Customer Response to Pricing Reset Remains Strong U.S. Large: daily volume growth U.S. Medium: daily volume growth on $6.2 billion of revenue on $0.9 billion of revenue Q1'18 7% Q1'18 30% Q4'17 8% Q4'17 26% Q3'17 5% Q3'17 18% Q2'17 4% Q2'17 3% Q1'17 3% Q1'17 -7% Q4'16 Q4'16 1% -10% 0% 5% 10% -10% 0% 10% 20% 30% • • U.S. Large volume growth of 7% in the quarter U.S. Medium volume growth of 30% in the quarter exceeded expectations exceeded expectations • • Continued increase in dollar volume each quarter Increasing penetration with existing customers and since Q4’16 acquiring new customers Note: U.S. Large revenue of $6.2 billion and U.S. Medium revenue of $0.9 billion as of 12/31/2017. 9 Total product COGS dollars (excludes freight, rebates and other adjustments) used as a proxy for volume.

Raised 2018 Guidance Ranges As of As of 1/24/2018 4/19/2018 2018E 2018E Sales ($ billions) $10.7 - $11.2 $10.9 - $11.3* • 2018 revenue now expected to grow 5% to 8% % vs. prior year 3% to 7% 5% to 8% on better price deflation and improved FX Op. Earnings $1.1 - $1.2 $1.2 - $1.3 • Strong volume in the U.S. is offset by softer % vs. prior year -2% to 6% 6% to 14% volume in Canada Op. Margin 10.5% - 11.1% 11.1% - 11.5% • Operating margin now expected to be 11.1% bps vs. prior year (60) to 0 10 to 50 to 11.5% on improved GP rate and expense productivity EPS $12.95 - $14.15 $14.30 - $15.30 % vs. prior year 13% to 24% 25% to 33% *Typo corrected at 8:00 a.m. 4/19/2018. Note: Guidance as of 4/19/2018. Reference slide 26 for GAAP vs. non-GAAP reconciliation. Results for 2017 have been restated due to 10 adoption of Accounting Standards Update (ASU) 2017-07, Compensation Retirement Benefits (Topic 715) . See supplement on IR website.

2018: Q1 Actuals and Full Year Guidance at the Midpoint Actuals Midpoint Q1 2018 FY 2018E • Expect the strong performance in Q1 to continue Sales ($ billions) $2.8 $11.1 throughout the year % vs. prior year 9% 6.5% GP 39.5% • 38.3% Sales growth rate still expected to slow as we face tougher comps in H2 and some favorability bps vs. prior year (60) (110) normalized (30) (60) in Q1 does not repeat OpEx 27.1% 27.0% • Q1 2018 normalized GP rate was down 30 bps bps vs. prior year (170) (140) (adjusted for revenue recognition change and national sales meeting timing) Op. Margin 12.4% 11.3% bps vs. prior year 110 30 • Will continue to hold Canada expectations EPS $4.18 $14.80 consistent with January guidance % vs. prior year 45% 29% Note: Guidance as of 4/19/2018. Reference slide 26 for GAAP vs. non-GAAP reconciliation. Results for 2017 have been restated due to 11 adoption of Accounting Standards Update (ASU) 2017-07, Compensation Retirement Benefits (Topic 715) . See supplement on IR website.