Greetings and welcome to the W.W. Grainger fourth quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the presentation. If anyone should require operator assistance during this conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to our host, Irene Holman, Vice President of Investor Relations. Thank you. You may begin. Good morning. Welcome to Grainger's fourth quarter and full year 2020 earnings call. With me are D.G. Macpherson, Chairman and CEO, and Deidra Merriwether, Senior Vice President and CFO. As a reminder, some of our comments today may be 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 slide presentation and in our Q4 earnings release, both of which are available on our IR website. This morning's call will focus on adjusted results for the fourth quarter of 2020, which exclude restructuring and other items that are outlined in our earnings release. I'll turn it over to D.G. Thanks, Irene. Good morning, and thank you for joining us. I'm excited that our new CFO, Dee Merriwether, is here with me. Dee brings a wealth of financial and operational expertise and a deep understanding of Grainger's business that will serve us well. She has been with Grainger for eight years in finance, pricing, and sales leadership roles. It's great to have her as our new CFO. For the call today, I'd like to provide an overview of 2020, highlighting accomplishments and challenges. Clearly, much of the year has been shaped by the pandemic, I'll also highlight our progress on key strategic initiatives. I'll turn it over to Dee to review the details of our fourth quarter results. I'll close by discussing how we will re-segment the business to more closely reflect how we think about the company, and we'll also touch on our high-level opportunities and priorities for both the High-Touch and Endless Assortment businesses. 2020 was obviously one of the most challenging and intense years in history. Through it all, we demonstrated agility, resilience, and a steadfast focus on supporting our customers and team members. At the start of the pandemic, we laid out three basic priorities: to serve our customers well, support our team members, and ensure we remain strong financially. I can confidently say we've been able to accomplish all three, and I'm proud of how the team has continued to execute on our purpose to keep the world working by living our principles every day. Over the last year, we persevered through the pandemic while continuing to deliver an exceptional customer experience. We've deepened relationships with existing customers and developed new relationships, many of which have returned for multiple purchases. We helped our customers secure product, manage their inventory, and solve their problems as we further embedded KeepStock and our other solutions in their facilities. Grainger was sometimes the only vendor our customers allowed on their sites to support their operations, a testament to our deep customer relationships. Another priority was to support our team members. We operated with the perspective that the pandemic would be challenging and longer in duration than we wanted, but that it would eventually end. As such, we maintained a stable workforce, deployed personnel to safely and effectively serve customers, and supported team members to ensure their safety and well-being. The pandemic is first and foremost a humanitarian crisis, and supporting our team members has remained a huge priority. Finally, we have remained very strong financially, generating over $1.1 billion in operating cash flow in this difficult year. As it became clear that our business model would be resilient throughout the pandemic, we reverted from a temporary focus on cash preservation to our longer-term strategic priority of growing the business profitably. The Grainger team has been active in serving our communities through this time of need. We have great team members who value giving back to others. As a company, we provided monetary and product donations to organizations like the Red Cross and the Children First Fund to support the pandemic response. The key leadership challenge this year was balancing our pandemic response while continuing to build the company for the future. Throughout, we remained focused on executing against our strategic initiatives. Within our High-Touch Solutions model, we improved the way customers find the products they need. We know this is core to our growth. In 2020, we launched our product information management system, which provides the foundation for our merchandising efforts. We now have over $2.8 billion of our product assortment remerchandised, $1.6 billion completed in 2020 alone. We also made enhancements to our search functionality and mobile app, resulting in a better user experience. We added features like search by image, where you can take a picture of the product you're looking for and get accurate matches to relevant items quickly and easily. We took a significant step forward with our marketing capabilities in 2020. We brought more capabilities in-house to develop the competitive advantage of industry-specific knowledge. These efforts helped us gain share and increase customer acquisition with the Grainger brand. We developed new capabilities to support on-site inventory management, including vending solutions and technology, allowing us to remotely upgrade or alter installations to better serve customers during the pandemic. We also opened a new distribution center in Louisville earlier this year, now our largest facility, with the capacity to stock 700,000 products in a strategic geographic location. We leveraged the building to test product expansion on a set of new categories with very strong results. We also made strong progress with our Endless Assortment businesses. Zoro continued to expand its product portfolio, adding 2.5 million items in 2020 to bring the total SKUs to over 6 million. Zoro also improved its marketing capabilities, resulting in improved ROI and higher customer repeat rates. They are leveraging the MonotaRO playbook to improve the fundamental growth and profitability of the business. MonotaRO continued its exceptional growth and profitability performance. All in all, a great year for the Endless Assortment team. Now, before I review our 2020 results, I think it's helpful to step back and take a look at the impact the pandemic has had on our operating performance. From a revenue perspective, we started to see a shift to pandemic-related products starting in mid-February of last year. In late March, as pandemic product demand surged, we saw a significant decline in other non-pandemic product as lockdowns took hold. Since that point, we have seen continued strong sales of pandemic products, which has ebbed and flowed based on the virus, including another surge in the fourth quarter, which mirrored the increase in case counts. Non-pandemic products are slowly coming back, and while not yet at pre-pandemic levels, they have improved quite a bit from April lows. We expect the pandemic to continue to impact revenue through at least the first half of 2021, and then start to moderate as vaccinations take hold. We will detail our forward-looking thoughts in a bit. The pandemic has also had a big impact on gross profit, driven by two main factors. First, we were impacted by product and customer mix. Pandemic products are generally lower margin, and we sold large quantities to healthcare and government customers, which typically receive more favorable pricing. This was exacerbated early on as we initially prioritized product allocation to those most in need, like health systems and those on the front lines. Sell-through margins have been negatively affected by these mix impacts. The second driver is that we have been aggressive in supporting our customers by trying to anticipate the needs they might have. As a result, we placed large orders for certain products in Q2 of last year. As we have gone through the pandemic surges, the supply-demand picture has changed rapidly for some products, and we had to revalue our inventory to reflect this reality. The vast majority of our purchases have worked well, a few have not. We have reverted to our normal purchasing processes and will continue to monitor market dynamics as the situation unfolds. The impact on GP is easier to understand sequentially. Our GP dropped significantly in Q2, and it's then impacted the remainder of the year. Moving forward, we expect U.S. GP to improve sequentially and to exit 2021 as high or higher than we started in Q1 2020. Finally, as we look at SG&A, overall net costs were lower despite some increased costs for enhanced safety and cleaning protocols and workforce disruptions. The team was able to tightly control costs while also continuing to invest for the long term. Despite these unique and challenging circumstances, we were still able to deliver strong overall performance in 2020. A few of the highlights, we delivered organic constant currency daily sales growth of 3.5% at the total company level, driven by our above-market growth of 800 basis points in the U.S., due in part to pandemic-related sales. Also, we achieved over 18% daily sales growth in the Endless Assortment businesses. We delivered operating margin of 11.2%, reflecting strong SG&A leverage, which helped to offset the previously mentioned pandemic-fueled GP headwinds. We generated over $1.1 billion in operating cash flow while returning $939 million to shareholders through dividends and buybacks. We remain disciplined in our capital deployment, maintaining strong adjusted ROIC of over 28% for the company. In order to focus on our core High-Touch and Endless Assortment businesses, we divested Fabory and China, two non-core businesses abroad. Overall, I am confident in the direction we are heading and very excited about the future. We have gained significant share and built strong capabilities. We are in a very good position to deliver strong performance this year and for years to come as the pandemic loses its grip. With that, I will turn it over to Dee to take us through the fourth quarter results. Dee? Thanks, D.G. Turning to our quarterly performance. Organic daily sales, which adjust for the divestitures of Fabory and China, finished up 5.6% on a constant currency basis in the fourth quarter, underpinned by growth in our U.S. segment and continued impressive performance in our Endless Assortment businesses. In the U.S., we realized strong outgrowth to the broader MRO market, which contracted about 1.5%-2% versus prior year. Our gains were driven by pandemic-related demand, which remains at elevated levels, sales to new customers, and growth with mid-size customers. The Endless Assortment model continues to deliver with 20% growth in daily sales again in the fourth quarter, while also generating improved operating margins. We remain very excited about the future of this business, and we'll discuss our plans to provide further transparency as we introduce our new GAAP Reportable Segments for 2021. At the total company level, margin pressure continues to be driven by pandemic-related headwinds, primarily in the U.S. segment. I will detail the pandemic mix more in a few slides. In addition, we continue to see business unit mix impact as we experience significant growth from our Endless Assortment businesses. SG&A costs were favorable by $42 million year-over-year as we captured 235 basis points of SG&A leverage in the period through prudent cost controls in the U.S. and Canada, and we gained strong expense leverage in our Endless Assortment businesses. This resulted in Q4 operating margin at 10%, down 75 basis points from the fourth quarter last year. From a cash flow perspective, the business continues to produce robust cash flow, with operating cash flow of $336 million at 170% of net adjusted earnings and free cash flow of $291 million. We restarted our share repurchase program in the fourth quarter and completed $500 million of repurchases in the period. Finally, we delivered strong return on invested capital at over 28% for the full year. Turning to our U.S. segment, daily sales increased 3.7% in the quarter compared to the fourth quarter of 2019. On the product side, sales of pandemic-related products remains elevated, up 49% in the quarter, but have tapered off from the peak in the second quarter. We continue to see meaningful improvement in our non-pandemic products trend, which has improved to down 7% in the quarter, exiting the year with December at its lowest decline, down 5%. We've also seen a significant uptick in new customer acquisitions month-over-month, with encouraging signs of repeat buying. From a customer perspective, we see improved growth with both large and mid-size customers, with the latter growing about 6% in the quarter, continuing to show signs of improvement from earlier in the year. Gross margin of 35.7% was down 290 basis points compared to the fourth quarter of 2019. The unfavorable variance in gross margin was driven most notably by pandemic-related headwinds, which accounted for nearly 90% of the GP decline. The pandemic impact was driven by continued product and customer mix and mark-to-market inventory adjustments, which D.G. outlined earlier, as well as freight-related surcharges, net of pass-through shipping charges to customers. In the second half of 2020, we started gaining solid traction on price realization, which nearly offset continued cost headwinds as we exited the year. From an SG&A perspective, we gained 155 basis points of leverage with cost decreasing approximately $14 million year-over-year. The reduction was driven primarily by decreased travel expenses, lower depreciation, and general operating efficiencies. Operating margin declined 12%-12.8% in the fourth quarter as the pandemic impact of gross margin weighted more heavily than the SG&A leverage gained. Adjusted return on invested capital was a very healthy 36.5% for the full year of 2020. Looking at pandemic product trends. While sales of pandemic-related products decreased from the second quarter through October, continued demand for key products including masks, gloves, and cleaning supplies has kept pandemic sales elevated year-over-year, and we saw this pick up again in the last few months of the year as cases spiked headed into the winter. We've also seen customers across industries prepare for the vaccine distribution, needing related, but slightly different products, like those required to work in refrigerated storage units. January sales remain elevated but have tapered off from Q4. On the non-pandemic side, things continue to get better. We exit the year with December down 5% and have continued to see improvement with January roughly flat year-over-year. Looking at share gain on slide 10, we estimate the U.S. MRO market declined between 1.5%-2% in the fourth quarter, showing strong improvement from the mid-teens decline we saw in the second quarter. Grainger was able to capture roughly 550 basis points of outgrowth, fueled by pandemic-related sales and our growth initiatives. On a full year basis, we estimate that we have outgrown the broader MRO market by roughly 800 basis points. This outgrowth was aided by significant pandemic-related volume, some of which, particularly in the second and third quarters, was related to large one-time orders that are unlikely to reoccur. We estimate that approximately 250 basis points of the market growth in 2020 was a result of these non-repeating pandemic transactions. Accordingly, as we move into 2021 and lap these pandemic sales spikes, we expect to see some volatility in our year-over-year share gain metric. That being said, we are confident in our ability to serve new and existing customers during these challenging times. We believe we are doing the right things in merchandising, marketing, and sales effectiveness to drive repeat purchases and produce 300- 400 basis points of sustainable outgrowth in our U.S. High-Touch Business. Moving to our other businesses. Organic daily sales increased 14.6%, or 13% on a constant currency basis. The Endless Assortment business grew at an approximately 20%, with strong results in both MonotaRO and Zoro during the quarter. For our international high-touch business in both Mexico and Cromwell, we saw continued sequential improvement. However, both businesses remain impacted by pandemic-related shutdowns. Overall, operating margins for other businesses were up 210 basis points. The favorability was driven by significant SG&A leverage in Endless Assortment, notably at Zoro, which lapsed heavy investments in the prior year period. Zoro continues to execute the MonotaRO playbook and delivered low single-digit results for the year. Turning to slide 12. The Canadian market has seen an overall economic slowdown during the pandemic, which has notably impacted our natural resource and export customers. Throughout the pandemic, our team in Canada has remained focused on serving new and existing customers well, while also accelerating our customer diversification efforts. In Canada, daily sales decreased 3.2%, or 4.4% on a constant currency basis. Volumes in Canada reflect the pandemic-driven slowdown. However, the business continued to improve sequentially. We had positive sales growth in the month of December, and we believe the business is well-suited for post-pandemic growth. Gross margin at Grainger Canada declined 1,040 basis points year-over-year. This was primarily driven by lapping significant one-time supply chain efficiencies, and to a lesser extent, the impacts of pandemic-related headwinds. Cost management and the benefit of pandemic-related subsidies resulted in 315 basis points of SG&A leverage. Given the continued uncertainty surrounding the pandemic and the subsequent path of economic recovery, we will not be providing formal guidance at this time. This picture remains fluid, as does the shape of the pandemic and the customer demand for pandemic products. Similar to the last few quarters, we want to continue providing some insights into how we're thinking about the current quarter's performance. From a sales perspective, our preliminary results for January show year-over-year sales up about 9% at the total company level on a daily organic constant currency basis. While this is a strong start to the quarter, we face more difficult comps in February and March when pandemic sales started to spike. With this, we expect daily sales to moderate and end the first quarter up between 3%-5% organically. Note, we'll also have one less selling day this quarter. From a growth margin perspective, we expect GP improvement of around 50-100 basis points sequentially versus Q4 2020. This anticipated lift is underpinned by a slowdown in pandemic product demand, continued price cost recovery, and the lapping of freight headwinds experienced in Q4 2020. On a year-over-year basis, this would imply GP will be down between 150-200 basis points in the quarter. With respect to SG&A, we expect costs will inch up sequentially as business activity progresses and as things like variable comp reset with the start of the new year. With this, we anticipate SG&A of between $730 million-$750 million for the first quarter of 2021. While this is up slightly versus Q4 2020, we will still be down meaningfully year-over-year. As always, we remain focused on managing near-term headwinds while continuing to invest in the business for the long term. From a capital allocation perspective, we remain committed to our balanced framework. For 2021, we anticipate investing between $225 million and $275 million back into the business. These CapEx investments include DC expansion in Japan, continued IT, and KeepStock investments in the U.S., and normal levels of maintenance capital. Beyond that, we anticipate executing a similar dividend and share repurchase strategy, putting between $600 million-$700 million to work on repurchases in 2021. Although we are not providing 2021 guidance, I thought it might be helpful to provide some insights into how a post-pandemic recovery could play out through the year. As it's the largest portion of our business and one of the most impacted by the pandemic, we have charted our U.S. segment on slides 14 and 15 to give you some context. If we have seen continued progress on vaccine distribution and a return to near full economic activity as we enter into the second half of 2021, we would expect our results to trend back towards more normalized levels. On slide 14, we map out year-over-year sales growth in dollars. Similar to our pandemic, non-pandemic sales chart, you can see the quarter-to-quarter sales spikes from pandemic-related products, most pronounced in the second quarter, which remained elevated through the year and finished up $835 million, or 54%, in 2020. This drove pandemic product mix as a percent of total sales to 28%, a large increase compared to 19% in 2019. Conversely, non-pandemic sales were down dramatically in the second quarter and remained suppressed through the balance of the year, finishing down $540 million, or 8%, in 2020. These trends did improve sequentially. In 2021, we expect to face lapping headwinds as pandemic sales continue to moderate from the spikes we saw last year. That being said, I think it's important to remember that more than 70% of our sales comes from non-pandemic products, and as the economy recovers and these sales rebound, it should more than offset the lapping headwinds from pandemic-related products. This will also help to normalize our product mix back towards pre-COVID levels. Accordingly, we would expect to see year-over-year growth in 2021, but the magnitude will be determined by the pace of the economic recovery. Related to gross profit margin, as product mix trends towards pre-pandemic levels, we would expect to see improved GP rates throughout the year. This includes sequential improvement from Q4 2020, beginning in Q1 2021. We expect to exit the year with U.S. GP rates as high or higher than Q1 2020 levels. I want to reiterate, while this commentary relates to the U.S. business, we showcased it because it represents more than 70% of the total company results and was the most heavily impacted by the pandemic. With that, I will turn it back over to DG. Thank you, Dee. Turning to slide 17, I am excited to announce changes to our GAAP reporting structure, which will better align our financial disclosure to the way we manage the company, while also providing increased transparency for the investment community. Beginning in 2021, we will shift our segments to High-Touch Solutions N.A. and Endless Assortment. Thinking about these businesses under two new segments is consistent with our strategic priorities for each segment and how our teams are organized internally. Our new High-Touch Solutions N.A. segment is comprised of our Grainger branded businesses in the U.S., Canada, Mexico, and Puerto Rico. This further solidifies the work we have done over the last couple of years to create a consistent go-to-market approach across the region, while also merging the commercial functions of these businesses into a single organization. It also reflects the fact that we run the supply chain as one entity across the region. We feel confident that these businesses are well-situated to support our customers with quicker, more coordinated decisions to drive profitable share gain and exceptional customer solutions across North America. Given the growing size and importance of our Endless Assortment model, the timing is right to begin providing standalone disclosures for this important business. Our Endless Assortment segment will consist of our MonotaRO and Zoro businesses, which operate primarily in Japan, Korea, the U.S., and the U.K. We continue to more closely align the operations of these businesses, taking the lead from the success we've had at MonotaRO. Alongside these changes, we will also take the opportunity to simplify our corporate cost allocation and intercompany sales methodologies to better align with industry best practices. Given the amount of change, we wanted to preview the resegmentation this morning in preparation of shifting to the new structure, starting with our first quarter 2021 results. Between now and our Q1 earnings call, the team will be working to file our 2020 10-K in normal course under our historical presentation. Shortly thereafter, we expect to file an 8-K with three-year recast and summary financials reflecting the new segmentation, including quarterly information for the 2020 period. On March 9th, we plan to host a modeling call to help you fully understand the change and to answer any additional questions that you may have. This should position us well for our Q1 call on April 30th, which I would point out is a week later or so than normal. Going forward, giving our new Endless Assortment reportable segment, we will be pushing back our earnings call calendar to align with MonotaRO's schedule. Shifting gears, we continue to execute against our business priorities. In our High-Touch Solutions N.A. model, we remain focused on remerchandising our product line to ensure customers and team members can find the right solutions quickly. We know that remerchandised categories see increased sell-through rates while also significantly improving the user experience, so this work is an important pillar in our share gain efforts. We expect to remerchandise an additional $1.5 billion of product in 2021. This process has become embedded in the way we work and will be a constant moving forward. We will continue to invest in and improve our marketing efforts, which supports all customers and has delivered proven share gain over the past few years. Lastly, we will continue to improve the path that we are on with our Canada operations as part of the North America Grainger business unit. Our improved cost position, exceptional service, and early success in expanding into new customer segments gives us confidence that we are on the right path in Canada. We will update you on Canada's performance as part of the High-Touch Solutions N.A. segment. In our Endless Assortment model, we expect to add over 2 million items to Zoro in the U.S. in 2021, pushing us to over 8 million SKUs on the site. We will work to continue improving profitability through enhanced marketing efforts. We will further leverage analytics to refine our customer acquisition funnel and to improve customer repeat rates at Zoro. MonotaRO reflects its resilience in 2020 and will look to continue momentum in 2021. The business expects to launch new product and order management systems in the first half of the year to further improve internal processing and shorten lead times. Additionally, work continues on two new fulfillment centers, with the Ibaraki facility expected to be completed in mid-2021. There's a lot of great work being done across the organization, and I am excited about the opportunities in front of us in 2021 and beyond. On slide 19, I just wanted to reiterate our earnings growth algorithm. As we have shed non-core businesses over the last few years and moved forward with more streamlined reportable segments, the path to long-term growth comes into clearer focus. On the operational side, we feel we are well situated to gain share profitably in our North America High-Touch business. This includes 300-400 basis points of sustainable annual outgrowth in the U.S., improving top-line performance in Canada, and operating margin expansion as GP rates recover and we continue to gain SG&A leverage. In the Endless Assortment, we expect to continue to produce 20% annual top-line growth while also ramping margins at Zoro U.S. into the high single digits over the next three to five years. These strong growth drivers, alongside a business that generates consistent free cash flow and has significant capital allocation flexibility, gives us confidence in our ability to deliver strong returns for our shareholders. I'm proud of our results for the quarter and the full year and want to thank our team members for their commitment to safety and customer service. I also want to thank our customers and suppliers who have been great partners throughout this challenging time. We have needed to work together more than ever over the past year, and those relationships have been crucial. We have gained share, improved our merchandising and marketing capabilities, deepened our customer relationships, and expanded our assortment while improving margins at Zoro. We are in a strong financial position to grow the business profitably moving forward. We remain committed to fulfilling our purpose of keeping the world working throughout this pandemic, as well as continuing to execute our strategy so we can achieve this purpose for years to come. With that, we will open the line up for questions. Thank you. Ladies and gentlemen, at this time, we will conduct our 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. Please limit yourself to one question and one follow-up question per queue. If you would like to remove yourself from the queue, you can press star two on your telephone keypad. Once again, to ask a question, press star one on your telephone keypad. Our first question comes from Ryan Merkel with William Blair. Please state your question. Hey, good morning, all. Morning. Morning. First off, can you explain slide 14 in the deck a little bit more? How much are you assuming pandemic sales to be down in 2021? I guess I'm just trying to get a sense of what the safety surge headwind could be for 2021. Yeah, sure. The headwind will largely depend on how long the pandemic goes. If you think about over 10 months of pandemic sales, we sold about $100 million in incremental pandemic product. We know that the pandemic sales are very strong right now and will continue to be so. In the year, we would expect several hundred million, something like that, to be a headwind. We also expect to more than recover that in non-pandemic. Ryan, I would also comment that given the relationships we have with government and healthcare customers and the way pandemic sales were throughout the year, our incremental margins on pandemic sales were a lot lower than what we lost on the smaller loss of revenue for non-pandemic. We do expect profitability improve, and we expect to have growth as non-pandemic recovers. Okay. That's helpful. The next slide, the gross margin framework, is really helpful. Thanks for that. I guess my question is on the 250 basis points of ramp from 4Q 2020, do you expect it to be gradual like you're showing? I would think in 2Q, you could see a bigger jump just based on the comps. As part of the answer, can you just tell us how to think about freight and inventory adjustments? I would think those impacts would be falling off. We expect the freight impacts to fall off in the first quarter in some way and certainly the second quarter as well, although the freight environment remains tight. The reality is that more people are shipping product to their homes than ever, as you probably are aware of, and that has driven a fairly tight freight market. We don't expect to be impacted all that much by that. In terms of inventory adjustments, just to be clear, in the second quarter of 2020, we took a number of actions to try to get product for our customers to protect service. Many of those worked out, some did not work out as we expected, and we received that product in mostly Q3, I'd say. Every week that goes by, we learn more. We expect it to match anything we take in inventory to the actual pandemic sales as we learn more. We would expect there still to be some of those inventory adjustments in the first half of the year, but just to slowly fall off after that, basically. Yeah, the ramp we show is more like what we'd expect to see, Ryan. Thank you. Our next question comes from David Manthey with Baird. Please state your question. Thank you. Good morning. In the fourth quarter, you reported 70 basis points of sequential degradation in gross margin. I think your outlook was more for a flat outcome. Can you quantify approximately the material factors that affected the fourth quarter gross margin working from the third quarter levels? Yeah, sure. I'll turn it over to Dee. Roughly, the surge in pandemic had a modest impact. The inventory adjustments had a bigger impact and was a large part of that. Dee, do you want to provide a little bit of comment? Yeah. Thanks, D.G. Yeah, I would say if you look at the U.S. segment, which I think if you're talking about slide 15, that over 90% of the sequential impact from Q3 to Q4 was all pandemic-related headwinds. D.G. talked about, and I spoke a little bit about our mark-to-market adjustments. I would say if you look at the full year, I know you asked a sequential question, but if you looked at the full year for the U.S., I would say about half of our full pandemic impact was related to our inventory adjustments. With a bigger portion in the fourth quarter. Correct. Okay. Second, as the fourth quarter gross margin didn't play out exactly as you expected relative to your outlook last quarter, when you look at the gross margin outlook here, what factors could prevent you from achieving the anticipated levels that you have outlined here for 2021? Well, I think that most of what we have is pretty well understood and known at this point. If we get to a point where the vaccinations work and the third quarter starts to look better economically and there's less pandemic product, that's generally the shape of how it'll play out. Obviously, if the pandemic doesn't get better and we're still in a really elevated pandemic state and pandemic is still a huge portion of our business, they would be somewhat less. Still improve over the year, they'd be somewhat less as we exit the year than is shown in that slide. Thank you. Our next question comes from Christopher Glynn with Oppenheimer. Please state your question. Thanks. Good morning and welcome, Dee. Congrats on the new role. Thank you. I was curious, D.G., you kind of left off with affirming the 3%-4% outgrowth as your long-term algorithm. For 2021, is it reasonable to net the kind of 2.5% of call out large pandemic orders against that as a thought as we kind of model out the year? Yeah, in the U.S., I think the way to think about it is we gained 800 basis points of share in 2020. 250 of that we think is non-repeating. You'd say 550 is what we think is real share gain. If we gained 400 basis points of real share gain ex those orders, you'd subtract 250 from that, and we'd be at 150 in the year. Across the two years, we'd be 950. I think the two-year story, I think the main point here is that, and I hear it from customers every time I talk to them, and I talk to customers every week at a minimum. We are viewed very favorably in terms of how we've handled this. Certainly we took extra risk with inventory, and it certainly had an impact on our GP. We are in a great position from a relationship perspective, and we will have a very strong two-year share gain period, and we will exit those two years with very strong economics. For us, that's really the main point and that's what we've always been trying to do. Yeah, you do have to subtract the $250. In any case, it's going to be a very strong share gain over those two years. Okay, that makes sense. Again, to kind of the affirming exit pitch there. The high single-digit margin at Zoro, if you said it, I missed it, but where was that in 2020, and directionally, does Zoro scale profitability a bit in 2021? We expect it to go. It was low single digits. We expect closer to mid-single digits in 2021 and high single digits in three to four years. Three to five years. That time range. Thank you. Our next question comes from Deane Dray with RBC Capital Markets. Please state your question. Thank you. Good morning, everyone. Add my congrats to Dee on a new role. Thank you. D.G., I don't mean to put you on the spot, but I'd be interested in hearing maybe just a description of the product category of what product purchase did not work out or categories did not work out. Those were just to replay. That was really a scary time. I know you were scrambling to get PPE, so I'm kind of anticipating that's gonna be an example, but just what didn't go right there, just from a history lesson. Yeah. A lot did go right. There are certain categories where supply-demand has changed dramatically since that point, when if you wanted to buy product for your customers, you had to buy in very large quantities at inflated cost. I would say there's a very narrow range of SKUs that fall into that category. They're all PPE, Deane. That fall into that category that have become the reason for the inventory restatement. It's not like it's hundreds of SKUs. It's a very narrow set of SKUs. If you ask me would I do it again, I'd say yes. I think it was the right decision. A lot of those products have sold to customers and kept them safe. Certainly, you're seeing the impact in terms of the inventory adjustments at this point. Good. I fully appreciate that. That was the answer I was expecting, that was PPE related. Second question is, maybe we're getting to a little better feel for post-pandemic, and how the sales will ramp back up. What I'm trying to do is get a sense of how will the recovery have a different look and feel versus previous recoveries from recessions, where you typically get this big restock phenomenon where customers had run down their own inventory, and now as they restart, there's a big burst of restocking that goes on. It just doesn't feel that's the way it is going to happen this time. Any color just to give us a sense of what you're expecting that ramp looks like? Yeah. I think it's not gonna happen that way primarily because it's not a broad-based sort of all segment impact. I think what you're gonna see is certain segments turn on. We've already seen manufacturing come back relatively strongly as the year progressed and into 2021. We've certainly seen some restock. We don't get a lot of restock given what we sell, but we certainly have seen volumes pick up with manufacturing. We still are in a very challenged state with hospitality, airlines, cruise lines, those types of things. I think what's gonna happen is certain segments seem to turn on as we recover here, and they don't all turn on at once. You probably don't see a huge sort of restock. You see more of a paced restock as we go. That would be my expectation. If you ask the next person, they may have a different answer. Thank you. Our next question comes from Chris Dankert with Longbow Research. Please state your question. Good morning, congratulations again, Dee. I guess, D.G. I know we've gone over this territory before, with the re-segmentation happening now, just again, can we come back to Canada? It's been about five years since it's really been a positive contributor here. What's the logic in keeping it around? What's the long-term prospect for getting this thing back to a real contributor to growth and profitability for Grainger here? I think it's a great question. First of all, let me be clear. We expect to provide as much transparency into Canada as we did before the re-segmentation. It's quite easy to provide you with the numbers you need to understand what's going on in Canada. Secondly, though, I would say the performance in Canada last year was pretty good. We've seen growth now in December, and January was good for Canada, which is the first time we've seen that in four or five years. We have very good customer feedback. When I talk to customers there, the feedback is very good. Our cost structure's in the right place. We have stabilization in gross profit, ex some of the inventory efficiency issues we talked about this quarter, which are not operational. We feel like, the business was roughly break even last year in the midst of a pandemic. We actually think it's on a very good path, and we think in the next several years it's going to be profitable, growing part of the portfolio. We've taken all the hard action now, and we are grinding out customers. We aren't losing contracts anymore. It just feels very different. I think we've also built some deep customer relationships through the pandemic. It's going to be a profitable part of the North America portfolio, albeit not as big as it once was, but it will start growing now is our expectation. Got it. Thanks for that. Again, just thinking about price mix in the U.S. specifically, pretty nice results in the fourth quarter. I know we're not guiding, just how do you think about pricing into the new year as we started to see a good number of vendors really come out with pretty significant increases? Just any commentary on the pricing environment as we move into 2021. Yeah. I think this is one where you really need to segment. There have been a few categories where supply demand has been impacted by the pandemic that have had very large cost increases, and everybody's taken price increases on those categories. We are no different. In general, inflation is still fairly modest, and we think that price cost mix will be neutral over time and maybe a little better given our starting position. We're seeing, in some categories, huge cost increases, and everybody's adjusting prices on those. Then for the rest, we're seeing modest price inflation, and we are seeing some early signs of a pretty decent price cost mix. Thank you. Our next question comes from Nigel Coe with Wolfe Research. Please state your question. Thanks. Good morning, everyone. We've been talking about the inventory mark to markets a fair bit. I'm just wondering if there's any way you could quantify in dollar terms how much inventory is still kind of being held there to try and help us think about the risk of it. I think my real question is more on the growth algorithm for non-pandemic sales in 2021, you obviously provided some detail on slides 14, 15. If we think about IT as a proxy for MRO, let's call it 4%-5% recovery in 2021. You expect to grow 300 basis points over that number. Is that the right framework? Yeah, that is generally the right framework. Again, we would year-over-year be hampered a little bit because of some of the outgrowth. We said 250 basis point outgrowth that was really one-time orders. Yeah, that's generally the long-term framework. Okay. Oh, and- And then I asked a question at the beginning there. The short answer is the curve that we showed, I think, on slide 15, takes into account sort of what we think the risks are with any inventory. That is already embedded in that curve. Okay. Just on Zoro's operating margin improvements and the remerchandising, just so I understand this kind of model, do you basically earn a commission on the remerchandising sales? Essentially the more volumes you remerchandising, the better your kind of fixed cost absorption, SG&A absorption, and that's what drives the margin expansion. Let me clarify a few things there, and I think I can answer the question in the process. When we've talked about remerchandising as a priority, that is mostly in the Grainger brand. That is mostly making sure that we have very highly curated product data, so it is easier for customers and team members to find product than anybody else on the roughly 2 million items we would have in the U.S. With Zoro, we are expanding the offer. You don't have as much curation with that model. You couldn't possibly, given the number of SKUs you have. What happens when you add SKUs is you get growth, and you get customer acquisition first, and then you're able to get repeat buy. That does not add much expense to the business. You do, as you grow, get fixed cost leverage with that investment in product SKUs. That isn't the full story. Part of the full story is we're also growing with existing customers and getting repeat buy, and that adds to some of the fixed cost leverage as well. Hopefully, that answers the question, Nigel. Thank you. Our next question comes from Adam Uhlman with Cleveland Research. Please state your question. Hey, guys. Good morning. Congrats, Dee. I wanted to start on SG&A expense. Thanks for providing all the detail on the first quarter. That's very helpful. I guess, you're expecting to be down meaningfully in the first quarter. We start to cycle some pretty easy comps from the temporary savings. I guess, could you help us dimension how we should be thinking about the rest of the year? How big is the reset of incentive comp? Presumably we'll be traveling at some point in the second half of the year. Should we expect a big step up in Grainger's expenses related to that? Maybe just flush out the SG&A outlook. Yeah. I'll turn it over to Dee in a minute. I think, in general, we don't expect to have sort of a big step up through the year. The comps may look unfavorable. As a reminder, we went into this with the opinion that the virus was going to be a little longer lived than we wanted, for sure, but that we would come out of it and need to operate. We did not take a whole bunch of draconian actions. We prioritized what we did. I think we will continue to prioritize more tightly what we're working on, which is taking some cost out. Obviously, some of the travel budget will come back maybe the second half, maybe not. Hard to really tell given where we're at right now. Not all of it. We feel like we're still going to have very tight cost control, and be able to achieve leverage. Dee, do you want to provide any color on that? Yeah, I think you said most of it there, but I would just say generally, I think our long-term view to have SG&A be at half the rate of sales will be the continued focus. This year is going to be kind of wait and see. As D.G. noted, we're very focused on being very prudent with our costs, and I think it's all going to really depend upon how this pandemic progresses. I think we would slowly start to see expenses tick up as we get closer to normal levels of activity in the overall market with our customers. If we don't see us getting back to normal, we will still be very prudent with our expenses. Okay. Got you. Thanks. I guess, D.G., you were mentioning the kind of new customer wins. Sounds like a lot of more sticky relationships. Is there any way that you can dimension retention of new customers that you've got, like repeat buyers, folks you hadn't done business with, or any data you could share on active account growth that could help us better understand the market outgrowth that you delivered this past year? Yeah. In terms of contribution to revenue, I would say new customers' repeat rates were good. They're still a fairly small portion of the outgrowth, but we think it gives us a chance to. We certainly grew the customer file. We typically provide that information with Zoro. With Grainger, we don't often provide too many details on that. I will say the customer file is bigger, and we have more repeat by customers that were new in 2020 than we've had in years. I'd also say, to be honest, we're getting a handle on what that means and how to convert them to be consistently buying customers. It's a little early to understand sort of the long-term impacts of that. Thank you. Our next question comes from Chris Snyder with UBS. Please state your question. Thank you. Just following up on safety or pandemic, this was a very sizable, like $1.6 billion business prior to the pandemic. I guess my question is, how did this legacy business trend in 2020? Just so we can try to separate out the underlying business from the surge or new business that came online over the last year, just to help model out the trajectory, because I would assume that the underlying business carries more leverage to the industrial economy than the surge business that came on. That's a great question, and mostly unanswerable, I would say. Let me give you some customer examples to give you a sense. When the pandemic hit in Q2 of 2020, we are the largest industrial safety supplier. We are used to selling things like N95s. We are not used to selling N95s to hospitals, just to be clear. Hospitals haven't historically been big users of N95s. N95s typically go into places like grain elevators and dirty manufacturing processes. All of a sudden, all of our product was being shifted to hospitals and governments. We have gotten back to a more normal mix across what we call pandemic product than we did before. I think there's still a lot of messiness. There's still a lot of customers in the industrial economy that haven't come back and aren't using safety products maybe like they did before if they don't have the activity. I think it's a really interesting question, and one that is super hard to get at. Look, I would also point out that there's a lot of safety products, even in hospital systems. Hospital systems this year have done incredible things to protect people, to save people. They have been unable to do a lot of the historical safety maintenance things that they might have done. They just have been full out. Many of them have been full out on COVID, and there's a backlog of things that they will need to do, funding's available, that they just haven't done. I think it's a really interesting question and one that is really hard, and I'm sorry to give you some anecdotes, but certainly, I have a lot of them, where I think there is some pent-up demand for normal pandemic product. No, I appreciate all of that. Then just kind of following up, could you provide some color or numbers around the margin difference between pandemic and non-pandemic revenues, just as we try to model out this margin trajectory into 2021 as that shift normalizes? Yeah. We haven't provided that. I will say that the half a billion in non-pandemic that we were short in 2020, that probably has normal increment decrement numbers that you've seen from us. The $800 million in pandemic that we sold above normal would have a lot lower incremental margins, quite a bit lower, maybe less than half, as you think about it, which sort of gets you to what happened to our overall slight decline in operating earnings for the full year. That may be a way just sort of to allow you to sort of hunt and think about it. Thank you. Our next question comes from Patrick Baumann with JP Morgan. Please state your question. Oh, hi. Good morning. Thanks for taking my question. You covered a lot of ground on the short term. I just wanted to move on to the long-term growth algorithm for a second, where you're targeting, I think, low double-digit earnings growth on high single-digit revenue growth. Can you give us a high-level view on the moving parts on margins within this, particularly how we should think about gross margins over the medium term once this mix dynamic from pandemic normalizes, and then just kind of the puts and takes within that? For the company, and Dee, you can keep me honest if I say anything that doesn't make any sense. For the company, we expect the U.S. business, the high-touch model, to have fairly consistent, if not consistent margins, gross margins over time. We expect to have SG&A growing at half the rate of growth, and that's kind of the earnings algorithm for that model. We expect the [Amazon model to continue to grow much faster than the rest at something like 20%. If you just include the fact that those gross profits are lower than the average, that has a roughly 20 basis points impact on the overall. You might see a slight decline in overall GP, and a slight decline in overall SG&A, given that that business also has lower SG&A, but it should be fairly stable once we get through this. As a follow-up to that. Oh, go ahead, Dee. I'm sorry. Again, I was just gonna add to D.G. that I would agree with that. Coming out of the pandemic, I think we would look for a much more stable and potentially more accretive margins on the High-Touch than what we've seen over the pandemic. Just as a follow-up to that, I guess I'm a little surprised that you would expect the High-Touch to have, just given some of the growth initiatives relative to maybe KeepStock and onsite and stuff like that, where margins tend to be lower. Maybe just talk about how you're positioning competitively to expand those parts of the business and kind of hold your margins going forward. Yeah. I would point out that we continue to see, and even the last quarter, we continue to see very strong results from our mid-size customers. Even if there's some pressure with large customers, we expect growth with mid-size customers to continue to do that. That should help us there too. They use less services. Yes like KeepStock. They're higher. They use both types of services. Higher GP, less services, and so higher margins. Thank you. Our next question comes from Hamzah Mazari with Jefferies. Please state your question. Thank you. Good morning. Just sticking with the medium customer initiative, DG, maybe you could talk about sort of what kind of growth to expect in 2021. I know, I guess it was 6% in Q4, and whether that's sort of baked into your gross margin assumption of exiting sort of at pre-pandemic levels in Q4 2021. I guess, just what's baked into your assumption on medium customer growth within that gross margin sort of trajectory? Yeah. I think there's a few dynamics. One is that in 2020, I think it's important to recognize that, particularly in the second quarter, because of how we prioritized supporting healthcare systems and governments, we had less product for a while there with mid-size customers. Our mid-size customer business took a bit of a dip. There were also more closed mid-size businesses during that period. We've seen that slowly come back, not fully back yet, but we do expect normalcy with mid-size customers, and we have baked in significant share gain with that group. We don't have huge outgrowth in 2021. The pandemic, we think, is gonna be a factor in the first half of the year, but we think we will exit the year with the mid-size customers growing faster than large, which is baked into our gross profit assumption. Got it. Just my follow-up question, and congrats, Dee, again, on the new role. Just on Zoro UK, is that a business that can scale up? I know we talk a lot about Zoro US, but just any thoughts there. Thank you. Yeah. I'd say yes is the answer. The business has done well in terms of customer acquisition, revenue path. It's got a healthy gross profit for a business that's relatively new. Masaya and the team are working hard to make that a scalable business, and we still have some positive expectation there that that is going to be a success story. You know, the U.K. market was probably more impacted this year than some others. Certainly, we've seen continued growth through this cycle with the Zoro UK business and a lot of good signs. Good. Well, thanks. I really appreciate everybody's questions. I'll just close by reiterating, we're viewing the pandemic as a likely two-year event, and we expect to gain a lot of share during those two years, and we expect to have very strong economics exiting out of that. I want to thank our team members and our customers for all we've worked together on to really put ourselves in a good position to have great relationships moving forward. It's been an all-hands-on-deck effort. Thanks to everybody, and I hope you stay safe, and I hope to see you at some point in person. Thanks. Thank you. This concludes today's conference. All parties may disconnect. Have a good day.