Q3 2021 W W Grainger Inc Earnings Call
Greetings and welcome to the W. W. Grainger third 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.
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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.
Thank you you may begin.
Morning welcomed grangers third quarter 2021 earnings call with me are D. G Macpherson, Chairman and CEO, Andy Meriwether Senior Vice President and CFO.
As a reminder, some of our comments today may include forward looking statements actual results may differ materially due to various risks uncertainties, including those detailed in our 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 Q3 earnings release, both of which are available on our IR website. This morning's call will focus on adjusted results, which exclude restructuring and other items that are.
Find in our earnings release, we will also share results related to monitor all please remember that monitor arrow as a public company and powers Japanese GAAP, which Jeff differs from U S GAAP and as reported in our result, one month in arrears as a result, the numbers disclosed today will differ somewhat.
Brian monitor with public statements with that I'll turn it over to D. G.
Thanks, Irene good morning, and thank you for joining us the.
The Grainger edge is our framework that defines who we are why we exist and where we're going while establishing a set of operating principles.
I'm proud of the ways that we use the principles to guide decisions and deliver results.
I wanted to start this quarter with a big Thank you things are very challenging on many fronts, given the ongoing pandemic and labor and material shortages nothing in the world seems to be working exactly the way it should.
Our manufacturing partners Transportation partners Grainger team members and certainly our customers are all finding harder than ever to keep the world working I want to thank all of them for their tremendous efforts.
I want to offer particular, thank you the frontline workers, who continue to go above and beyond Grainger is proud to support the hospital staff government agencies teachers, and many others, who continue to do great work in a very challenging environment.
I might say that in spite of these challenges we performed very well, but in reality, it's partly because of how we're wired. The grainger is doing so well we have seen strong demand this quarter, especially in the U S. We have product available in our network and have been able to ship it to customers quickly.
Our service to customers has been exceptional given the circumstances, we are leveraging our scale, demonstrating our agility and gaining share.
Our goal is to always be in an advantaged position to help our customers solve their problems as I've been out with customers. This past quarter time, and again I hear the Grainger is executing well.
Customers tell me that they are pleased with our performance and you can see this in our revenue growth.
While the current supply chain environment is volatile and uncertain. We are confident in our current plans and our readiness to respond to any evolving dynamics in the face of labor and material shortages throughout the supply chain, we are providing strong relative service and helping our customers avoid disruptions. We continue to actively leverage our network, even if sometimes we get the orders from west.
The optimal locations at a higher cost.
We are investing in inventory, while actively monitoring the freight market and the west coast ports.
And as it relates to labor, we have made great progress in closing staffing gaps and training team members, which has resulted improvements and improvements, especially in our DC operations or.
Our customer research shows that this is driving customer satisfaction.
Turning to our financial highlights demand in the quarter was robust, resulting in strong revenue and gross margin performance and well managed SG&A.
We achieved organic daily sales growth of 11, 9% for the total company on a constant currency basis.
When compared to Q3 2019, the quarter was up 17, 3% on a daily organic basis, driven primarily by core non pandemic product sales, which is a positive indicator of our underlying run rate performance.
Hi, Touch solutions North America segment grew 11, 6% on a daily constant currency basis in the U S. We drove approximately 100 basis points of share outgrowth versus the prior year and 475 basis points on a two year average.
We remain confident in our ability to grow 300 to 400 basis points faster than the market on an ongoing basis, our service to customers, especially the last two years has contributed to meaningful share gains.
Our endless assortment segment finished the quarter with 14, 9% daily sales growth on a constant currency basis I'd like to note two things that temporarily temporarily moderated growth in this segment first zoro lapped a very strong third quarter in 2020 for context, we opened up pandemic product supply to zero customers in Q3 2020 that was previous.
Some users mostly for government and health care customers in the third quarter 2021 zero managed to drive 11, 9% revenue growth and we would compare that to Q3 2019 were up 36%, which is really strong.
Also I'm not sure it was impacted by several external factors, including a slow start to vaccinations and a generally slower Japanese economy.
In local days in local currency sales were up about 17, 5% compared to Q3 2020, and mono drove continues to take share, especially as COVID-19 restrictions lift and we grow with our targeted enterprise customers and as we look at results versus Q3, 2019, <unk> sales are up over 37%, we feel that the compare.
Chris into 2019 for both businesses is more indicative of our underlying business strength, we still expect the segment to close the year with growth at about 20% above prior year.
We saw strong gross margin expansion across all segments, even above our expectations that we discussed last quarter.
Solutions North America was up 140 basis points over Q3 of the prior year and endless assortment was up 115 basis points.
We'll cover the drivers for both segments.
Lastly, we returned 327 million to shareholders through dividends and share repurchases in the third quarter and we maintained strong return on invested capital of 31, 4%.
Turning to our quarterly quarterly results for the company I discussed most of what's on this slide but wanted to point out a few additional items first our SG&A was $812 million right, where we thought it would be we continue to invest in marketing and labor primarily through increased variable compensation and wage rates in the Dcs and like many companies. We're also starting to see increased.
Health care costs as team members returned to routine medical visits and undergo deferred elective procedures and while overall spending is up versus the prior year, we were still gaining significant leverage when compared to 2019.
Our operating earnings were $438 million up 17, 4% and a resulting EPS is $5 65 for the quarter grew up which is growth of 25% overall it was a really strong quarter with that I'll turn it over to dean to take us through more detail.
Thanks D G.
Turning to our high Tech solutions segment, we continued to see a robust recovery with daily sales up 12% compared to the third quarter of 2020.
At 14, 5% compared to the third quarter of 2019.
In the U S. We saw strong growth, especially in our core non pandemic product categories.
Both large and mid sized customers saw significant growth at 10% and 19% respectively.
Canada continues to be slow as recurring shutdowns in many of the larger provinces.
This is closed or operating at minimal capacity.
As vaccination rates improve and businesses reopen we expect more typical purchasing behavior to resume and sales to follow.
Canadian Daily sales were up 11, 7% or five 7% in local days in local currency compared to the third quarter of 2020.
For the high Tech solutions segment.
GP margin finished the quarter at 39, 4%.
Good and 40 basis points versus the prior year third quarter.
Our focus and diligence on managing price cost spread contributed to our GP improvement.
In the quarter, we saw strong price realization to customers both on contract and web pricing.
Our realization was better than anticipated and as a result price cost spread was above neutral.
In addition, consistent with the second quarter, our U S pandemic product mix it was about 22%.
An improvement versus 28% in the third quarter of 2020.
We are confident that our run rate <unk> remains strong and we will finish in line with the expectations, we set forth for the fourth quarter.
On Slide 20, you will find a chart with details on the U S and Canadian businesses.
This information has been.
Been provided to help bridge, our prior reportable segments to our new high Tech solutions North American segment.
I like to give you some advance notice that we will continue to show daily sales and gross margin by business.
However, as our operating expenses across the segment have become more intertwined our operating margin by geography will no longer be provided in our 2022 reporting.
On slide nine.
Taking a deeper dive into high Tech solutions for the U S.
The delta bearing in the renewed bass mandates in July reversed the declining trend we were seeing in the second quarter for pandemic products.
As the virus surge, we saw pandemic product demand pick back up especially for math.
However of particular note our core non pandemic sales growth was at or above 20% every month in the third quarter.
We are encouraged to see this growth as a sign of more regular business and economic activity.
When comparing core non pandemic sales to Q3 2019 sales were up 12%, which is quite strong.
In total our U S High Tech solutions business is that 12% for the third quarter 2021, and up 16% as compared to 2019.
Looking at market outgrowth on slide 10 in the third quarter as expected we saw our share gain grow as we lap more reasonable yet still inflated Q3 2020 comparisons.
In the quarter, we estimate that the U S market grew between 10, and a half and 11, 5%, resulting in our estimated outgrowth of approximately 100 basis points versus Q3 2020.
So normalized for volatility we are continuing to show the two year average share gain which was about 475 basis points over the market for the third quarter of 2021.
A really exceptional result.
Given the noise and fluctuations in the market number across industrials. The two year average is a better estimate of our true market outgrowth.
We remain focused on our key initiatives, which give us confidence in our ability to achieve our U S share gain goal of growing 300 to 400 basis points faster than the market.
Now, let's cover our U S GP rate.
We saw a significant lift in the high touch U S GP performance in the quarter sequentially.
Sequentially, we wanted to comment on.
On two of the biggest factors that make up the difference between the second quarter and the third quarter first the biggest contributor the inventory adjustments are behind us as anticipated.
In addition, we are seeing greater price realization than expected.
Note that while we sold some of the pandemic inventory that was previously written down the impact of GP was immaterial.
We're encouraged by these results and are confident in our ability to achieve our expected 41% GP rate in Q4 based on continued pandemic mix improvements.
Price realization in the fourth quarter, and our ability to navigate supply chain challenges.
Moving to our endless assortment segment.
Daily sales increased 12, 7% or 14, 9% on a constant currency basis.
And by continued strength in our new customer acquisition at both Zoro and monitor all as well as growth of larger enterprise customers that amount of taro.
G P expanded 115 basis points year over year, driven primarily by Europe U S.
We took a number of pricing actions based on evolving market conditions, and we deemphasize lower margin channels.
In addition, we experienced improved rate efficiencies as Earl primarily as a result of fewer b to C customers, who typically placed smaller orders that are more expensive to ship.
Operating margin for the segment finished up 80 basis points over the prior year third quarter due primarily to improved gross profit margin.
I'll go into more detail on the next slide as we provide further transparency on the results for both businesses.
Moving to slide 13, and local currency in using Japan, local selling days, which occasionally differ from U S. Selling days monitoring daily sales grew 17, 5% compared to the third quarter of 2020.
GP margin finished the quarter at 25, 8% 30 basis points below the prior year third quarter as we continued to grow with enterprise customers.
As a result operating margin decreased 65 basis points to 12%.
Switching to Zoro U S daily sales grew 11, 9% as compared to the strongest sales quarter of 2020.
Zero G. P grew 375 basis points to 33, 9% and achieved 325 basis points of operating margin expansion.
Yeah.
In addition to the strong financial performance in this segment. We also continued to execute well on our key initiatives.
First when it comes to our registered users. We saw continued growth across both businesses, which is an important driver of top line performance.
And on the right Europe continues to actively add skus to the portfolio at.
At the end of the third quarter of 2021, we had a total of 8 million skus available online achieving our goal for the year a quarter early adding nearly 2 million skus in the last nine months.
We remain encouraged by our progress with SKU additions.
Once again I would like to provide some color commentary as it relates to the fourth quarter and the full year.
For the fourth quarter for revenue, we expect total company daily sales to be between 11, and a half and 12, 5%.
We anticipate company gross margin will fall between $37, two and 37, 4%.
As discussed before we expect the U S. G P rate to exit the year at or above pre pandemic levels.
And for SG&A, we expect a similar level of spending in the fourth quarter as we saw in the third quarter between 810, and 815 million with increased variable compensation wages and health care expenses.
And while it's unclear at this point, we may have some additional risk as it relates to vaccine D&A costs.
Given the strong performance in the quarter, we remain confident in our guidance range.
For the full year, we expect revenue to be at or above the midpoint and all other metrics to be stronger than the low end of the range. We discussed at the end of the second quarter.
But likely still below the mid point, given the pandemic inventory adjustments taken in the first half.
With that I would like to turn it back to D. G for some closing remarks.
Okay.
Thank you D before I open it up for questions I have just a few points.
First I'm immensely proud of the Grainger team and their commitment it's been very challenging, but we continue to demonstrate the strength and resilience of our team and our supply chain.
Second it was a very good quarter across the board results were above our expectations and finally, despite the current market and supply chain uncertainties. We are confident in our ability to deliver solid performance in the fourth quarter and into 2022.
And with that we'll open it up for questions.
Thank you.
And at this time, we'll be conducting our question and answer session.
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One moment, please while we poll for questions.
Our first question comes from Chris Snyder with UBS. Please state your question.
Thank you. So my first question is on North America high touch growth relative to Tesoro.
Is it fair to assume that the company prioritizes high touch volumes over endless assortment during periods of tight supply just given the better margin and more important customers early stickier customers on the high margin side.
Yeah. Thanks. Thanks for the question the answer to that question is no.
In terms of our inventory position, we've been able to serve both the high touch model and zoro for a while.
Well throughout this period.
What I would say is that if you're thinking about <unk> growth. There's a couple of things that are impacting those growth rate in the quarter and and they will get better as we move forward. One was last year, we opened up in the third quarter, the safety products to zoro and as a result customer acquisitions and revenue were extremely high in a lot.
The customer acquisitions, where consumers as well.
As people are just looking and scrambling to find product. The other thing is we've been very clear and focused on attractive business acquisitions and as a result, we have shut off some channels for acquisition that weren't as profitable long term and so that's that's going away moving forward as well and so that's been a bit of a drag.
Saar, but it hasnt been because we haven't been shipping product.
Where are we have been serving customers well across both both models.
I appreciate that.
And then a second question just wanted to talk about the midsize opportunity prior to the 2017 price reset you know if I remember correctly. The company had lost a lot of that mid sized business.
Prior to the reset, but it's coming back really strong up almost 20% in Q3 can you just help us frame. This opportunity going forward is there any risk around zoro cannibalization and then what kind of gross margin tailwind could this spring to the company.
Sure. So yeah that was a big part of the reason for resetting prices was we had gone through a long period of decline with with midsize customers and here, we're really talking about midsized customers that have some sort of mechanical complexity, so think about midsize manufacturers or or or companies that really value some of the technical product support.
Search capabilities of the Grainger model, obviously since the price reset we've captured a lot of that back we're still fairly significantly below our high point with with midsize customers. We feel like we've got a long runway ahead of US we are getting smarter. All the time, we are not seeing much cannibalization with Zara Zara tends to focus on smaller businesses and.
Businesses that are or maybe a little more narrow in and what their needs are and so they tend to segment to different types of customers more.
The greater mid sized customer typically has a fairly fairly high mechanical complexity or complexity of some type and so we are really pleased with what we're seeing I would say I think we went from about $2 billion to less than $1 billion in that space over a 10 year period and now we've recovered some of that we recovered all of that we think we can get back above 2 billion. So we think we've got.
Long run plant.
And D geologists add as it relates to.
Contribution to gross gross margin and.
In the quarter and helped us about 10 basis points and you know based upon the different than.
The large growth rate versus the medium growth rate, if it's around that amount you know, 10% versus 19% 10% of our gross margin.
Basis points improvement it is reasonable.
Thank you.
Our next question comes from Christopher Glynn with Oppenheimer. Please go ahead with your questions.
Yeah. Thanks.
Congratulations on a good quarter.
So you kind of affirm the approximately 20% outlook for endless assortment for the year It does imply.
Pretty decent sequential ramp into the fourth quarter.
I'm just curious you know you mentioned the Japanese economy, and I don't know if you're seeing a pivot there right now and that you also mentioned the.
Channel emphasis shifts at zoro does that imply they've kind of there.
That they're laughing or something.
Yeah, Yeah. It both of those things are are correct. So in Japan.
They've got a really slow start to the vaccination and had fairly hard shutdowns over the summer and that.
That has rectified that problem that I have pretty high vaccination rates and we're starting to see more activity with with larger manufacturing customers in particular.
Japan, So we are seeing some improvement there.
Expect to see that continue with zoro, yes, we have effectively lapped some of the actions we took to focus more on nonprofit customer acquisitions of both of those things should help us moving into the fourth quarter.
Yeah.
Great and then.
The price realization, obviously came in better than you expected as you said.
You have a lot of freight contracts that have been good.
At some point those come up and.
You also at times in the past they've had ability to kind of defer cost increases from suppliers.
At times, so I'm wondering how the those figure in given that you've been really locked down really tightly on on the gross margin view here and how it transpired.
And kind of a sweet spot there as you pivot into 'twenty two with some of those things I mentioned come into play.
So let me let me try to answer you answered. The question. So you know we.
We generally try to think about.
Managing cost as well as we possibly can.
We are obviously working with our suppliers on a constant basis in this environment to make sure that we are taking cost increases that makes sense in pushing back things if they don't make sense.
Our suppliers have been great about working with us to find the right path for cost increases.
And then on transportation.
Sort of the same thing we really are focused on understanding.
What cost increases are reasonable and working with our suppliers and our partners to get the right rate outcome, we price to market.
In general when you have inflationary periods.
Not this type of inflationary for you, but normal inflationary periods, we've historically probably been able to.
Take market price increases and not have as much cost increase or.
Have a delayed and so we will sometimes haven't have a period of advantage I think right now.
Given the pace of cost increases I think were pretty well matched and will continue to be pretty well matched and that's that's that's our expectation.
Even given there's been a lot of off cycle cost increases in and we've been able to price those through as we go. So I would say I don't think there's a big gap right now are a big benefit right now it's just it's a it's a fairly wild time, obviously in the supply chain I think we're navigating through.
Our next question comes from Ryan Merkel with William Blair. Please go ahead with your questions.
Thanks, Good morning D. G. You mentioned that you're navigating supply chain costs will create challenge as well can you talk about some of the actions that you took.
Well.
Yes.
Probably can't talk about all the details but.
There's there's challenges at every stage of the supply chain at this point.
And so I think the amount of work that's required to navigate here is much more than you would you would find in a typical setting.
One of the things we did do is we saw some challenges coming on the horizon, we actually already preordered a bunch of product early in the year to try to get inventory out and we have been able to build some inventory throughout.
Throughout the year maybe.
Maybe not as much as we'd like but we have been able to build some inventory that's helped us.
Our supplier management team and product teams are working very close together to find make sure. We've got the right substitute products. So we can serve customers. If there is a gap.
In a in a particular supplier that can provide us product.
We are actively prioritizing product coming off of Asia, we have.
[noise] up wages and distribution centers and gotten staffing right. So we are basically clean consistently now which is good I was a little bit of a bit of a challenge back in may.
So basically if you follow the supply chain view at every single step. We are working we are working on it every single step of the way and there is really no. Other path right now Theyre just to make sure we are executing as well as possible at using our agility and our scale to try to make sure. We can service our customers and we've done that we've done that way.
Got it makes sense, Okay and my follow up is on SG&A leverage I know in 'twenty. One you had costs returning and then of course higher costs from an ERP supply chain issues. My question is how should we think about SG&A SG&A leverage and 22.
Are you able to have productivity offset higher costs or do you expect cost to ramp further off of the <unk> baseline.
Well I can take that D G.
You know are our focus right now is making sure that we can continue to serve customers serve customers well and some of the ramp as you've noted is due to you know.
Some of the the actions we took last year to really.
Tight cost controls around that time period, and so you know when I think a good measure is probably to look at our 2019 call.
And look at some of the SG&A leverage we haven't been able to gain over that time period. Since we haven't provided maybe real guidance related to 2022, yet, but that's how we're focusing on it and we are still looking to continue to gain leverage.
As we head into 2022.
Very similar to what we were doing around 2019 timeframe is the best I'd be able to tell.
Yes at this point in time, but we are not getting off the fact that where we are focused on continuing to gain SG&A leverage over the longer term.
Yeah.
Thanks. Our next question comes from Deane Dray with RBC capital markets. Please state your question.
Thank you and good morning, everyone.
Good morning.
Hey.
Hey, Good morning, I. Appreciate you gave price cost for the U S High touch business what was price cost.
For the total company if he could be specific or Directionally and then do you have a target for 2021 just given the circumstances.
In terms of supply chain pressures inflation et cetera.
Oh, Hey, I have to start.
Yeah, Yeah, we don't measure E on a price cost basis. So that's why you don't hear us talk about total company.
<unk> cost, but the thing I will say is all of the segments and all of the businesses are very focused on one maintaining price competitiveness and to you know in this inflationary period being able to pass on cost to customers. So that is a consistent tenant tenant for us.
So that is what I can say.
The other thing I would say Scott the answer your question I mean, clearly zoro had very high price cost leverage given that the GP improvement.
We said some of that's just.
Segment specific which customers are acquiring and how they're thinking about acquiring it but we do expect.
The endless assortment to continue to have strong profitability and profitably improvement at zoro.
I appreciate that and then as a follow up just related to price the three percentage points in price and high touch this quarter just what's the expectation for for Q does that carry are there other price actions that you've taken and do you.
Well that all carry into 2022 is there any sense so be some pushback receptivity issues in terms of pricing do we carry that into 2022 or not.
So.
We did take some pricing actions.
In September and.
We saw some good results there and also through the month of October thus far so we expect.
That momentum to carry us through to Q4.
And you know like always D. G mentioned, our supply management team is continuing to work with our supply base on what increases look like for 2022, and we expect to continue.
We do get more costs.
Pass that through early in Q1.
Yeah.
Thank you.
Our next question comes from David Manthey with Baird. Please state your question.
Thank you good morning.
As a percentage of sales.
Gross margin and Opex I think will be very different in 2022 versus what they were in 2019.
And the reason I mentioned that you made a comment about leverage in 2022 being similar to 2019 were you referring to contribution margins there or if you can just help clarify that statement.
Sure sure so.
He was trying to give some context since we are not talking about 2022 at this point just.
Just to help you understand that we're focused on gaining leverage and you know back in 2019, we we had set out a path to say that we were looking to continue to focus on.
Growing our expenses less than sales. So that's the tenants that are that I was trying to articulate since we are not giving guidance on 2022 at this point.
Okay understood.
And then as it relates to Europe pricing mechanisms I think you've talked before about the the open pricing on the website. So you can just sort of adjust immediately.
But.
Could you talk about <unk>.
Contract pricing and what I'm wondering is where are you being most effective in recapturing inflation. These days is it just in those spot prices or is it surcharges or renegotiating contracts. How are you being so effective at this point.
Oh, yes, we.
We are capturing price inflation in all areas.
I would say with our customers that primarily by on web price and with contract customers. You know earlier in the year, we talked about the fact that it would be a little lumpy because of the timing as it relates to when we get pass on price with customers, but you know similar to some of the actions that DJ articulated.
That we are executing as it relates to supply chain you know that that also goes for the commercial teams and you know as they are working with customers to.
Past pass on price. So you know we're close to the end of the year now and a lot of those discussions that both our sales team and then online we've been able to you know past pass on these costs are pretty effectively.
So that and that applies to contract customers as well as web.
Web based customers.
Thank you.
Our next question comes from Adam Uhlman with Cleveland Research. Please state your question.
Hey, guys good morning.
I guess I was wondering if you could share with us what youre seeing with your keep stock business.
Hum sales, then unfolding there and it would seem like you should be having better access in it and the customer side I'm wondering if you could share any insights about.
New customer wins or any new initiatives recently or or maybe what you have planned for next year.
Sure. So we continue to keep stock is really a critical portion of our business.
It's been a portion of our business has been you know obviously busy throughout the pandemic, we've had access to all of our of our <unk>.
Customer inventory well not all but the vast majority of our customer inventory locations and have continued to serve customers well through keep stock.
We have put in a number of improvements.
To help us be more effective and planning customers inventory and fulfillment inventory to keep stock.
We continue to get significant growth out of keep stock.
Certainly as heavy manufacturing has come back to your this year. It's been it's been very very good for our keeps that business in that because that's a heavy heavy heavy keep stock area.
I won't talk too much about sort of.
What we're what we're investing in other than to say, we are investing significantly in it.
And through software capabilities to enable us to provide better service to customers and better analytical insights to customers and that's gonna be a continuous focus for us around the keeps Tucker.
Okay got it thanks that's helpful.
And then I think you had mentioned vaccine vaccine mandate cost and I believe that there is some element of.
With the GSA contract might be a requirement for vaccination and then could you just help me understand what.
What all that might mean for Grainger and.
Good.
Cost for the business.
Do you want and I'll I'll take I'll take this one this is a this is a.
Kind of a challenging challenging one and in many ways. We are certainly federal contractor, we will comply with the GSA order, we have plans in place to comply with that.
I would say the osha.
Ruling and how that comes down is probably.
More of a question Mark in terms of vaccine mandate cost it.
We are ready.
Ready to do what we need to do and prepared to do whatever needs to happen.
We are hopeful that.
The vaccine mandate is done in a way that doesn't hurt the supply chain I've been in.
Our transportation depots in our facilities in Europe.
First facilities.
And it actually a mandate.
Thought through could cause significant problems to an already challenged supply chain and so we are we don't know where all that's going to land just to be clear, but we are prepared and we've done some things to prepare for any eventuality there.
And in trying to understand what the best path forward is going to be depending on how long that shakes out.
Thank you.
Question comes from Jacob 11th with Smelliest Research. Please state your question.
Good morning, everybody.
Good morning, just one just wanted to.
I mean, you guys have a pretty clean balance sheet at this point in Detroit I know when you when you talk about how I'm a couple of years ago, you flex up a little bit more aggressive buybacks. So maybe you can just help us think for how youre looking at the balance sheet today.
And maybe secondarily to that whether M&A could play a role over the next couple of years.
So this is D. I'll start off you know you know, we like our credit rating of course and we.
We don't see any big changes related to our capital allocation strategy.
We did provide a guidance that from a share buyback, we thought we would be somewhere between the $600 million to $700 million range for the year.
And we think we're going to be at the high end for for this year.
And so you know no real I'll say changes to our philosophies.
That we've had in the past you know that's working well for us.
Okay.
Okay. That's helpful.
Remember this is a better netback for Cromwell something that.
It doesn't get a lot of airtime as does maybe you can help us understand.
How the how that business is doing and how the turnarounds we draw an absolute there.
So maybe I'll do you want to start I will just give prospects so.
<unk> is a relatively.
It is obviously not a not a huge business for us, but it's a it's an important one in terms of understanding whether we can get the growth we need to get in the U K.
UK market has been challenged the team has done a nice job of improving service and serving customers through this through this time.
They have over the last few years it will consistently lowered the loss.
And we feel like it's a it's a business that has the potential to be a strong contributor from a profit perspective over time, but we actually saw some work to do but I would say that they've reset their cost structure. They are providing great service to customers and they have they have lowered their losses over the last few years, and we would expect them to show.
Profitability coming out of coming out of 2022.
Did you the only thing I'd add there is that you know in the quarter climb while was able to cut their losses year over year, and we expect them to come close.
To cutting them in half, which is what the focus has been.
Year over year.
Our next question comes from Hamzah <unk> with Jefferies. Please state your question.
Good morning. Thank you My question was just around Zoro U S.
Maybe you just talk about the competitive dynamic in that market I know, it's smaller customers online only et cetera, but but but just maybe talk about who youre competing with there and then I guess you have 8 million Skus, where work with that SKU count goal.
Eventually.
Well so on the on the second half of that question. We have 8 million Skus today, we would expect to get to $10 million in the next couple of years at a minimum.
And whether or not it goes to 15 or more it's probably best to open for debate, but we know we've got a long ways to go to get to get the skew count right in terms of the competitive market. It's really very very broad online. So it's big Big Internet players it's.
Certain marketplaces.
Customer, sometimes buy through a through smaller local retailers.
As well and so there's there's a very broad competitive set when you look at small businesses and how they buy sometimes they buy the hardware stores.
And it's pretty fragmented today, and there's a lot of different options for small businesses to buy.
MRO products and so we are that that market in particular is super fragmented and so you know we feel like we're growing and gaining share.
From a number of different sources.
But it's not like there's sort of one or two players that are sort of dominant in that space. It is a very very broad in terms of the competitive set.
Got it and my follow up question I'll turn it over just on on on achieving pre pandemic gross margins in the U S business exiting this year.
I know you've talked about price realization, you talked about inventory adjustment et cetera, but maybe just talk about the confidence level, there and what could go wrong for you not to achieve that I know were already in the fourth quarter. So there's you know two months left or whatever so any thoughts there would be helpful. Thank you.
Go ahead.
Yeah. So what I would say is you know.
We're pretty confident and that's why we've continued to focus on showing you where we've come from and where we're going.
In the deck and continue to talk about it.
The two biggest factors that really gives us confidence is the product mix.
Where we are you know versus last year, we were at in the U S. We're at 28%.
On pandemic and now we're at 22 and trending well as we would expect and then price, which we've talked quite a bit about here today and so you know I noted earlier that we.
Implemented some price increases in September and the realization in September and October is looking to we expect that to continue through the fourth quarter.
And we expect it to cover costs that we have visibility to.
And you know as it relates to anything else related to supply chain challenges <unk> talked a lot about that you know we are very focused on it and we believe our scale puts us in a unique position to deal with some of those challenges today.
We have good availability and we're managing the cost process well. So I think you know we're pretty confident.
Thank you.
Our next question comes from Chris Dankert with Loop capital. Please go ahead with your question.
Hey, good morning, Thanks for taking my question.
I guess thinking about the endless assortment business here.
Again, 20% growth kind of over the medium term aggressive very impressive growth, but I guess.
Strategically what's the biggest bottleneck to growth in that business I mean, given the scalability of digital I mean is it simply customer awareness and engagement, which obviously takes time, what why couldnt that be 30% or something even higher at this point.
Yeah, I think if you look at the long history of of Mono Trop you start to you start to understand.
Kind of the limits, obviously that business has gone from nothing to over 2 billion U S dollars and has a very long history of growing very very quickly but.
But 20% has been.
That they've been out for for a long time most of that has to be is really about making sure that you have the processes and systems in place to acquire attractive small business customers. Our business customers and then you have to work very hard to get them to repeat and to become regular purchasing customers and.
And that is that is not something that throwing.
A whole bunch of money at necessarily helps you got to be very targeted in how you're acquiring customers and you have to be targeted about how you're working in identifying what what segment theyre in and what matters to them. So that you can actually get the growth that you'd want to get so it isn't an easy thing. It is a scalable business for sure, but you know that.
Our experience has been that the team's ability to build the capabilities learn and have high quality growth.
Limits, you're at about 20% in many cases and that that you've seen that through <unk>.
Got it that's very very helpful. Thank you.
And I guess, you know again fairly sizeable investment in that business this year.
As we go forward just how do we think about SG&A growth in that business, but at this point is it principally advertising and analytics spend or is there do we need any additional kind of physical assets. There just how do we think about SG&A growth in endless assortment.
Yeah, I would say I would have different answers to timber note Sherwin tour of zoro, it's mostly around marketing.
Marketing data analytics systems, they picked up most of their own much of their own system infrastructure now they continue to invest in systems.
So the investments aren't huge physical assets immuno.
<unk> you have that plus you have given their growth and their size, they're going to they're going to be investing in the next three years to four years five years and pretty significant distribution center efforts as well and so wow.
While we don't talk about that much.
Then exceptional actually are building physical acts of assets to serve their customers and they have more of those investments that they will make over the next three or four years.
Yeah.
Thank you. Our next question comes from Josh prevents me with Morgan Stanley. Please state your question.
Hey, good morning, guys.
Oh did you just a first question on I guess kind of the the.
Competitive.
The benefit of just having a better supply chain and some of your smaller competitors.
How do you go about ensuring that the share you've picked up on that converts at some reasonable level to something permanent like is there something you can point to in the past maybe even the pandemic related stuff in terms of by converting those marginal customers respond by customers into something more structural like how was what's your approach.
On that.
Yeah.
It's a great question I think.
The reality is that when you're out serve customers that.
That becomes pretty sticky growth always has been in our in our business and so when you. When you are able to have better service than the market in general typically you see a fairly long time horizon. When you can continue to grow right now I'd say, our customers are having all kinds of conversations with us about sort of sustainably supply chain and how we can leverage our capability.
These to help them grow into the future. So it certainly doesn't feel like.
This is a.
One of them done advantage. It feels like people are trying to figure out how to make sure that they can function really effectively going forward and we're having all kinds of conversations about how to help customers lower their.
Their processing cost improve their inventory management the core things that we typically work on with customers. We are really engaged with right now so.
I would just say that we feel like.
Certainly there'll be some of this we talked about that last year, having having pandemic products some of that growth some of our very outsized share growth last year.
It was not going to repeat but the 475 basis points a year share growth feels like that that's that's repeating and it feels like it's sustainable in terms of the volume that we've captured a sustained.
Got it that's helpful and then.
I appreciate the.
Color on kind of the inventory repricing and you know kind of about one for one or kind of matching that in real time that allowed temporary benefit, but maybe just looking at the other side of the equation with some bigger.
Customers on contract.
How do you sort of keeping up with the price cost equation, there or is it getting a little bit more you know kind of exotic with things like surcharges.
And then what are you anchoring that sort of stuff too because inflation feels a little bit more unusual than just like hey steel is higher I mean, everything is higher and not every product category has like the same pain point. So how are you managing with that and customers that are maybe on a bit more long term contracts tend to be a little bit more info.
<unk> on price.
Steve do you want to take that or.
Yeah, Yeah. It was about the gentlemen, sorry.
Uh huh.
No not seeing a big difference between customers you know I would say at this point I think you know, especially during this time our product availability is really what is at the forefront of you know some of our relationships.
Whether you're a mid sized local large local or are all our large contracts.
In addition to the things that you know D. G. Just kind of noted related to you know.
The way we serve customers in a multichannel way you know right now I think it's also you know boding very well for us.
In addition to you know how easy it is for them to find the products on our website, which you know time is money for a lot of these customers. You know right now is that they are dealing with a lot of challenges like we are experiencing and I think that availability is what's really really really making a big big difference.
Even for large contract customers there is.
And in flexibility and and and.
And some you know our pricing, but we do have more flexibility right now than then I would say we've had of late.
Thank you. Our next question comes from Nigel Coe with Wolfe Research. Please state your question.
Thanks, Good morning, everyone.
I wanted to ask a sort of a short term question and then and then that's sort of a more strategic question, but.
Last quarter, you were pointing towards the lower end the range low end the mushroom range anyway, now you're pointing towards the low to mid point. So I'm just curious I mean, I think I know the answer but I'd be curious D. G. D. What's changed from your perspective from July two to now and I'm, specifically interested in you know what.
You know pricing has been stronger.
Whether the retention on prices, it's been stronger that's surprising to the upside.
So yeah, Yeah, you just said it there at the end of Q3 was better than what we expected.
We had improved mix and improved price.
And that favorability.
Flying through the full year EPS for us.
And you know revenue that that volume coming through with that price list was better than what we expected and so you know just to reiterate the total company expectations.
We've slowed that through to two to two.
<unk> talked to talk to you about where we expect to be on a full year basis.
Revenue being stronger and so then we said that we're going to be at the midpoint of the range there and then for everything else.
I reiterated that at least what these results that we would be low end up to the mid point. So we've tried to pull in the improvement that we saw in Q3.
And the pricing side of the equation is that been surprisingly good.
Right, Yeah price realization is better than we would have expected at this point.
Okay, that's great and then.
The medium sized customer growth regain market share regain strategy.
The inside sales.
And part of that strategy alongside the.
There were pricing initiatives. So I'm just curious maybe just give us an update a D. G on on sort of what's happening with the inside sales force and some of the metrics around that and whether used in investing in that capability.
Sure you know I would say that inside sales has had a really nice bounce back. This year are they they cover customers last year, obviously that some of which had been struggling.
But we've seen a really nice revenue path with inside sales.
One thing I would point out is that during the pandemic we have been.
Fairly locked in our coverage and the reason is we wanted the relationships to be stable as and its customers went through the pandemic and so we haven't invested a lot more ore and we haven't invested any less inside sales, we consider it to be an important part of our future.
And we've liked the results we've had but given the pandemic, we haven't we haven't really changed coverage.
Really anywhere during the pandemic, we're talking about sort of adding some coverage potentially in the future, but we'll talk about that as we as we head into the future, but so far it's been a very stable and a nice growth path for us this year the inside sales team.
Thank you.
Our next question comes from Patrick Baumann with Jpmorgan. Please state your question.
Hi, Good morning. Thanks for taking my question first one is on a zero gross margins I thought that the view here was that zero was going to face some mixed headwinds over time from a more third party product in and I can see the skus have gone up a lot in that area.
Is that still the case.
Or is this like shifts in customer channel enough to offset that such that gross margins there can actually improve.
Well, Yeah, I mean, I think I think what you saw is that the shifts we've made in terms of how we're acquiring customers and focusing on acquiring a really strong business customers has helped gross margin more than a third party shipping has heard it third party shipping will be a small drag we think over the next.
Next several years as it becomes a bigger portion of the proportion of the mix, but we still think we've got a ways to continue that to improve.
Improved gross margin and we've seen that this year and then hold whole gross margin closer to closer to steady moving forward.
How big is third party shipping that as a percentage of mix.
Cause or whatever.
What's that.
As a percentage of sales I guess or wherever you want to talk about it it's a growing portion of sales.
We've typically talked about that number will probably be talking about that at the end of the year and we talk about sort of the path moving forward.
And then a quick one on receivables.
Talk about the comment in the release about like that two.
$268 million of growth being driven by.
Growth in credit sales.
Is that a change in how things are normally done I, just I'm asking because I don't recall seeing that kind of language from you before maybe I missed maybe I've missed it.
Yeah, it's not a it's not a change it's just in relation to the fact that our sales are up and and as a result of that you know that's driving accounts receivable.
Isabel.
Okay, great. Thanks.
Thank you. Our next question comes from Michael Mcginn with Wells Fargo. Please state your question.
Hey, just a quick one for me do the majority of your contracts re price at a certain time like calendar yearend or are they kind of staggered throughout the year and what kind of percentage of your contracts have yet to reset at the new pricing.
So.
Contracts can be.
Of different durations, you know they can be 1234 or five years.
I'd say three years is kind of a more common version, but in general when we set contracts we set.
Specific times multiple times a year, when we can alter price either up or down based on market conditions. So most of our contracts have the ability to reset price multiple times during the year three times a year.
<unk> is the most common a common.
Number of times, you can reset price.
Thanks.
Thank you and there are no further questions at this time I'll turn the call back to D. G Macpherson for closing remarks.
Great well, thanks, everybody for joining us we really appreciate it.
Hopefully you can tell we felt we feel good about the quarter, but more importantly, I think we feel good about.
How we're how we're growing how we are gaining share our ability to navigate the supply chain issues and still continue to invest in and core initiatives that we think are going to be important to our long term success.
So we feel really good about the path forward as well.
Wish all of you.
A safe Halloween and look forward to talking to you soon thanks, so much.
Thank you. This concludes today's conference all parties may disconnect have a good day.