Q1 2022 W W Grainger Inc Earnings Call
Hello, and welcome to the W. W. Grainger first quarter 2022 earnings conference call and webcast. At this time all participants are in a listen only mode.
Question and answer session will follow the formal presentation.
If anyone should require operator assistance. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded its now my pleasure to turn the call over to Kyle Bland VP Investor Relations. Please go ahead.
Good morning, welcome to Grainger is British quarter of 2022 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 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 table at the end of this presentation and in our Q1 earnings release, both of which are available on our IR website.
This morning's call will focus on our first quarter of 2022 results, which are consistent on both a reported and adjusted basis for all periods presented.
We will also share results related to monitor row. Please remember that monetary row, as a public company and falls Japanese GAAP, which differs from U S GAAP and as reported in our results one month in arrears as a result, the numbers disclosed will differ somewhat from monitoring public statements now ill turn it over to D. G.
Thanks, Kyle good morning, and thank you for joining us today I'll provide an overview of our first quarter performance and then pass it to <unk> to walk through the financials in detail.
I'll begin by quickly highlighting our strategic operating framework, the Grainger edge I am proud of our team members as we embrace the edge at every level of the organization and in everything we do day in and day out.
This framework serves as the basis for our culture and defines how we work together to serve our customers and communities.
I'm excited to share that earlier. This month, we were recognized as one unfortunate one hundreds one photo fortune's 100 best companies to work for.
This award is a tribute to team members across the organization.
Turning to slide five not unlike the past two years, the first quarter of 2022 through some challenges, including the ongoing impacts of the pandemic heightened inflationary pressures supply chain and labor challenges and now the Russian war in Ukraine.
I'd like to spend a few minutes on how we are managing through these challenges.
First we continue to manage through the highest inflationary period in our careers on the cost side, we are leveraging our purchasing scale and working closely with our supplier partners to chart a shared path forward.
High inflation, our goal remains to be price competitive while targeting price cost neutrality.
On the supply chain front, we continue to work with our supplier and transportation partners to ensure products are available and delivered to customers on a timely basis U.
U S customer service levels are starting to improve as carrier capacity increases.
Overseas freight remains pressured with delays port congestion and container challenges and when coupled with increasing fuel prices is pushing costs higher than historical trends. We expect these costs to remain elevated throughout the year.
We remain focused on securing product for our customers as we navigate through the continued product shortages and delays.
We expect the ongoing COVID-19 related shutdowns in Shanghai, and broader China will further challenged supply chains over the coming months.
<unk> been increasing our inventory position since the middle of last year to maintain service levels and continue to monitor developments to stay ahead of the game.
In my visits to our customers in Q1 I continue to hear that we are performing well relative to the market unsecured product.
We also continue to stay focused on hiring and maintaining competitive payroll and benefits to ensure we attract engage and retain high performing teams.
This is especially important for customer facing and support roles within our distribution and contact centers.
We continue to receive feedback the granger as a great place to work and our team members feel valued as they work to support our customers each day.
We continued to invest in our strategic initiatives like marketing re merchandising keep stock and technology.
These efforts coupled with our advantaged service have allowed grainger to have strong outgrowth versus the broader MRO market.
Switching gears to our financials demand remained robust and we finished the quarter with sales growth of 18, 2% or 17, 9% on a daily constant currency basis.
Our resort adults were driven by strong performance in both segments High touch solutions North America had exceptional daily sales growth of 18, 2%.
In the U S. We have to be the broader MRO market by 550 basis points for the quarter as our supply chain and inventory investments helped us meet our customers' needs.
Total company gross profit margin finished the quarter at 37, 9% expanded 245 basis points over the prior year first quarter, the largest component of our expansion over the prior year was lapping the pandemic related inventory adjustment that we took in the first quarter of 2021 .
Even when excluding that adjustment. However, we were still up nicely year over year.
We delivered 14, 6% operating margin an increase of 305 basis points over the prior year as the improved gross margin performance was further aided by top line leverage and disciplined cost management.
In the quarter, we delivered an adjusted ROIC of 41% and returned 163 million to shareholders through share repurchases and dividends.
Yesterday, we announced an increase in our dividend, which marks our 51st year of consistent increases and continued commitment to our shareholders.
As a result of our strong performance, we are raising our full year 'twenty two 2022 guidance estimates.
I continue to be impressed with how our team has come together to deliver such great results.
Earlier this year, we talked about our focus areas for 2022 executing on our key growth initiatives driving operational excellence and strengthening our culture. We've made strong progress in all three areas and continue to build the company for success.
With that I'll turn it over to D to take us through more detail on the quarter and our guidance.
Thanks D G.
I like to Echo D. G sentiments are execution and teamwork in the first quarter drove very strong results.
Turning to slide eight.
He covered revenue and margins at the total company level and I'll get into more detail in the segments in a minute before.
Before we do I'd like to highlight a few other key points are.
Our total company SG&A as a percentage of sales was 23.3% gaining solid leverage over the prior period first quarter.
Given our investments in the D C that Minotaur al and I continued strategic initiatives and high touch solutions I am proud of the way the team concurrently manage these investments as well as operating expenses to support strong topline performance in the quarter.
Finally, resulting EPS in the quarter was $7 and 750.
58% versus the first quarter of 2021 .
Turning now to our high Tech solutions segment for the first quarter. We continued to see strong results with daily sales up 18, 2% compared to the first quarter of 2021 .
We saw impressive growth across the board with double digit revenue growth across all of our North American geography, and both large and midsized customers.
In the U S. We saw strong price realization from our recent pricing actions and delivered strong growth in every end market with particular strength in commercial transportation and heavy manufacturing.
In Canada. The economy has rallied back in the business saw year over year sales growth in nearly every end market with manufacturing, especially strong this quarter.
The Malian Canadian daily sales were up 10% or 11, 8% in local days in local currency.
For the segment G. P finished the quarter at 44% up 310 basis points versus the prior year.
If we exclude the first quarter 2021 pandemic product inventory adjustment, we still achieved gross margin expansion of roughly 80 basis points.
This expansion was largely driven by favorable product mix and also aided by the return of the in person Grainger show in February .
While the shell provided a modest tailwind in the quarter. It is expected to net out as we move through the balance of the year.
Given the timing of price and cost increases in the quarter, our price price cost spread was favorable however, when netted against increased freight costs. It was largely neutral.
I'll also note that our pandemic makes at the end of the quarter was back to near pre pandemic levels at just above 20% of sales mix and we continue to see similar results through the first few weeks of April .
While we have included our pandemic related sales in the appendix for this period.
Given that we have returned to pre pandemic makes levels, we do not expect to provide this information in subsequent quarters.
And the operating margin line, we saw improvement of 395 basis points year over year as the strong gross margin recovery was aided by 85 basis points of operational expense leverage.
Overall, an extremely solid quarter for the high touch solutions North American segment.
Looking at market outgrowth on slide 10, we estimate that the U S. MRO market grew between 12 and a half in 13.5%, indicating that we achieved roughly 550 basis points of market outgrowth in the quarter.
As I've gone out and spent time with customers and investors over the last few months.
We often are asked about the drivers of our share gains.
No our supply chain scale, and our ability to deliver products to customers has been strong.
We also know that by focusing on and investing in the right areas like re merchandising our assortment.
Increasing our use of analytically, driven marketing and improving the effectiveness of our sales force, we can consistently deliver growth above the market.
We continue to execute well and our goal to achieve three to 400 basis points of annual market outgrowth remains intact.
Moving to our endless assortment segment.
Sales increased 12.1% or 10.4% on a daily basis.
Results were heavily impacted by foreign exchange given the depreciation of the Japanese yen.
In local currency and local days monitor all cheap, 18.4% growth, whereas zoro U S daily sales were up over 19% both very strong.
Growth continues to be driven by new customer acquisition at both zoro and Mount of Taro.
And Manav Charles continued success with enterprise customers.
D P expanded 10 basis points versus the first quarter of 2021 while operating margin declined five basis points as planned.
This decline was primarily exalt D.
D C investment that monitor.
And what's the offset.
Mike.
King.
Good night.
On the 20 <unk> people.
Please note the fight covering channels.
Zoro and monetize.
In the appendix.
In addition, we've also continued its positive.
Upgrading tricks.
It's like well you can see registered users are up 20% over the prior year period.
You'll see the count of registered users for Zoro has been restated for prior reporting.
In 2021 so I'll make this strategic pivot away from certain less productive channels, allowing them to focus on more profitable beta be customers, who also have a higher likelihood to make repeat purchases.
This all drives higher lifetime value customers to the world.
As a result, we've elected to remove these customers from this metric, which lowers the nominal user count resolved, but the growth rate remains relatively consistent to what we have shown in the past.
We think this is a more accurate way to reflect this metric and we will use this new definition going forward.
On the right. We show the continued growth of the Zoro SKU portfolio, we are targeting around 2 million SKU additions again in 2022 and are off to a good start as we continue to onboard more strategic third party partner.
By your partners.
Now looking forward to the rest of the year.
We're off to a great start and results remained strong in April with total company daily sales trending up around 20%.
Well, we don't typically adjust our guidance expectations after a quarter and acknowledge the broad market uncertainty our conversations with customers results to date and continued momentum give us confidence to make a change at this time.
And as a result.
We are raising our 2022 full year guidance, our new outlook includes expected daily sales growth between 11, and 14% and EPS between $25 and $27 representing over 30% earnings growth year over year at the midpoint.
We've also updated our supplemental guidance in the appendix, which reflects a slight upward revision in the high touch solutions operating margin and an increase in total company operating cash flow.
With that I'll turn it back to D. G for some closing remarks.
Thank you D before I open it up for questions I would make just a few comments.
First we performed extremely well in the quarter I'm proud of the team and the way we've executed focused on serving customers well and navigated through some of the bigger challenges that we discussed at the beginning of the call.
We continue to execute on our growth drivers drive operational excellence and strengthen our culture.
We are well positioned to continue serving customers well and to have a very strong 2022.
As we shared last quarter I'm excited to provide some information on our upcoming Investor day.
We will be hosting it on Wednesday September 21st at our northeast distribution Center and border town New Jersey.
We will be focused on providing more details on our strategic initiatives and longer term outlook as well as provide a tour of our D. C, where we will highlight some of our automation and ESG investments at work.
More detailed information will be available in the coming weeks and we certainly look forward to an exciting day.
With that we will open up the line for questions.
Thank you will now be conducting a question and answer session.
So that to be placed in the question queue. Please press star one on your telephone keypad. We ask you. Please ask one question one follow up then return to the queue. Once again Thats star one to be placed into question Q1 moment. Please while we poll for questions. Our first question today is coming from Jake Levenson from.
This research your line is now live.
Good morning, everybody.
Hi, good morning.
I just wanted to see if we get a little bit more color on what's happening with our neighbors in the north I know you folks are used to break that out a little bit separately, but maybe you can just give us an update on how things are progressing in Canada.
The end markets are finally turn in your favor.
Kind of on that on a sustainable path to profitability there.
Yeah, Yeah. That's a great question. Thanks for asking so you know I think the business is on a very sustainable path to profitability.
We have reset the way the business operates over the last three or four years, we're seeing signs of a share gain returning into that business. The cost structure is in a good place and we're seeing growth with some attractive customer segments, most notably our manufacturing and health care.
And that business just continues to get better and better from a profitability perspective, and it's steady and it's going to continue to be a steady rise in profitability, but we feel pretty good about the math wrong.
Okay. That's helpful. And then just as a quick follow up I'm looking at the at the safety side of the business and I imagine that that's that's factor kind of pre pandemic levels as a percent of sales well I guess the question is what is the new normal will look like for <unk>.
For your customers in terms of buying those products, obviously that the.
The mandates and re changing our social norms around mask wearing and whatnot.
Are your customers still buying masks and hand, sanitizer and things like that it at.
So I guess you could say.
Yeah, you know I think I think you talked about it you know, we're we're pretty much back to pre pandemic mix I'd say, there's a slight elevation in some of those products.
You know I can't really predict what customer behavior is going to be around around those products given the way that the.
Virus proceeds, but what I, what I will say is that we see most customers going back to some normalcy I I've been in a number of manufacturing plants. The last couple of weeks in and in almost all cases, there isn't a lot of.
New P. P E b versus what was born in 2019 being being used so we we don't expect it to be hugely elevated mask and sanitizer sales going forward and we were pretty much back to normal still elevated but not that much.
Thank you. Our next question today is coming from Ryan Merkel from William Blair. Your line is now live.
Hey, good morning, everyone and thanks for taking the questions first off I was hoping you could unpack. The comment you made about speaking with customers and they expressed a lot of confidence about demand.
In particular I'm curious if if you spoke with energy customers, if they're seeing a big uplift here.
Yeah.
Oh I can give you my perspective, and then B, if you've talked to customers that have a different perspective I have I have not talked to you all that many energy customers I have talked to a lot of heavy manufacturing like manufacturing commercial customers and.
Despite you know we talked about a little bit about despite sort of the uncertainty of the world everybody right now I'd say super busy.
I'm just hanging on and if I can get the supply chain parts into my operation I have the demand and we see that through most of the customers that we're talking to right now so a lot of positivity I Havent I havent been up to and I think it's been a while since I've been in an energy plant. So I don't have that perspective, but generally customers are pretty pretty bullish on on demand.
Right now.
Okay. It's helpful.
But I wasn't I was just gonna concurrent my time with customers is similar to a disease experience up to this point in the air.
Okay.
That's helpful. And then for my follow up you know what really stood out to me was the profit margin in the high touch business and I'm curious the guidance seems to imply that <unk> will be the high watermark. So can you just unpack why why that might be the case.
Sure.
Yeah. So you know when we talked about guidance last year I think you know a lot of the underlying assumptions really stick them, even with some strong performance up to this point I'm you know, where we of course have to lap a floor for the you know adjustments.
The first quarter is the time, when we work with our suppliers.
On.
Some of our largest our price increases are in line with our car cycle that we work with them I know the cost cycle has been a little.
Unusual, but I will say the seasonality related to price changes we are assuming the same types of outcomes. So you are exactly right. We feel like Q1 will be a higher watermark as far as it relates to that and we will moderate as we go through the year.
Again, you know some of the tenants are the same we're still focusing on price cost neutrality and remaining price competitive.
In this market.
Thank you. Our next question today is coming from Nigel Coe from Wolfe Research. Your line is now live.
Thanks, Good morning.
So wanted to just return to Canada, you know that.
Business.
In days gone by was tracking low double digits until the.
So until the oil and gas bubble burst in 2014, but any reason why it can't get back to those kinds of levels. I mean, there's been a ton of changes in the business profile and on the cost base. So just curious on that and then on the mid sized customer margins. They used to be running I think about 10 points above the average in.
In that segment are they still in that kind of zone.
I think Nigel your question on Canada is revenue growth can we get back to sort of double digit revenue growth is that your question is no no no margins margins are margins yeah yeah.
Structurally we don't think there's any reason why we can't get there.
Given given the path of the business where.
Where we're focused on sequential improvement and we do feel like we can build to that but it's going to take.
Multiple years to get back to that 10% they've got a good path.
I'm very confident that we will continue to improve improve margins in Canada.
Structurally there's no reason why we can't get back to double digit margins there.
And then.
Do you do you want to take the second half of the yeah, Yeah, and I'm, a midsize customer I think that's a good assumption now to use our high single high single digit number.
Okay. That's great. Thanks, and then just April any comments on how April has been tracking relative to you know is.
The strength you saw in monkey.
Very well.
Yeah. It's a it's D. Do you mentioned that it's a 20% its if anything it's been slightly better than what we saw for <unk> revenue in April but that generally is very very good.
Thank you. Our next question is coming from David Manthey from Baird. Your line is now live.
Thank you good morning and.
Congrats on the Fortune designation, that's it's a great honor. Thank you.
Could you please update us on on high touch in some of your efforts. There I mean, you had really nice outgrowth and I'm trying to understand the factors there I'm sure. It's a combination of these things, but D. G. If you could talk about customer receptivity and then any idiosyncratic.
Things that are going on there in terms of.
A better offering or or changes in incentives that they didnt youre doing inside grainger to drive those better results.
Yeah, and you know we've talked about some of these things before you know the the primary initiatives for us are around continuing.
Continuing to improve our product assortment through merchandising efforts and making it easy for customers to find what they need we continue to make great progress there, we see cause and effect in terms of driving share gain through that effort. Our marketing efforts were getting more capable in terms of marketing spend.
Spending money in the right places and getting really strong returns out of marketing and that that's a big piece of it we see nice expansion of our keep stock offer so becoming more integrated with our customers inventory management practices and supporting their inventory management practices.
Those are things that had been very consistent in and are a bit evergreen for us at this point in the sense that we're always getting better it does it does.
That was actually to drive significant share gain I don't think there's really anything idiosyncratic I think the core things that we're working on them I would I would add providing better insights to our customers to help them manage their business to take cost out and I think we're getting better and better at that as well but.
You know the only idiosyncratic thing would probably be supply chain related I think them through.
This time, we've done a better job than most of managing having product of finding customers substitute products. If we don't have products and being able to serve them and so we would probably getting some benefit it's hard to quantify from.
I'm, just having inventory and being able to serve customers where others cannot.
Yeah that sounds good and then just quickly if you get to zoom out on.
Gross margin kind of five year plus sort of basis.
Do you expect gross margin to continue to decline.
The decline gradually over time all else equal.
Well, there's two of them you know yeah go ahead, you can take out.
I was just gonna add D. G. You can continue.
Continue on you know in.
And the high touch business, we've kind of noted specifically for this year that.
We're focusing on gross margin stability around 40%.
And did you were you going to talk about the outlook.
Yeah, Yeah, yeah, so what I would what I would say is we feel like we are price competitive at at the gross margins. We're at we feel like within the high touch the 40% number is gonna be a fairly stable number over time.
We are a company gross margins are likely to go down slightly just given the endless assortment growth continues to be to grow faster than the business and they tend to they operate at a lower gross margin and lower SG&A.
But in terms of segment performance, we actually expect pretty pretty stable gross margins over the over the next several years.
Thank you next question today is coming from Josh Poker Winski from Morgan Stanley . Your line is now live.
Hi, good morning.
Yes.
Just first question I guess, a clarification do you mentioned I think in some of your opening remarks.
About a kind of a seasonal benefit in one queue. It kind of tied into a sales event in February I, just sorting to unpack that hoping to unpack that a little bit more and maybe add some numbers to it if he could.
Yes.
Oh sure Yeah, we we returned to our in person Grainger show in Orlando in February that's what I've met them in my prepared remarks related to show it was really great to be back in person.
So it was well attended we heard great feedback from our customers and from our team members.
From a Q1 G. P perspective, the show provides a modest tailwind for us year over year.
And that's due to a supplier funding as you as you can imagine and its favorable impact through the year will moderate.
First as prior years, we go through the year.
Okay got it very quick.
Yes.
Understood and then a competitor of yours are.
Pretty recently talked about some supply chain stabilization, maybe not seeing as much inbound inflation outside of freight related items, what would what would the grainger take on that would be I mean, obviously the freight environment has gotten more difficult in.
China is a bit more wildcard with lockdowns, but is it would that be your take as well where do you see that differently.
We certainly have seen some improvement in particularly domestic freight in terms of service and and.
You know price increases certainly moderated a bit.
We're starting to moderate a little bit on an ocean freight as well.
With the Lockdown in China, you know who knows how that's going to play out but yeah. We we would we would say something similar where things were easing a little bit and and continue to do that domestically.
These pieces is probably the more complicated one right now.
Thank you. Our next question is coming from Chris Snyder from UBS. Your line is now live.
Thank you.
I guess first I kind of lost to follow up on Dg's prior commentary around the longer term gross margin drivers and certainly I understand the endless assortment of outgrowth is a structural gross margin headroom at the consolidated level.
But what gives the company confidence that it can hold business slide gross margin steady.
Beyond 'twenty two.
This is a pretty competitive.
Business. So is it a mid size outgrowth like what gives you that confidence on that.
Yeah, I mean, I think I think are just.
Working with our customers understanding the value we provide.
You would create seeing some midsize outgrowth and them having confidence in as we continue to to return to more industrial product as we've seen we.
We just feel like our price isn't it isn't a competitive place and you know we can continue to to support our customers and provide what they need and sell on the value that we provide and that that's really what our business is based on and we're going to do that.
Thank you and then I wanted to also follow up on the last question and commentary around.
Maybe easing in some of the domestic freight costs, our supply chain and I understand you know.
That part of it but has a lot of supply chains overall, he used or you know has perked someone gotten more difficult.
With the China shutdowns, even if some of the domestic.
The market has opened up a little bit.
Yeah. So you know I would just I would first come out to the China shut down it's going to take weeks and maybe longer for that to flow through.
In terms of understanding understanding the impact you.
You know I would say that yeah ex that what we were seeing before was still significant supply chain challenges, but more isolated to specific suppliers that we're having trouble getting product to meet their their manufacturing needs and so it wasn't as widespread as transportation improvement.
And you know, we do buy a lot domestically as well and so for customers that have the materials that we haven't seen you know Pete Pete.
Labour had gotten a little bit better.
Transportation I got little bit better, there's still plenty of pockets of challenges though.
And we still see a it's still a challenged supply chain for.
Our supplier's perspective in many cases, but it is more isolated to specific suppliers rather than it was broad based at this time last year. You would have just said it was it was kind of chaos and it gets less chaos now, but theres still still plenty of challenges.
Thank you. Our next question is coming from Hamzah <unk> from Jefferies. Your line is now live.
Good morning, Thanks for taking my question. This is Hans Hoffman Silicon for Missouri. My first question is just on the cyclicality of the portfolio today could you just walk us through how to think about how.
How your business performs in a recession and maybe any differences in the mix of the portfolio today versus past downturns.
Oh, you're talking about if there's a recession how have we performed in past recessions is that your question yeah, Yeah, Yeah yeah.
Is there any difference in the mix in the portfolio today versus past downturns I you know I don't think so.
To answer the second part first I don't think there's a significant change in the mix of the portfolio, we have more endless assortment business, but I don't know that that will probably perform similarly.
The short answer is is we generally performed well in downturns, we we look at share gain during downturns that it's usually been very good part of that is because we are steadfast in maintaining tank service to customers in downturns and that allows us to serve customers better than many others can oh.
And we generally still generate a whole bunch of cash during downturns and still perform well. Obviously you know everybody takes a hit we take out the financials that you can look go back and look at 2008 nine is probably the most severe when we've had and you can you can model what happened there.
But you know where where you know one of the things that I would sort of say that we are while we don't know when a recession will hit we are.
Certainly aware of the uncertainties in the world and we are being very mindful of the cost of running the business. So we are prepared for anything that happens, but and generally performed well and we would expect to do that again.
Great. Thank you and then could you just walk us through what your market share is that I would meet with medium customers are and what the total addressable market there is.
Yeah. So so.
And D. Do you want it you may have the details roughly if you go back.
Over a 10 10 and 12 year period, we were at about $2 billion with midsized customers, who dropped below a 1 billion. We're now I think a billion and a half or more billion six maybe this year or something like that is the expectation. We're still two two and change market share with mid size customers.
We feel like we've got a long road ahead, and we continue to do a really nice job of re acquiring customers that that left us and then growing with existing customers and building solid relationships. So we think we've got a long runway in terms of share gain with midsize customers.
Yeah, I mean, he says that you hit that D G.
Thank you. Our next question today is coming from Deane Dray from RBC capital markets. Your line is now live.
Thank you and good morning, everyone I apologize I joined a bit late I'm not sure. This was covered but D. G. I was hoping you could expand on what types of products are in short supply did you have any missed sales because you know who you would blame it on the supply chain.
No I Wouldnt I, you know I wouldn't say, we had many michelle's we have I mentioned this a little bit before are more than ever probably we're relying on some of our product information investments to make sure we can get customers to substitutes, but we wouldn't have any.
Sort of things that wouldn't be in the news already obviously, if a product is a chip in it that's been a challenge are there certain commodity products that had been even been challenged. So so you know I won't call out specific products, but I would say we've done a nice job of finding alternatives in most cases and it's hard to argue that we're missing.
Too many sales I'm sure we are missing some cells and they're just not occurring because nobody has those products.
That's helpful and then just qualitatively.
Can you comment on your mix.
With regard to a typical reopening if you know coming out of the pandemic you've got a number of your customers opening up shop back to work and so that's one granger typically gets.
Nice lift as.
They haven't restock their shelves, but now they have to sue you typically get a bigger lift during the reopening of restarting process is that still reading across in your north American businesses or is this kind of the steady MRO run rate.
You know this is this is first of all we have not had many customers that closed shop I mean, we've been with our customers throughout there were a few in in certain categories that shut down. So if you said.
If you said cruise lines, which we have cruise line customers, obviously, they shut down and that you know you'd see a little bit of that type of growth potentially there, but it's a very small portion.
Hospitals governments manufacturing plants.
You know retail organizations in terms of distribution centers have all been open the whole time. So you know one of the things that's been maybe surprising to the pandemic is just how consistent the growth has been if you go back to 2019, we've seen substantial growth and we saw really growth in AUM.
The only in the front end of the pandemic in 2022 did we really see a drop because most customers actually kept operating and so I think it's just normal business, we don't see much restocking going on.
Thank you. Our next question today is coming from Chris <unk> from loop capital. Your line is now live.
Hey, Thanks for taking the question.
I guess and forgive me if I've missed it but can we get a little bit more detail on the zoro strategic pivot I mean, it sounds like you know moving more into productive channels. I mean does this meaningfully change the Tam is to change the growth outlook for that business was at a margin driven decision just any color on that strategy change would be great.
Yeah, and you know, we've been making a strategic pivot with that business for the last several years are dramatically expanding the product line building new data analytics capabilities.
Giving that business getting that business independent from a technology stack. So there's been a lot of investment that's happening in terms of the question specifically, you're asking we have done.
Done a whole bunch of analysis working with the team in Japan on.
Customer profitability and customer profitability not in terms of the first transaction, but in terms of lifetime value in and we are skewing our efforts to two attractive business customers.
And so what you've seen is dropped some volume that that certainly could have in the short term because it's just not helpful. In terms of creating a profitable long term business I think ultimately it actually will accelerate our growth rate as we get better at acquiring and getting attractive customers through the second and third order where they become more frequent buyers.
But certainly we have we have made it a little bit of a shift in getting out of some channels that were lower lifetime.
Got it that's really really helpful and I guess kind of what's that as a backdrop any kind of color you're able to provide in terms of kind of price versus volume inside of the zoro business this quarter.
You know I think the price the price volume it wasn't much different than what we saw in the whole business that we talked about before so you know.
High single digit pricing.
And substantial volume growth is what we're seeing in that business at this point.
Thank you. Our next question is coming from Christopher Glynn from Oppenheimer. Your line is now live.
Thank you for the money.
So I appreciate the comments that reopening isn't causing really episodic demand that you can.
Really think of but yeah.
I think you maybe referring to somebody else.
Cradic benefit from competitors, having relatively less supply chain wherewithal than you in getting product through.
I think you know historically when you grew volumes and customers, it's pretty sticky base for continued scaling so.
Just wanted to kind of revisit that.
No there there might be some reversion once everyone has sort of democratic access to process.
Worth to procurement, but yeah, just I'll listen from there.
Yeah, It's a great question I think.
You know what I'm, what I'm, what I'm hearing from customers is.
Most of the work that we've done has been highly valued to support their operations and to keep them up and running.
And in many cases, we've actually added inventory.
Inventory management solutions to our keeps dark solutions or further embedded in customers.
Really really want to continue to have long term relationships. So that you know you could argue there may be some pull back, but that's really not not the behavior, we're seeing and it's not what we're hearing from our customers. Our customers are are saying if anything we've learned a whole lot about you know who we want to partner with a wide one apart with them through this time.
And our ability to keep keep customers going super valued I think it will continue to help us be sticky with those customers.
Yeah.
Great. Thanks, that's all that's all for me thank.
Thank you Chris.
Thank you. Our next question today is from you from Patrick Baumann from JP Morgan. Your line is now live.
Well. Thanks. Good morning can you talk about the approach to pricing this year should we assume the 8% in the first quarters at good level.
To work from now or if you're taking more actions that are providing another boost here in April and for the rest of the year.
Yeah do you why don't you do on Japan.
I cannot hear you D.
I can take it then so what what we've what we basically have been been looking at is you know we took price obviously through some of the back half of last year as well as as everybody has.
Zinc prices will moderate a bit so we don't think the level. We're at will be the full year number year over year, because we think.
The price increases will moderate that doesn't mean prices will go down it won't but but relative to some of the changes that we made last year, you'll start to see a bit slower or lower Ah <unk>.
Difference, so we would expect them to moderate somewhat still.
Still pretty healthy price, obviously this year.
Got it and then with all of this Oh, sorry go ahead.
Yeah, sorry, I don't know what that was.
There's a problem with my line I apologize for that yeah, we and.
And and you know high touch you asked I know, specifically, we usually talk a little bit about the pricing outlook and so we're expecting price to be about six to seven for the year.
And then with all the pricing and the positive price cost in the first quarter just curious why.
You arent able to increase the gross margin guide can you just talk about the puts and takes there.
And whether you may see some benefit of cost inflation moderates given that.
LIFO accounting dynamic you mentioned last quarter.
Yeah. So you know, we we've kind of usually you talked about the lumpiness of price for us.
And how it impacts gross margin due to the year with a large portion of our high touch U S business being contract based.
So in light of Ste.
Still saying suppliers are continue to come in with a cost inflation request and our ability to continue to work with them on that when we look at the outlook.
We believe that staying in line with our current gross margin is not feasible right now knowing that we're going to have some lumpiness as we continue to appropriately pass through some inflation as it comes to off cycle.
As the year progresses as you know the math works you have less last month to to place some of that through.
Okay understood. Thank you.
Yeah.
Thank you we've reached end of our question and answer session I'd like to turn the floor back over to D. G for any further or closing comments.
Sure. Thanks, Thanks, everybody for joining us it's a pleasure to have you on and hope you're all doing well you know I would just reiterate the fact that where we're completely focused on what we can control and that's making sure we advance our strategic initiatives to grow profitably building. The culture. We think is really really important.
And making sure that we serve our customers well and while there are many things going on.
Right now is very very strong and and we feel good about the share gain performance. We're getting we feel good about what we're seeing in both models and and you know really really optimistic for the future. So thanks I Hope you all have a great rest of the weekend and take care.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.