Q3 2022 W W Grainger Inc Earnings Call
Greetings and welcome to the W. W. Grainger third quarter 2022 earnings conference call.
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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 Kyle Bland, Vice President of Investor Relations. Thank you you may begin.
Good morning, welcome to <unk> third quarter 2022 earnings call with me are D. G Macpherson, chairman and CEO and Dean Meriwether Senior Vice President and CFO as.
As a reminder, some of our comments today may include forward looking statements.
<unk> results may differ materially as a result of various risks and uncertainties, including those detailed in our SEC filings reconciliations.
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 Investor Relations website.
This morning's call will focus on our third quarter 2020 results, which are consistent on both a reported and adjusted basis for the respective quarterly periods presented we will also share results related to monitor. Please remember that monitor was a public company and followed 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'm going to provide an overview of our third quarter performance and I'll pass it to <unk> to walk through the financials.
I typically do I'd like to start with our Grainger edge framework, which guides our strategy and behaviors across the company and with our customer and supplier partners one of our Grainger edge principles is to do the right thing.
So where is that commitment more obvious when we respond to natural disasters graders long history of being there for our customers before during and after the crisis strikes.
Last month Hurricane Ian destroyed parts of the U S. Most notably in southwest Florida.
Our team spent days nights and weekends on the front lines working long hours to get essential products like generators, sandbags and tarps to our customers.
After the storm passed our sellers onsite service Representatives and branch team members are on the ground, making sure. We served our customers and many of them did this while balancing their own personal recovery efforts.
We know the road ahead will not be easy, but the Grainger team will continue to be there to support that community as they recover and rebuild.
Before I get into the financial highlights from the quarter I wanted to talk a little bit about what I've seen and heard during my market visits with customers.
I recently visited in outdoor equipment manufacturer that experienced a surge in demand during the pandemic.
As consumers had excess cash and a desire to spend more time outside during COVID-19. They saw a major uptick in revenue there now facing a dip in demand as consumers begin to pull back on spending.
I've also visited some of our aerospace customers, where it's clear that business activity has picked up.
Especially in 2022 was COVID-19 impacts are diminished.
The industry is now making investments in new airplanes and other equipment to meet ongoing changes in business and leisure travel demands.
All told we continue to experience a dynamic market with some industry still on the upswing some of it is stabilized and others that are trending down.
While our customers will face different levels of impact as we navigate through this inflationary period, we know that grainger wins because of our ability to add tangible value to our customers' operations through inventory management digital solutions product substitutes.
This has been true in past economic cycles will be expected to continue as more and more customers turn to us for solutions, thanks to a relevant product offering knowhow.
Vantage supply chain.
Turning now to our results, we performed very well in the third quarter with sales growth of 16, 9% or 23% on a daily constant currency basis.
This normalizes for the impact of the significantly depreciating Japanese yen.
Our results. This quarter include strong growth in both segments as we continue to execute well against our strategic priorities.
Outgrew the U S MRO market by 700 basis points in our U S high touch business and delivered over 22% sales growth in endless assortment on a daily constant currency basis.
Total company gross profit margin finished the quarter at 38, 5% expanding 145 basis points over the prior year third quarter prop.
Profitability was strong throughout the quarter was especially strong in the month of September as we.
Benefited from a confluence of factors.
Putting some timing benefits that provided a tailwind to gross margin.
He will outline the details in a few minutes.
The strong gross margin performance, coupled with solid SG&A leverage helped us achieve 15, 3% operating margin.
An increase of 230 basis points over the prior year third quarter.
We delivered adjusted ROIC of nearly 42% up over 1000 basis points compared to the same period last year. We also generated $380 million in operating cash flow and returned 286 million to shareholders through share repurchases and dividends.
Due to the strong results achieved in the quarter and continued strong trends in October we are again, raising our 2022 full year guidance.
Starting with the customer and living our Grainger edge principles is helping us to deliver value to all of our stakeholders.
With that I will turn it over to D to discuss the details.
Thanks D G.
Did you highlighted it was another quarter of exceptional results, which are summarized at the total company level on slide seven.
We delivered strong growth and gross margin performance across both segments and also managed our SG&A well.
Driving 85 basis points of leverage in the quarter as we continue to stay disciplined.
Investing to support long term sustainable growth.
This growth in profitability resulted in diluted EPS for the quarter of $8 27.
46, 4% versus the third quarter of 2021.
Turning now to our high Tech solutions segment for the third quarter. We continue to see strong results with daily sales up 19, 4% compared to the third quarter of 2021.
We saw broad based double digit growth across all geography, and over 20% ROE with both midsize and large customers in the U S.
Daily sales growth in the U S, 20% fueled by broad based volume growth and strong price realization of over 12% in the quarter.
Yeah.
Canadian Daily sales were also strong up 11.4% or 15.5% and local day in local currency.
For the segment GP margin finished the quarter at 46% achieving 125 basis point of margin expansion.
The increase is primarily due to product mix as well as favorable price cost spread realizing a timing benefit and we continue to work cost discussions with our suppliers.
Price cost was also aided by some targeted customer and product actions as we work to ensure we are we are receiving the right economics for the value we provide to customers.
These favorable contributors to gross margin were partially offset by heightened freight costs in the quarter.
Our pricing team continues to do a really nice job managing through this highly inflationary environment and while the timing will always be choppy from quarter to quarter. We remain focused on our core pricing tenant of achieving price cost neutrality overtime, while insuring.
Prices remain market competitive.
Increased SG&A spend in this segment was driven primarily by higher head count to support growth in compensation costs as well as continued investment in marketing.
Even with the increased investment we delivered 150 basis points of SG&A leverage year over year.
And when combined with the continued gross margin expansion Q3 operating margin of 17, 3% was up 275 basis points versus the prior year.
Overall, a very strong quarter for the high Tech solutions business.
Looking at market outgrowth on slide nine we estimate that the U S MRO market, including volume and price inflation grew between 12, five and 13, 5%, indicating that we achieved roughly 700 basis points of market outgrowth in the quarter.
As you heard at Investor Day last month, we're having great success, gaining share as we execute against our strategic growth engine.
Given our recent performance and go forward expectations as announced at Investor Day, We are now targeting 400 to 500 basis points of annual outgrowth going forward.
Hundreds basis points increase from our previous outlook target.
The strength of our initiatives coupled with our supply chain advantage gives us confidence in our ability to deliver against this commitment.
Moving to our endless assortment segment.
Reported in daily sales increased eight 6% or up 23, 7% on a daily constant currency basis.
After normalizing for the significant impact of the depreciating Japanese yen, which is down over 23% versus last year.
In local currency and local day Minotaur, all achieved 19, 8% Roe.
Zoro U S was up 27, 4%.
Revenue growth continues to be driven by strong new customer acquisition and repeat business for this segment as well as enterprise customer growth at monarch tower.
Gross margin expanded 130 basis points versus the third quarter of 2021, and we continue to see great efficiencies from increased average order value.
We also benefited from favorable business unit mix.
<unk> grew faster than monetize in the quarter.
Segment operating margin declined 95 basis points in the quarter as favorable gross margins were offset by continued investment to support growth in both businesses as well as D. C startup pocket monitor all where the new N a gala D C.
The new facility is ramping nicely.
As we exit our legacy facility in the first quarter of 2023, we anticipate that the business will return to normal operating margin thereafter.
On slide 11, we continue to see positive results with our key endless assortment operating metrics.
Total registered users are tracking nicely with zoro and monetize all combined up 17% over the prior year period.
On the right. We show the continued growth of Zoro skew the girl SKU portfolio.
Now in over $10 3 million Skus.
You'll see a more modest increase between the second and third quarter.
The old pair it back into offering a SKU that did not meet our service level expectations.
We continue to target around 2 million SKU additions in 2022 and have a robust pipeline to meet that goal as we finished the year.
Turning to guidance.
Yeah.
It was another very strong quarter and with sales in October trending up over 16% on a daily reported basis or over 21% in constant currency, we are raising our 2022 full year outlook.
While we acknowledge that the broader market conditions remain uncertain and the risk of a potential recession has certainly increased.
Have not seen any meaningful slowdown in our business and continue to outperform our normal seasonal trends.
Our updated outlook for the full year 2022 includes expected daily sales growth between 15 point by 16, 5% and EPS between <unk> 29, 10, and 29 70, 848% increase year over year at the midpoint.
This implies Q4 daily sale, which normally slow due to seasonality will grow roughly 9% to 13% as we face into difficult comps over the fourth quarter 2021, especially in November and December .
We also continue to see further FX headwinds from the depreciation of the Japanese yen.
We've included updates to our supplemental guidance as well, which can be found in the appendix.
While it is not our typical practice to change guidance each quarter doing so provides our most up to date expectation in light of the current economic environment.
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, while this quarter brought more market fluctuation and potential uncertainty broadly both our market and our performance was strong I remain confident in <unk> ability to create tangible value deliver a flawless experience and gain share profitably over the long haul.
We are grateful for our customers' continued confidence in Granger no matter. What comes next we will remain a trusted resource ready to help them navigate any cycle.
I would also like to thank the Grainger team for all they've done and continue to do to support our customers.
But our team's continued commitment to focusing on the things that matter, we are well poised to deliver a very strong finish to the year.
With that we will open the lines for questions.
Thank you.
And at this time, we will conduct a question and answer session if.
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Our first question comes from Tommy Moll with Stephens. Please state your question.
Good morning, and thanks for taking my questions.
Good morning, good morning.
D. I wanted to circle back to your comments on high touch gross profit in third quarter, you called out price cost was a tailwind in the period and there were some timing impacts I think related to.
With suppliers, but if you could elaborate on what.
You were referencing there around the timing and whether that implies that it may look different next quarter or at some point in the future that'd be helpful. Thank you.
Thanks for the question Tom So, yes, we did perform well in the quarter.
Top and bottom line and specifically related to the gross margin expectations.
Yeah.
Periods.
Michigan product mix tailwind as.
As well as favorable price cost spread and I didn't know that that was due to a couple of factors.
Price cost being favorably as we realized the timing benefit.
But really as we continue to work through cost negotiations with our suppliers.
We do expect that to normalize over the next couple of quarters.
And so that really aided.
And then the.
Outperformance. In addition to that you know from time to time and good hygiene, we continue to work with customers to make sure that we are receiving the value that we provide to them from economic perspective, and so we also see some benefit in the quarter from that we also expect that to continue.
That's helpful. Thank you.
Shifting gears to.
Capital allocation.
If im looking at your guidance for this year correctly I think in terms of operating cash flow. There's no update to your prior guidance, but it looks like capex and share repurchases have been pulled in a little bit. So I'm curious for any commentary you can give there and then also as you think about Capex for next year and some.
The capacity expansion initiatives, you talked about at Investor day, if theres any early peek you can give us about our priorities for 2023 that'd be helpful. As well. Thank you.
Sure Yeah that is correct. We did it based upon the range, we had out there for operating cash flow less that.
As is and just based upon where we were trending with share repurchases as well as as we've looked at what we thought were fall through capex by the end of the year, we made some tweaks.
Those numbers as well since we have the opportunity to do so as it relates to China.
2025, we will talk a little bit more about what we expect capex to look like in February .
Thank you.
Our next question comes from David Manthey with Baird. Please state your question.
Thank you and good morning.
At the Investor Day, you discussed stellar coverage and seller effectiveness as two of your strategic growth engines.
I'm wondering if you can talk about the trajectory there.
How many outside sellers you have today versus what you had last year and what is the plan for 2023.
Yeah sure. So thanks, Dave.
We are we talked at Investor day are based on our improved customer information, we have been able to identify a potential to add some sellers.
Added them relatively small percentages overall to a couple of pilot areas that we're running now and we expect to have results of that early in the year and that will inform what we do going forward. We do think we're going to have the ability to.
Consistently add sellers and also improve the effectiveness of sellers based on.
The information we have now built and have on customers and so that's a pretty exciting path. We won't have a detailed for you in terms of what that looks like in the aggregate, probably Intel or second quarter next year. When we start to hear get all the results back from about.
Okay. So TBD and then as a follow up could you tell us specifically when the monitor row occupancy expenses that are duplicate today drop off and approximately what the magnitude of that overage is right now.
Sure I was clear about yeah, I was over there for weeks ago I'll, let <unk> answer the sort of exact timing, but just to give you sort of a magnitude you know, they're they're operating to two buildings in the Osaka area. The new ones a six storey enormous building that is coming up to speed and getting up to the wind volumes.
Take over entirely and they expect that to happen, mostly by the end of the year. The other ones have been running at the same time, so thats, a duplicate costs and B I'll turn it over to you for the numbers.
Yes, so just to add on with D. G said, we expect.
Then the duplicative costs drop off after Q1 of 2023.
Okay.
Thank you. Our next question comes from Josh pressure in ski with Morgan Stanley . Please state your question.
Hi, good morning folks.
Alright, good morning too.
Hey, good morning, So I just wanted to focus in a little bit more on the outgrowth I mean, I think we've sort of transition here from a period of time with kind of more hyper inflation and a little bit more scarcity supply chain wise to what sounds like it's sort of.
Moving supply chain environment.
Yeah today, just based on what some of your peers in broader industrial cohort of said any sort of change in the way customers or competitors are sort of interacting with the marketplace.
Clearly the background circumstances are changing just wondering if if their needs or their priorities are changing as well.
You know I think I think that there's been a fairly significant.
Increased attention to supply Assuredness, given what's happened in the last few years.
Our supply chain is improving you know they did improve they are fully back but they are improving for sure.
It Hasnt really changed those discussions are customers still want to understand how they can make sure that they have what they need to get their jobs done obviously, we've always done that two different ways, whether having inventory in a branch or we're managing inventory on site.
We're having next day delivery all of those things help customers, but we're still having a lot of a lot of conversation with customers about.
You know based off based on our ability to serve them. During these challenging times, how can we continue to help them and we think a lot of that the performance. We've had in our supply chain is going to be pretty sticky moving forward based on what we're hearing.
Got it that's helpful. And then do you just follow up question for you on.
The gross margin tailwind in those kind of I'll call it.
Extra conversations youre, having with your suppliers about the about that economic value, which sort of sounds like a different way of saying rebate, maybe I'm mischaracterizing. It but is that something thats on more of an annual cycle, where that normalizes, when the calendar flips or or what's the timeline that we should think about there.
Yeah, I wouldn't think about it so much as rebates, but just you know where passenger cars.
Constantly negotiating.
Price timing.
Timing.
It's whereas our supply supplier partners.
And some of that timing some has moved up some has slipped out.
While we continually add I didn't talk about the lumpiness of GP, because it's very difficult to tell.
Everything perfectly involved from a price perspective, and a cost the actualization perspective, so it's nothing more than that and then that really aren't focused on.
Supplier rebates.
And the reason for this.
Got it that's helpful and a nice quarter I'll leave it there.
Thank you.
Our next question comes from Jake Levenson with Melleous Research. Please state your question.
Good morning, everyone.
Good morning.
Okay.
If we do the postmortem if you will on the on the pandemic period over the last couple of years do you have a sense of how many of these new customers that you picked up during COVID-19 or are still buying from you or maybe just any color you have on kind of the retention rates.
Yeah sure so.
It's inherently a tricky a tricky thing to figure out what I would say is that our customer file has increased substantially versus 2019. So a lot of that a lot of the new customers have stuck around it.
Our customer file was at its peak in the heart of the pandemic in 2020.
Both for both for Grainger and for Zoro and firm Mazzaro. They all had sort of a similar pattern and what was going on there was there was a lot of consumers buying and just trying to find whatever they could find for safety reasons that that's all gone back to normal and so we think that what we see now is all of the business customers that we were able.
Two to acquire during during the pandemic either for pandemic reasons or other reasons and we've had really healthy growth of the customer file and I think that's probably the biggest signals that make that make that matters. The most.
Okay. That's helpful.
In gears.
Price or are your suppliers I mean, certainly we're still saying price of Christmas for you folks what's it up on a year over year basis or are your suppliers still putting through broad based increases or is what we're saying.
Pan out most of it is worth watching what's already been action.
Yeah, so so and <unk>.
You may have other other adds to this.
We continued to see through our cost cycle this year increase.
Increases for them from a number of suppliers I would say, it's less intense now than it was certainly you know in the first half of the year.
But most and what youre going to see in terms of price increase a lot of it is sort of what's already been taken before and so you know you're just you're just seeing the impact of that but we do expect.
Some increases to continue to flow in.
As as things continue to go forward, but just not as intense.
Thank you Andrew.
And our next question comes from Deane Dray with RBC capital markets. Please state. Your question. Thank you. Good morning, everyone wanted to touch.
Back on price realization.
And D. G can you give us a sense of how much of your price now is being driven by what you would call the value based pricing as opposed to standard markup.
Dean.
What do you I'm not sure I understand you go ahead go ahead did you can take that one.
Yeah, Deane I Wonder first of all to clarify I want to make sure.
To stand up the question so.
Do you want to add a little bit more color in their charge sundar because it's more of a holistic question, but just give us a sense on pricing you know traditionally historically with distributors was much more of a standard markup.
And what you've seen is with the advent of more services being added.
And then understanding exactly the kind of value that grangers, providing you're actually able to.
Gain more pricing and under this umbrella value based pricing and wanted to get a sense of where you are in that transition do you feel like you've done as much as you can or you're halfway through just any color there would be helpful.
Sure.
Well I would say I think if you go back you know.
Back several years to the pricing strategy change to ensure that we could provide competitive pricing to all.
Customers you know.
We're through that cycle now, where it's more of a cycle I would say was higher sophistication related to using.
Our own internal information product information and coupling that with market information.
To get the best price for customers and it's a high touch business as you kind of articulate it is making sure we get to the best price.
Based upon the value we provide those customers and this is like a mid sized customer that has less there's less services for less than the price is relevant for them as well that's why I will say we are there.
However.
We always have opportunities with the broad assortment that we have.
Over one 7 million skus to million.
You know things are constantly changing the market is changing parts are changing end market prices changing so I.
I will say our pricing sophistication continues to get better.
From time to time that leads to us being able to.
You do have some pricing levers in our benefit.
While we still remain competitive.
Okay. That's helpful. And then look supply chain has come up a number of times, how would you characterize it in terms of our product availability and lead times stock outs on and just yeah also.
Also if you could we then if that's been the same for your private label offerings.
Yeah. So.
What I would say is that certainly portions of the supply chain I would say are pretty much back to normal the portions that we control being able to pick pack and ship and get things that we're clean pretty much every night.
A year ago, we had labor challenges and all kinds of challenges that those are pretty much gone away.
In terms of our own supply chain and then the outbound transportation is also pretty strong at this point and less of a problem.
From a supplier standpoint, there is still <unk>.
Layers that are catching up to the challenge that they've had and so lead times are are elongated in some cases.
What I would say is that our service levels in terms of having product and being able to get as customers are our high on a relative basis and getting back moving back towards what we would expect to have from a from an absolute basis. So we do see a lot of improvement there.
There's still a long way to go I mean at this is that that was it's been quite a shock to the supply chain and there's still a long ways to go for from our suppliers from transportation entities coming from I think your question on on on global source product.
Certainly we're seeing it become much easier to get sailings from from Asia into the U S and the cost of that is coming down substantially from its peak maybe back to where it was but certainly coming down and so we do see that starting to flow much better than it had earlier earlier in the year.
Thank you. Our next question comes from Ryan Merkel with William Blair. Please state your question.
Hey, everyone I had a follow up on gross margin can you help quantify the price cost timing benefit in <unk>, and just speak to sustainability and to <unk>.
Sure well if you look at a later time.
All of our bank in the U S.
Gross margin was up like.
And you've got 125 basis points about half.
Half of that I'll call it the price costs.
Benefit and.
Again, we see that price cost benefit normalizing as we get into 2023.
Sorry.
So through the fourth quarter.
Got it that's helpful. And then I had a follow up on price really I'm trying to get at how much price is going to carry over into 'twenty. Three just based on what you've passed through so far and when do you lap sort of the bigger price increases that you took in 'twenty two.
Uh huh.
Well, let me start in 'twenty, one when you look at this quarter here, it's going to be especially in November and December will be lapping 2021.
Our first I would say significant Uh huh.
Price inflation period, so that's why it's going to be a little bit tougher comp for us.
I believe the last two months of this year.
Our rack forward price you know, we're thinking it'll be in.
A single deal.
Mid single digits.
The low to mid single digit.
It looks like what the ramp will be heading into 2023.
Helpful. Thank you.
Our next question comes from Chris Snyder with UBS. Please state your question.
Thank you.
In the past the company has spoken.
Two an ability to hold our north American high touch gross margins.
So does the fact that 2022 is running a bit hotter than expected.
No change at all should we expect maybe some slight easing or normalization lower.
In 2023.
Yeah, maybe just let me just talk about philosophy or Andy if you want to add to what you can I think that you know.
As.
You mentioned there have been some some tail winds that are probably.
Modest modest and it might come back.
Dropped down a little bit I think that the overall algorithm hasnt changed at all there's been a lot of messaging as the last two years.
Obviously, we had deflated GP given all of the pandemic product and challenges with that.
Which was all the right things in right things to do to serve our customers and now you're seeing sort of the normal GP with probably a little bit of tailwind that that may that may bleed off.
The algorithm is still the same we're going to where our plan is to grow faster than the market and the high touch model four to 500 basis points to have consistent GP and and you know.
Slight SG&A leverage as we go forward and that's that's it that's the algorithm and the algorithm for the high touch the endless assortment model is exactly the same as well.
I appreciate that thanks for all the color and then my follow up on on that outgrowth in the U S.
So you know obviously the company raised the target to four to 500 bps and it's really substantially above you know kind of the pre COVID-19 run rate for the business, but I guess my question is.
Year to date, the outgrowth is running in the 700 or so bip range when.
When we think about that compression from say 700 down to four or 500, what does that reflect is it just maybe some level of conservatism is it. The fact that maybe 'twenty to 'twenty two we're seeing outsized pricing versus the market are or that some of the maybe some of the product availability share gains that the company has realized is going away like what what's that kind of delta that.
Rushing back thank you.
Yeah, I mean, it's a great question. So so I think we've mentioned this at Investor day, but just to put maybe a finer point on it when we look at what we get from a share gain perspective, we're looking at cause and effect for the actions that we take.
This year is higher obviously than our target.
And we've actually been able to determine that we think some of that might be availability related.
Just having product win when others didn't.
Some of that becomes sticky as I as we've mentioned before but when we look at the four to 500 basis points. That's looking at the actions, we take around merchandising and marketing and seller covers sorry effectiveness and keep stock.
To drive share gain and that's where that number comes from so we've had a little bit of benefit. We think this year. That's due just to having having a better rate, but our execution around the supply chain there may be other stuff.
Thank you. Our next question comes from Christopher Glynn with Oppenheimer.
Thanks, Thanks, good morning.
So D G building off.
Immediately prior question for Chris.
I wanted to kind of bridge that to the medium customer.
Greatly the large customers, obviously, a bigger revenue base, but we have lower share there you're doing you know.
20% on 20%.
And a lot of your capabilities do seem to be.
Ramping as you've hit on some nice algorithms.
And you have a long term CAGR for the endless assortment shall we start to think about medium customer along those lines can you can you hold the 'twenty with that lower share demographic.
Well, what I would say is that we think we can grow midsize customers faster than large customers through the through the cycle.
A lot of that has to do with the.
The lower share we have but also some of the actions, we're taking are allowing us to acquire and penetrate.
Midsize customers, whether thats 20 or not.
I won't comment on that but I'll just if you recall we were in the high.
1151, 8 billion number you know 10 15 years ago, and you know what.
We're gonna breakthrough $1 5 billion here in the next year or so we think until we're getting back to where we were but there's still a long ways to go. So we do feel comfortable that theres going to be faster outgrowth with midsize customers.
Then there are four.
Okay, and then just to revisit the.
Gross margin algorithm you had the 37% target in 2025 based on a 30% or 30 basis point kind of.
Tiny mix impact over the interim.
You know based on kind of a 37 three this year should we just ship that algorithm thinking about the multiyear target.
Are you talking about the GP.
Yes makes it using the minus 30 basis points as the.
Driving force and maybe you want to shift my thoughts relative to that.
Not necessarily I think the only thing that's probably changed on a consolidated basis.
<unk> continues to depreciate, but that's kind of impact of top line and GP rate should be.
The same algorithm that we've discussed.
Thank you. Our next question comes from Patrick Baumann with Jpmorgan. Please state your question.
Patrick bomber and your line is open please state your question limit yourself.
Hello can you hear me.
Yes got you.
Sorry about that.
So you mentioned product mix as a favorable factor in the quarter year over year can you elaborate on that at all because I thought we'd moved past the pandemic versus non pandemic stuffs, just wondering what that might be now.
Related to <unk>.
Yeah that is true, but don't forget that the pandemic stuff that was also safety equipment, which is a significant piece of our business and we continue to sell.
Is that a more safety that the other piece is that.
We're also selling a whole lot more technical products and technical product. That's also product mix for us and generally those skus.
Have a little bit better margin for us.
I'm sorry, what what are some examples of that technical product what does that do.
Handling.
Things that are more technical than.
And manufacturing processes.
Pieces and parts as it relates to <unk>.
Our assembly lines and things like that.
Are the more technical product when we say safety product I think a lot of people think about that and gloves and and things of that nature. So these are more products that are utilized or adjacent to a man.
Manufacturing.
Do you view that piece of the expansion that you're seeing is more sustainable like is that a function of maybe some of your re merchandising efforts or anything else or is that temporary.
Absolutely.
You.
You hit it on the head.
Re merchandising efforts are making sure that those products are much easier for our customers to find and are helping them solve their business problems.
Okay. Thanks, and my follow up is on Zoro.
Can you give a sense of how fast you think that market for endless assortment that that business model is growing in the U S.
Zero growth in kind of the 27% range. This quarter, obviously very strong I'm just curious like how you think that market itself is growing it's obviously taking share from Mike I think traditional distribution.
But I don't really have a good.
A sense of how fast it's growing.
Yes, I mean, we we don't we think that market's growing similar to what the whole market is growing.
Which would be sort of low.
Low double digits.
As you know 10% to 13% in.
In the quarter as kind of the market growth that we saw.
Thank you and our next question comes from Nigel Coe with Wolfe Research. Please state your question.
Yeah. Thanks, good morning, everyone.
So I'm guessing the the mix of manifest you know oxy manufacturers' grown high twenties.
Matter of fact in mid twenties commercial up low twenties government up mid teens I'm guessing that's somewhat.
Technical products and favorable mix I'm guessing that's what it comes down to but.
I do want to go back to the to the this kind of mix it with temporary temporary kind of gross margin benefit did you say 25, 50 did I get that right.
No.
Well what were you you were talking about how much.
Priced cost.
Yes.
The temporary supplier negotiation benefit.
Yeah, well that nowadays.
Well I've noted one of them is the U S.
Over made year over year was about 125 basis points and I said about half of that roughly half of that so call. It 60 basis points.
I think she's our basis points is what we're saying.
Is price cost favorability that we believe will normalize.
Okay.
So about $20 million, Okay got it that makes a lot more sense.
And then just thinking about.
You know you're sort of apex supply chain you know, we're seeing some big movements in currencies are the Chinese yuan so to the extent that you're still manufacturers', sorry, just two thoughts white label products from China, given the move in the U R. Given the moves in ocean freight rates, what kind of benefit do you realize or does that benefit.
Get fully captured by our suppliers.
So what I would say is that as we think about next year as well.
About any year, we try to think about it.
The total cost, we're going to see and the the make sure we're pricing to market and getting the best cost we can we can get.
In many ways those cost improvements will be embedded in price cost because we will understand how those movements and everybody else is going to have similar similar movements. The proportion of product that comes from China is actually pretty similar across major competitors today and so we don't think we are disadvantaged organicism Shirley.
On that so we would expect that to sort of flow through.
In sort of normal ways from etc environment.
Thank you.
And we have reached the end of the question and answer session. I will now turn the call over to D. G. Macpherson for closing remarks alright.
Alright, thanks for thanks for joining US today, we really appreciate you being on the call.
As we've as we said you know, we're certainly happy with the quarter.
I'm, probably happier with sort of our longer term ability to consistently gain share.
And do it in a profitable way.
And feel really good about the things, we're doing and as we face into an uncertain and uncertain market.
Hope all of you have a great weekend and a great rest of the year and look forward to talking to you in 2023. Thank you.
Thank you. This concludes today's conference all parties may disconnect have a good day.