Q4 2023 W W Grainger Inc Earnings Call
Operator: Greetings, and welcome to the WW Grainger fourth quarter 2023 earnings conference call. At this time, all participants are in a listen only mode.
Greetings and welcome to the W. W. Grainger fourth quarter 2023 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your tower.
Operator: The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I'll now turn the conference over to Kyle Bland, Vice President of investor relations. Thank you. You may begin. Good morning. Welcome to Grainger's fourth quarter and full year 2023 earnings call. With me are D.J.
Phone keypad. Please note. This conference is being recorded I would now.
Now I'll turn the conference over to Kyle Bland, Vice President of Investor Relations. Thank you you may begin.
Kyle Bland: Good morning, welcome to <unk> fourth quarter and full year 2023 earnings call with me are D. G Macpherson, chairman and CEO and be very whether it's senior vice president and CFO.
Kyle Bland: McPherson, Chairman and CEO, and D. Meriwether, Senior Vice President, and Sia. As a reminder, some of our comments today may include forward-looking statements that are subject to various risks and uncertainties. Additional information regarding factors that could cause actual results to differ materially is included in the company's most recent Form 8K and periodic reports filed with the SEC. This morning's call will focus on our adjusted earnings for the fourth quarter of full year 2023, which excludes the loss on the divestiture of our E&R industrial sales subsidiary. We have also included a daily organic constant currency growth metric to normalize for the impact on revenue. Definitions and full reconciliations of these non-GAAP financial measures with their corresponding GAAP measures are found in the tables at the end of this presentation and in our earnings release, both of which are available on our IR website. We'll also share results related to Monetaro. Please remember that Monetaro is a public company and follows Japanese GAAP, which differs from US GAAP and is reported in our results one month in arrears. As a result, the numbers disclosed will differ from Monetaro's public. Now, I'll turn it over to DG. Thanks, Kyle. Good morning.
Kyle Bland: As a reminder, some of our comments today may include forward looking statements that are subject to various risks and uncertainties additional information regarding factors that could cause actual results to differ materially is included in the company's most recent form 8-K, and periodic reports filed with the SEC.
Kyle Bland: This morning's call will focus on our adjusted earnings for the fourth quarter and full year 2023, which excludes the loss on the divestiture of our <unk> and our industrial sales subsidiary.
Kyle Bland: We have also included a daily organic constant currency growth metric to normalize for the impact on revenue.
Kyle Bland: Definitions and full reconciliations of these non-GAAP financial measures with their corresponding GAAP measures are found in the tables at the end of this presentation and in our earnings release, both of which are available on our IR website.
D. G.: We will also share results related to monetize please remember that monetary or was a public company and felt 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 from amount of Charles public statements now ill turn it over to D. G.
Donald G. Macpherson: And thanks for joining the call. In 2023, the Granger team will continue to drive our strategy forward by remaining focused on what matters, providing our customers with a great experience and exceptional service. The customers we serve play a vital role in keeping their businesses and institutions running, and everything we do is focused on making their jobs easier. We made meaningful progress this year in building new capabilities in both segments to help our customers and team members support the work they do. We've done this by investing in technology.
D. G.: Thanks, Kyle good morning, and thanks for joining the call in 2023, the Grainger team continued to drive our strategy forward by remaining focused on what matters, most providing our customers with a great experience and exceptional service the customers. We serve play a vital role in keeping their businesses and institutions running and everything we do is focused on making their jobs easier.
D. G.: Made meaningful progress this year in building new capabilities in both segments to help our customers and team members support the work they do.
D. G.: We've done this by investing in technology, our supply chain network and our high touch growth engines to ensure we can provide the best experience as possible.
Donald G. Macpherson: Supply Chain Network and our high-touch growth engines to ensure we can provide the best experience possible. As a result of this focus, we delivered record sales and earnings for the year. I'm incredibly proud of the progress we've made and want to take a few minutes to highlight some of this progress. In more detail, The Grainger High Touch Solutions model has undergone a digital transformation over the past several years.
D. G.: As a result of this focus we delivered record sales and earnings for the year I'm.
D. G.: I'm incredibly proud of the progress we've made and want to take a few minutes to highlight some of this progress.
D. G.: In more detail.
D. G.: The greater high touch solutions model is undergoing a digital transformation over the past several years, the strategic investments in our infrastructure talent and the development of custom capabilities to support our customers.
Donald G. Macpherson: Strategic Investments in our Infrastructure, Talent, and the Development of Custom Capabilities to Support our Community. We have built key technology infrastructure capabilities focused on two main domains that affect the customer experience. One, knowing our products better than anyone else, and knowing our customers better. These endeavors include the development of homegrown software assets around product information management, or PIM, and Customer Information Management, or CHIM, which allows us to store, codify, and scale our data assets.
D. G.: We have built key technology infrastructure capabilities focused on two main domains that affect customer experience, one knowing our products better than anyone else and two knowing our customers better than anyone else. These endeavors include the development of homegrown software assets or a product information management or pin and.
D. G.: And customer information management, or Ken, which allowed us to store codify and scale of data assets. These investments may seem simple and obvious but in the MRO industry context product and customer information is very challenging.
Donald G. Macpherson: These investments may seem simple and obvious, but in the MRO industry context, product and customer integration is very challenging. We offer millions of products with many technical attributes unique to each product category and then let them deliver these products to millions of customers across a wide range of. We have made great progress here. But the exciting part is that we still have a long way to go.
D. G.: We offer millions of products with many technical attributes unique to each product category and then let them deliver these products to millions of customers across a wide range of industries. We have made great progress here, but the exciting part is that we still have a long way to go.
Donald G. Macpherson: We have invested in additional technology talent that can partner with our MRO subject matter experts to bring Grainger's industry know-how to life. This partnership of talent is yielding significant benefits and helping us generate high-quality proprietary data insights through PIM. These insights are fueling our growth engines and helping us drive share. For example, our ability to capture detailed product information allows us to bid on more relevant keywords that could ultimately yield higher returns on our marketing. In addition, having this detailed product information coupled with customized workflows and processes means we're able to work with more granularity to gain confidence that our products are competitively priced. And we can do that at, Harnessing what we know about our customers' business operations through KIM, alongside our detailed product data, allows us to better match products to customers, saving them time and increasing confidence in their purchase.
D. G.: We have invested in additional technology talent that can partner with their MRO subject matter experts to bring <unk> industry Knowhow to life.
D. G.: This partnership with talent is yielding significant benefits and helping us generate high quality proprietary data insights to Kim Ann Kim.
D. G.: These insights are fueling our growth engines and helping US drive share for example, our ability to capture detailed product attributes allows us to bid on more relevant keywords that could ultimately yield higher returns on our marketing spend.
D. G.: In addition, having this detailed product information coupled with customized workflows and processes. It means we're able to work with more granularity to gain confidence that our products are competitively priced and we can do that at scale.
D. G.: Honestly, what we know about our customers business operations through Kim alongside our detailed product data allows us to better match products to customers saving them time and increasing confidence in their purchase.
Donald G. Macpherson: These are just a few examples where we have leveraged our data investments in an ecosystem where talent and technology work together to drive great outcomes. This work is serving as a great foundation for the value we deliver through our high-tech strategic growth. Starting with merchandising, we've reviewed roughly 80% of the overall product portfolio, and we plan to finish collectively reviewing the entire assortment by the time we close out 2020.
D. G.: These are just a few examples where we have leveraged our data investments and an ecosystem, where talent and technology work together to drive great outcomes. This workers, serving as a great foundation for the value we deliver through our high touch strategic growth engines sorry.
D. G.: Starting with merchandising we've reviewed roughly 80% of the overall product portfolio at least once and plan to finish collectively redoing the entire assortment by the time, we close out 2024, we continue to see strong revenue lift equating to several hundred basis points per re merchandize category, our second and third passes through the assortment have a broader lens first passes we continue to leverage learn.
Donald G. Macpherson: We continue to see strong revenue lift equating to several hundred basis points per re-merchandised. Our second and third passes through the assortment have a broader lens than the first pass as we continue to leverage learnings, and evolve our PIM capabilities as we add other relevant areas to our review. We are seeing strong results from this Evergreen initiative, which we believe sets us up well to continue to drive share gains through this work stream. Shifting to marketing, we continue to make progress on this. This year, we've put a particular emphasis on leveraging Kim and expanding top of the funnel marketing efforts to TV and streaming channels to increase brand awareness. We've seen positive results in many areas and plan to continue to increase investment and attractive returns going forward.
D. G.: If all of our Penn capabilities as we as we add other relevant areas to our review process. We are seeing strong results from this evergreen initiative, which we believe sets us up well to continue to drive share gains through this work stream in the future.
D. G.: Shifting to marketing we continue to make progress through this initiative this.
D. G.: This year, we've put a particular emphasis on leveraging Kim and expanding top of funnel marketing efforts to television and streaming channels to increase brand awareness. We have seen positive results in many areas and plan to continue to increase investment at attractive returns going forward.
D. G.: Our sales force remains an important demand generator for Grainger as mentioned at Investor Day, We're piloting the use of our enhanced Kim data to redraw seller territories to better serve underpenetrated customer locations.
Donald G. Macpherson: Our sales force remains an important demand generator for Grainger. As mentioned at Investor Day, we're piloting the use of our enhanced chem data to redraw seller territories to better serve underpenetrated customer locations. With this for the first time in several years, we've added about 200 salespeople to the organization over the last year and a half. It takes anywhere from 18 to 24 months for these new team members to ramp up to a profitable level.
D. G.: With this for the first time in several years, we've added about 200 salespeople to the organization over the last year and a half.
D. G.: It takes anywhere from 18 to 24 months for these new team members to ramp to a profitable level, but with the results. We've seen so far we are on the right path and expect this initiative to contribute to outgrowth over the next few years.
D. G.: To ensure that our sales force is most effective for investing in tools and technology, which leverage information from him and came to provide insights to our sellers at scale to help them better plan their day to day interactions with customers. We are piloting several different capabilities here in 2024.
D. G.: Lastly, with our enhanced customer information, we are finding additional opportunities to better solutions and reinforced the value. We bring to customers. This includes bolstering our value added services offering and advancing our inventory management capabilities to improve keep stock processes and technology, both of which increased stickiness with customers improve our productivity and drive share.
Donald G. Macpherson: But with the results we've seen so far, we are on the right path and expect this initiative to contribute to outgrowth over the next few years. To ensure that our sales force is most effective, we're investing in tools and technology that leverage information from Tim and Kim to provide insights to our sellers at scale to help them better plan their day-to-day interactions. We are piloting several different capabilities here.
D. G.: This has been a multi year journey, which is creating a significant competitive advantage for our business as we layer on further enhancements and leverage machine learning and AI capabilities, we will continue to power our growth engines drive share and deliver customer value.
Donald G. Macpherson: Lastly, with our enhanced customer information, we are finding additional opportunities to embed our solutions and reinforce the value we bring. This includes bolstering our value-added services offering and advancing our inventory management capabilities to improve keepstock processes and technology, both of which increase stickiness with customers, improve our productivity, and drive share. This has been a multi-year journey that is creating a significant competitive advantage for us. As we layer on further enhancements and leverage machine learning and AI capabilities, we will continue to power our growth engines, drive share, and deliver. Moving to the endless assortment model, despite more muted top-line growth in 2023, the proven flywheel continues to propel forward. Montara continues to play well.
D. G.: Moving to the endless assortment model despite more muted top line growth in 2023, the proven flywheel continues to propel forward.
D. G.: Taro continues to execute well they've seen strong growth with enterprise customers continued to expand with small and mid size customers and are getting opex operating leverage as they ramp into their distribution center and gala.
D. G.: In January had the opportunity to visit monitor Oh and was able to see the progress and have got law, which has been supported by a tight partnership between our U S supply chain organization and a Japanese counterparts.
D. G.: The zoro team has progressed on their strategy expanding their assortment, attracting new customers and improving BW with customer retention, while repeat rates improved in 2023. The team continues to focus on this evergreen initiative. This includes presenting and personalizing, our most advantaged assortment assessing our price competitiveness and proactively communicating delivery times to highlight where we are advantage.
D. G.: For many of these efforts the team continues to work with their monitor our peers to share best practices. They worked together to move the business forward.
Donald G. Macpherson: They've seen strong growth with enterprise customers, continue to expand with small and midsize customers, and are gaining operating operating leverage as they ramp up their distribution center in the Gulf. In January, I had the opportunity to visit Monetaro and was able to see the progress at Indagawa, which has been supported by a tight partnership between our US supply chain organization and a Japanese counterpart. The Thoroughbred team has progressed on their strategy, expanding their assortment, attracting new customers, and improving B2B customer retention. While repeat rates improved in 2023, the team continues to focus on this ever-grand, This includes presenting and personalizing our most advantageous assortment, assessing our price competitiveness, and proactively communicating delivery times to highlight where we are. For many of these efforts, the team continues to work with their financial peers to share best practices that work together to move the business forward.
D. G.: Now, let's turn to <unk> advantaged supply chain, we've made great progress to return service back to near normal levels. Following the unprecedented global supply chain disruption that our industry experienced over the last few years.
D. G.: We continue to hear that greater product availability and our next day order complete shipping capabilities greatly set us apart from our competitors, allowing us to show up well and win customers.
D. G.: As I mentioned that our 2022 Investor day, we set out to accelerate our investment in capacity automation and sustainability initiatives to further strengthen our service advantage, we are well on that path as we add new square footage to the network, including the following three new bulk warehouses, including a 525000 square foot facility in Pinedale North Carolina, that's scheduled to open later this year.
D. G.: If I can a 35000 square foot distribution center currently under construction in Gresham, Oregon, which still on track to open in 2025 and as shared earlier. This week, a new $1 2 million square foot distribution Center near Houston, Texas with the addition of these facilities, we're adding $3 5 million square feet to our supply chain network in total representing more than a 35% increase from where we'd be.
D. G.: Began 2023 these latest investments will only strengthen our promise to customers count on us to provide next day complete orders to keep their operations running and people safe.
Donald G. Macpherson: Now let's turn to Grainger's Advantage supply chain. We've made great progress to return service back to near normal levels following the unprecedented global supply chain disruption that our industry experienced over the last few years. We continue to hear that Grainger's product availability and our next-day order-complete shipping capabilities greatly set us apart from our competitors, allowing us to show up well on Wednesday. As I mentioned at our 2022 Investor Day, we set out to accelerate our investment in capacity, automation, and sustainability initiatives to further strengthen our service. We are well on that path as we add new square footage to the network, including the following three new bulk warehouses, including a five That's scheduled to open later this year.
D. G.: Finally, I think it's important to reinforce how the grainger edge is truly the key to all of the success that I just mentioned.
D. G.: Everyday our purpose, we keep the world working motivates us to do our best for customers communities and each other.
D. G.: Our commitment has driven a culture, we are very proud of and one that's continuously they noticed externally.
Recently Grainger, Inc. Third out of 400 of America's largest companies and the American opportunity index for our commitment to developing internal talent to drive business performance and individual growth index, primarily focuses on the experience of workers and non college degree rules and the company's ability to offer them growth and development no matter their career path. Additionally, grandeur of as Nate and glass doors.
D. G.: <unk> 2020 for best places to work by stores more than 50 million unique monthly visitors and this recognition is particularly special.
D. G.: First time Grainger was named glass towards U S. Large employer list. Both of these awards are based on third party facts, a proprietary career databases not surveys so they eliminate subjectivity and serve as a testament to the way the Grainger edge has strengthened our team member experience and employer brand.
Donald G. Macpherson: 535,000 square foot distribution center currently under construction in Gresham, Oregon, which is on track to open in 2025. And, as shared earlier this week, a new 1.2 million square foot distribution center near Houston, Texas. With the addition of these facilities, we're adding 3.5 million square feet to our supply chain network in total, representing more than a 35% increase from where we began in 2023. These latest investments will strengthen our promise to customers who count on us to provide next day complete orders to keep their operations running and people safe. Finally, I think it's important to reinforce how the Granger edge is truly the key to all of the success that I just mentioned. Every day, our purpose of keeping the world working motivates us to do our best for customers, communities, and each other.
D. G.: Lastly, before switching to the financials I want to take a second to announce an update to our 2030 sustainability target our target approved by the board early in the fourth quarter of 2023 seeks to reduce absolute scope, one and two emissions by 50% from a 202018 baseline up from the previous 30% target. This new go lives with a level required.
To reduce scope, one and two emissions to limit global temperature rise to one five degrees Celsius.
Environmental stewardship, which has long been a standing focus for Grainger remains a key component of our culture and is embedded with the grainger edge in everything we do to be clear our investments in sustainability of profitable as our team has been very resourceful in finding ways to prove our emissions while also supporting results.
Turning to slide nine we finished the year with over $16 5 billion in sales up eight 6% on a daily basis, or nine 5% and daily organic constant currency amidst the normalizing demand.
Donald G. Macpherson: That commitment has driven a culture we are very proud of, and one that's continually being noticed externally. Recently, Grainger ranked third out of 400 of America's largest companies in the American Opportunity Index for our commitment to developing internal talent, driving business performance, and individual growth. The index primarily focuses on the experience of workers in non-college degree roles and a company's ability to offer them growth and development no matter their education.
Environment growth for the year as highlighted by our high touch solutions U S business, which continued to gain profitable share, finishing the year with 525 basis points of market outgrowth exceeding our annual target of 400 to 500 basis points.
D. G.: <unk> had that strong top line. The team also did a great job of managing profitability through the year with operating margins up 130 basis points in 2023, finishing the year at 15, 7%.
Donald G. Macpherson: Additionally, Grainger was named Glassdoor's 2024 Best Places to Work. Glassdoor has more than 50 million unique monthly visitors, and this recognition is particularly special as it's the first time Grainger was named Glassdoor's U.S. Large Employer. Both of these awards are based on third-party facts or proprietary career data, not surveys.
D. G.: These strong results fueled record earnings ROIC and cash flow for the year adjusted EPS was up over 23% to $36.67 per share.
D. G.: Oh I see finished at 42, 8% and operating cash flow was over $2 billion, which allowed us to return $1 2 billion to shareholders through dividends and share repurchases overall the strong results for 2023 are the byproduct of a lot of hard work from our entire team and I am very proud of what we've been able to accomplish as we embark on another year, regardless of what market. We face we are well.
Donald G. Macpherson: So they eliminate subjectivity and serve as a testament to the ways that Grainger Edges strengthen our team member experience. Lastly, before switching to the financials, I want to take a second to announce an update to our 2030 sustainability. Our target approved by the board early in the fourth quarter of 2023 seeks to reduce absolute scope one and two emissions by 50% from a 2018 baseline, up from the previous 30% This new goal aligns with the level required to reduce scope one and two emissions to limit global temperature rise to 1.5 degrees. Environmental Stewardship, which has long been a standing focus for Grainger, remains a key component of our culture and is embedded with the Grainger edge in everything we, To be clear, our investments in sustainability are profitable as our team has been very resourceful at finding ways to improve our emissions while also supporting, Turning to slide nine, we finished the year with over $16.5 billion in sales, up 8.6% on a daily basis or 9.5% in daily organic constant currency amidst the normalizing demand.
D. G.: Positioned to continue on our momentum and expect to drive great results for our stakeholders in 2024 and beyond with that I will turn it over to Dean.
Dean: Thanks D G and I apologize upon everyone I'm a little hoarse today. So please bear with me.
Dean: Turning to our fourth quarter results, we had a solid quarter to finish out the year.
Dean: But the profitability coming in stronger than expected, but also reflecting on top line softness.
Yes.
Dean: For the total company result, any sales grew five 1% or five 5% on a daily organic constant currency basis.
Which was driven by growth across both segments.
Dean: Consistent with what we've seen all year.
Dean: Year over year top line growth rates continue to moderate.
Dean: As we wrap price pass in the prior year.
While sales finished within our implied guidance range for the quarter.
Did see more holiday related softness than anticipated and we ended the quarter.
Donald G. Macpherson: Growth for the year is highlighted by our High Touch Solutions U.S. business, which continued to gain profitable share, finishing the year with 525 basis points of market outgrowth, exceeding our annual target of 400 to 500 basis points. Alongside the strong top line, the team also did a great job of managing profitability through the year, with operating margins up 130 basis points in 2023, finishing the year at 15.7. Together these strong results fueled record earnings, ROIC, and cash flow. For the year, adjusted EPS was up over 23% to $36.67 per share.
The total company gross margin for the quarter finished at 39, 1%.
Dean: Declining by 50 basis points over the prior year period.
Dean: Both segments saw slight year over year margin contraction as expected, which I will detail in the coming slides.
Dean: But in total finished the quarter at the top end of our implied fourth quarter.
Dean: Total company operating margin was up 80 basis points, which was aided by a lack of roughly $35 million and onetime expenses in the prior year period.
When excluding this impact.
Dean: G&A as a percentage of sales was still favorable versus prior year by roughly 40 basis points.
Dean: In total we delivered diluted EPS for the quarter at $8 33.
Dean: Which was up over 16% versus the fourth quarter of 2022.
Donald G. Macpherson: ROIC finished at 42.8%, and operating cash flow was over $2 billion, which allowed us to return $1.2 billion to shareholders through dividends and share repayment. Overall, these strong results for 2023 are the byproduct of a lot of hard work from our entire team. And I'm very proud of what we've been able to achieve. As we embark on another year, regardless of what market we face, we are well positioned to continue our momentum and expect to drive great results for our stakeholders in 2024. With that, I will turn it over to. Thanks, DG. And I apologize up front, everyone. I'm a little hoarse today.
Dean: Moving on to segment level results.
The high Tech solutions segment continues to perform well with sales up four 7%.
Our reported and daily organic constant currency basis.
Dean: Steel by growth across all geographies.
Dean: Volume growth remained strong and accounts for a vast majority of the overall year over year expansion.
Dean: In the U S.
Dean: Almost all customer end markets continue to see growth in the fourth quarter with government contractors and health care seeing the strongest year over year performance.
Dean: Canada grew slowly in Q4, driven by the macro but the business remains solidly profitable in the quarter and finished 2023 with their most profitable year in over half a decade.
Dean: For the segment gross profit margin finished the quarter at 41, 4% down 50 basis points versus the prior year due to negative price cost spread a yearend inventory cost adjustments, which included the lap of a prior year LIFO inventory benefit that we did not repeat in 2023.
D. Meriwether: So please bear with me. Turning to our fourth quarter results, we had a solid quarter to finish out the year, with profitability coming in stronger than expected, but also reflecting some top line softness as we exited the year. For the total company results, daily sales grew 5.1% or 5.5% on a daily organic constant currency basis, which was driven by growth across both segments. Consistent with what we've seen all year, year-over-year top line growth rates continue to moderate as we wrap price past the prior year. While sales finished within our implied guidance range for the quarter, we did see more holiday-related softness than anticipated as we ended the quarter. The total company gross margin for the quarter finished at 39.1%, declining by 50 basis points over the prior year period.
Dean: These headwinds were partially offset by the continued supply chain tailwind that we've seen all year as improved product availability and lower fuel and container cost 12 year old or your favorite though.
Dean: Although we were price cost negative in the quarter and for the full year of 2023, we are nearly neutral on a two year stack is the timing favorability captured in 2022 it's fully unwound and we enter 2024 on a neutral fleet.
Dean: At the operating margin line, we saw an improvement of 90 basis points year over year as the slight GP decline was offset by leverage in the business quite continued investment in marketing.
Dean: To drive long term growth.
Dean: As mentioned year over year SG&A leverage was aided by roughly 90 basis points due to a lack of onetime expenses in the prior year period.
D. Meriwether: Both segments saw a slight year-over-year margin contraction as expected, which I will detail in the coming slides, but in total, the company finished the quarter at the top end of our implied fourth quarter. Total company operating margin was up 80 basis points, which was aided by a write-down of roughly $35 million of one-time expenses in the prior year. When excluding this impact, SG&A as a percentage of sales was still favorable versus the prior year by roughly 40 basis points. In total, we delivered diluted EPS for the quarter of $8.33, which was up over 16% versus the fourth quarter of 2020. Moving on to segment level results,
Dean: Overall it was another solid quarter for the high Tech solutions, North American segment wrapping up a great year.
Dean: Looking at market outgrowth on slide 13.
Dean: Estimate that the U S. MRO market grew in the quarter between two five and 3%.
Dean: Largely driven by price with industrial production are proxy for volume remained roughly flat year over year.
Dean: This indicates that the high Tech solutions U S business achieved roughly 225 basis points of outgrowth in the fourth quarter in total.
Dean: This more muted quarterly outgrowth reflects higher market based inflation in <unk>.
D. Meriwether: The high tech solutions segment continues to perform well, with sales up 4.7% on both a reported and daily organic constant currency basis. Fueled by growth across all geographies, volume growth remains strong and accounts for a vast majority of the overall year-over-year expansion in the US.
Dean: <unk> Q4 price contribution due to the timing of when we pass price versus the market.
Dean: On the pure volume basis, when looking at our volume contribution versus IP growth.
Dean: Market growth was closer to 475.
D. Meriwether: Almost all customer end markets continued to see growth in the fourth quarter, with government, contractors, and healthcare seeing the strongest year-over-year performance. Canada grew slowly in Q4 driven by a softening macro, but the business remained solidly profitable in the quarter and finished 2023 with its most profitable year in over half a decade. For the segment, gross profit margin finished the quarter at 41.4%, down 50 basis points versus the prior year due to a negative price cost spread and year-end inventory cost adjustment, which included the lap of a prior year LIFO inventory benefit that we did not repeat in 2020. These headwinds were partially offset by the continued supply chain tailwinds we've seen all year as improved product availability and lower fuel and container costs drove you over to your favorite.
In any case as D. G mentioned looking at the full year, we achieved an annual outgrowth target.
Dean: By capturing approximately 525 basis points of growth above the market and remain poised to deliver against our target again in 2024.
Dean: Moving to our endless assortment segment.
Dean: Sales increased 6% or eight 2% on a daily constant currency basis, which adjusts for the impact of the depreciating Japanese yen.
Dean: They're all U S was up two 6%, while Minotaur achieved nine 9% growth in local days local currency.
Dean: At a business level.
This growth reflects the continuation of headwinds they've experienced all year with declines in non core BDC volume slowing macro environment impacting the b to b customers.
D. Meriwether: Although we were price cost negative in the quarter and for the full year of 2023, we are nearly neutral on a two-year stack as the time and favorability captured in 2022 has fully unwound, and we enter 2024 on a neutral footing. At the operating margin line, we saw an improvement of 90 basis points year over year, as the slight GP decline was offset by leveraging the business by continued investment in marketing and takeout to drive long-term growth. As mentioned, year-over-year SG&A leverage was aided by roughly 90 basis points due to the elimination of one-time expenses in the prior year.
Dean: CDP customer growth remained steady in the high single digits for the quarter, while noncore BTC and B to C like customer performance remain down over 20% year over year.
Dean: And Minotaur, all macro labor headwinds continued to impact results.
Dean: However, the business scale drove strong growth with increased sales to new and enterprise customers, while also maintaining strong repeat purchase rate.
Dean: From a profitability perspective gross margin for the segment declined 60 basis points versus the prior year as Minotaur, all capability was offset by year over year declines that Doyle.
Dean: As in the prior quarters on a term results reflect continued freight efficiencies while the euro decline was driven by negative product mix and the impact of unfavorable timing from prior year price increases.
D. Meriwether: Overall, it was another solid quarter for the High Tech Solutions North American segment, wrapping up a great year. Looking at market outgrowth on slide 13, we estimate that the US MRO market grew between 2.5 and 3%. Largely driven by price, with industrial production, our proxy for volume, remaining roughly flat year over year. This indicates that the high tech solutions US business achieved roughly 225 basis points of outgrowth in the fourth quarter.
Operating margins for this segment expanded by 50 basis points.
Dean: Seven 8%.
Dean: Unfavorable gross margin was offset by SG&A leverage aided by the lack of onetime distribution center and commissioning costs in the prior year.
Speaker Change: Now looking forward to 2024.
Speaker Change: We expect to deliver another solid year performance amidst a more muted MRO market.
D. Meriwether: This more muted quarterly outgrowth reflects higher market-based inflation than Grainger's Q4 price contribution due to the timing of when we passed price versus the market. On a pure volume basis, we're looking at our volume contribution versus IP growth, our market outgrowth growth was closer to 475%. In any case, as DG mentioned, looking at the full year, we achieve an annual outgrowth target by capturing approximately 525 basis points of growth above the market and remain poised to deliver against our target again in 2020. Moving to our Enlistment Supportment segment. Sales increased 6% or 8.2% on a daily constant currency basis, which adjusts for the impact of the depreciated Japanese yen. Zorro U.S. was up 2.6%, while Montetaro achieved 9.9% growth in local days, local terms.
Speaker Change: Our outlook for the year includes revenue to be between $17 to $17 7 billion at the total company level.
Speaker Change: With daily organic constant currency sales growth between 4% and 7% driven by top line growth in both segments.
Speaker Change: With our high touch the most of this segment, we spend daily organic constant currency sales growth between 3.565%.
Speaker Change: In the U S. We're planning for the total MRO market growth to be largely flat with a range of down one 5%.
Speaker Change: One 5%.
This system is the flattish volume range, coupled with price inflation of between zero and 1%.
Speaker Change: On top of this market outlook, we expect to continue executing against our strategic growth engines to achieve 400 to 500 basis points.
Speaker Change: The U S market outgrowth in 2024.
D. Meriwether: At a business level, George's growth reflects the continuation of headwinds they've experienced all year, with declines in non-core B2C volume and a flowing macro environment impacting its B2B customers. B2B customer growth remained steady in the high single digits for the quarter, while non-core B2C and B2C-like customer performance remained down over 20% year-over-year, and Monetaro However, the business still drove strong growth with increased sales to new and enterprise customers, while also maintaining strong repeat purchase. From a profitability perspective, gross margin for the segment declined 60 basis points versus the prior year, as monetarily favorableness was offset by year-over-year declines of zero. As in the prior quarters, monitoring results reflect continued freight efficiency, while the zero decline was driven by negative product mix and the impact of unfavorable timing from Operating margins for the segment expanded by 50 basis points to 7.8% as the unfavorable gross margin was offset by SG&A leverage aided by the lack of one-time distribution center and commissioning costs in the prior year. Now, looking forward to 2024.
Speaker Change: And the endless assortment segment, we anticipate daily constant currency sales to grow between seven and 10%, which normalizes for the impact of two additional business thing.
Second foreign currency exchange headwinds.
Speaker Change: Minotaur was expected to grow in the low double digits in local currency and local teams as they continue to ramp new and enterprise customers and less than expected slower macro demand environment.
The wells anticipated to grow in the mid single digits at the antenna anticipate that many of the macro related headwinds impacting their core beta customers hold over into 2024.
We also expect the continued unwind of BBC and be the CLEC customers, which include retailers and marketplaces to impact results.
Speaker Change: Definitely in the first half of the year.
Speaker Change: And 'twenty 'twenty four the team will focus on growing long term relationships with its core customers, including work to improve targeted marketing fine tune their pricing model and drive consistent service for all of their costs.
Speaker Change: Moving to our margin expectations.
Speaker Change: Even after normalizing for some one time gross margin benefits, we realized in 2023.
Speaker Change: We expect total company operating margins to remain quite healthy in 2024.
Speaker Change: And the high Tech solutions segment.
Speaker Change: Operating margins will stay relatively flat year over year between $17 417, 9%.
D. Meriwether: We expect to deliver another solid year of performance amidst a more muted MRO market. Our outlook for the year includes revenue of between $17.2 and $17.7 billion at the total company level, with daily organic constant currency sales growth between 4% and 7% driven by top line growth in both segments. With our high-tech solutions segment, we extend daily organic constant currency sales growth between 3.5 and 6.5. In the US, we're planning for the total MRO market growth to be largely flat, with a range of down 0.5% to plus 1.5%. The system's a flattest volume range coupled with price inflation between zero and one.
Speaker Change: We expect gross profit margins down in 2024 after lapping roughly 50 basis points of one time benefits captured in 2012.
Speaker Change: We anticipate price cost for the year will be the only neutral.
Speaker Change: Worked our way through the tightening described.
Speaker Change: Seen over the last couple of years.
Speaker Change: On the SG&A side.
Speaker Change: This leverage while we continue to make incremental investments toward our strategic initiatives to fuel our growth.
Speaker Change: And endless assortment, we are modeling operating margins to be roughly consistent to what we've seen in the back half of 2023.
And the seven 3% to seven 8% range.
Speaker Change: Segment baseline following duals revenue declines.
Speaker Change: They're noncore B B C and D to C like us.
Speaker Change: At the business unit level. So operating margins are expected to decline by minus Harald operating margins are expected to be neutral for the year.
D. Meriwether: On top of this market outlook, we expect to continue executing against our strategic growth engines to achieve 400 to 500 basis points, A Newest Market Outlook in 2020. In the endless assortment segment, we anticipate daily constant currency sales to grow between 7 and 10%, which normalizes for the impact of two additional business days and the expected foreign currency exchange hit. Monetar was expected to grow in the low double digits in local currency and local gains as it continues to ramp new and enterprise customers amidst an expected slower macro. The world is expected to grow in the mid-single digits as we anticipate that many of the macro-related headwinds impacting their core B2B customers hold over into 2024.
Speaker Change: Turning now to capital allocation.
Speaker Change: Expect the business will continue to generate strong cash flow in the year.
The range of $1 92.
Speaker Change: $1 billion implying.
Speaker Change: Implying operating cash conversion around 100%.
Speaker Change: We plan to continue to execute a consistent returns driven approach to our capital allocation strategy, meaning our priorities remain largely unchanged from prior years.
Speaker Change: First we look at investing in the business and both organic investment and opportunistic M&A.
For 2024, we expect capital spending in the range of $400 million to $500 million.
Spending here includes continued supply chain expansion in United States.
D. Meriwether: We also expect to continue to unwind relationships with B2C and B2C-like customers, which include resellers and marketplaces, to impact results, especially in the first half of the year. In 2024, the team will focus on growing long-term relationships with its core B2B customers, including work to improve targeted marketing, fine-tune their pricing model, and drive consistent service for all of them. Moving to our margin expectations. Even after normalizing for some one-time gross margin benefits we realized in 2020, we expect total company operating margins to remain quite healthy in 2020, and the high tech solutions segment. Operating margins will stay relatively flat year over year between 17.4 and 17.9. We expect gross profit margins to be down in 2024 after lapping roughly 50 basis points of one-time benefits captured in 2023. We anticipate price costs for the year will be nearly neutral as we have worked our way through the timely discrepancies we've seen over the last couple of years. On the SG&A side, we expect modest leverage while we continue to make incremental investments toward a strategic initiative to fuel our growth. An endless assortment of them.
Speaker Change: We worked to stand up facilities in the Pacific Northwest and the Houston area.
Speaker Change: We also plan to further invest in our homegrown data and technology capabilities, helping power our growth engines and further our customer value proposition.
Speaker Change: Lastly, sustainability related spin most of priority, we will continue to invest in projects with solid returns to help achieve our emissions target.
On M&A, we remain highly selective.
Speaker Change: But are also open to investing in capabilities and acquire right essentially.
Speaker Change: Further our strategy.
Speaker Change: And we have a small dedicated team.
We continually evaluate opportunities in this area.
Speaker Change: Secondly, we expect to return the balance of our excess cash to shareholders in the form of dividends and share repurchases.
Speaker Change: As always we will formally set our 2024 dividend in the second quarter, but I can say, we remain proud of our history and increasing the dividend for 52 consecutive years.
Speaker Change: Expect to do so again.
Speaker Change: We do not pay a dividend pay out to specific metrics. However, we anticipate consistent annual dividend increases in the high single digit to low double digit percentage range every year.
Speaker Change: Lastly, we expect to allocate the balance of our cash flow to share repurchases and anticipate the amount to be between $900 million and $1 1 billion in 2024.
D. Meriwether: We are modeling operating margins to be roughly consistent with what we've seen in the back half of 2023 and the 7.3 to 7.8% range as the segment re-baselines following Zoll's revenue declines with their non-core B2C and B2C-like at the business unit level. Also, operating margins are expected to decline, while Milo Tarle's operating margins are expected to be roughly neutral for the year. Turning now to capital allocation, we expect the business will continue to generate strong cash flow in the year, with an expected range of $1.9 to $2.1 billion, implying operating cash conversion around 100%. We plan to continue to execute a consistent, return-driven approach to our capital allocation strategy, meaning our priorities remain largely unchanged from prior years. First, we look at investing in the business and both organic investment and opportunistic M&A. For 2024, we expect capital spending in the range of $400 to $500 million.
Speaker Change: We think the return focus allocation philosophy provides.
Musician optimal flexibility.
Speaker Change: Patiently manage investment while maximizing shareholder return.
Speaker Change: In summary.
All of this up at the total company level as mentioned, we plan to grow topline by well from 4% to 7% on a daily organic constant currency basis.
Speaker Change: Note that reported sales growth is a bit higher than our daily organic constant currency range.
Speaker Change: Normalizing for the divestiture of our E&S subsidiary.
Speaker Change: Ex changes and the impact of two additional selling days in 2024 compared to the prior year.
A reconciliation of these impacts is provided in appendix of this presentation.
Speaker Change: Operating margin in this class.
Range from $15 three to 15, 8% leading to expected EPS growth of 3.6 to 10, 5% or.
D. Meriwether: Spending here includes continued supply chain expansion in the United States as we work to standardize facilities in the Pacific Northwest and the Houston area. We also plan to further invest in our homegrown data and technology capabilities, helping power our growth engines and further our customer value. Lastly, sustainability-related bids remain a priority.
Speaker Change: $38 to $40 50 per share.
Speaker Change: From a seasonality perspective.
Speaker Change: We do expect both revenue and profitability.
Speaker Change: More back half weighted as we move through the year.
Speaker Change: This includes softest.
Speaker Change: In January.
Speaker Change: From the timing of the New York, New year's holiday and cold weather disruptions experienced midmarket across a large portion of the U S.
D. Meriwether: We will continue to invest in projects with solid returns to help achieve our emissions targets. On M&A, we remain highly selective but are also open to investing in capabilities and acquiring the right assets to further our strategy. And we have a small dedicated team to continually evaluate opportunities in this area. Secondly, we expect to return the balance of our excess cash to shareholders in the form of dividends and share buybacks. As always, we'll formally set our 2024 dividend in the second quarter. But I can say we remain proud of our history of increasing the dividend for 52 consecutive years and expect to do so again this year. We do not tie our dividend payout to specific metrics. However, we anticipate consistent annual dividend increases in the high single-digit to low double-digit percentage range every year. Lastly, we expect to allocate the balance of our cash flow to share repurchases and anticipate the amount to be between $900 million and $1.1 billion in 2020. We think this return focus allocation philosophy provides the organization optimal flexibility to efficiently manage investment while maximizing shareholding.
Speaker Change: With the January sales started slowly but picked up momentum as the month progressed with preliminary results of four 4% on a daily organic constant currency basis.
Stability with more muted inflation in the year, we won't see the pricing price timing favorability, we normally capture in the first quarter.
Speaker Change: Wednesday's close margins will show very little seasonality and remains equally successful with that.
Speaker Change: Full year gross margin outlook throughout the year.
Speaker Change: For SG&A, we expect year over year deleverage in the first quarter as we ramp up the investment spending in 2024.
Speaker Change: Average will improve each quarter slipped.
Speaker Change: Flipping to a tailwind in the back half of the year.
Altogether this will drive EPS growth.
Speaker Change: Flat to slightly down in the first quarter and will ramp thereafter.
Speaker Change: King.
Speaker Change: Before I hand, it back to D. G I.
Speaker Change: Wanted to quickly touch on our long term outlook, where we expect it to business over the next several years.
Speaker Change: As we discussed on our last call we've made great progress towards the 2025 targets, we laid out at our Investor Day in September 2022.
Speaker Change: We remain on track to hit our.
Speaker Change: Revenue calls, but are meaningfully ahead.
D. Meriwether: In summary, rolling all this up at the total company level, as mentioned, we plan to grow top line by roughly four to 7% on the daily organic concentrate. Note that reported sales growth is a bit higher than our daily organic cost and currency range as we're normalizing for the divestiture of our E&R subsidiaries, FX changes, and the impact of two additional selling days in 2024 compared to the prior year. A reconciliation of these impacts is provided in the appendix of this presentation.
Most of our profitability target.
Speaker Change: With this we'll be placing our 2025 target.
Speaker Change: <unk> long term earnings framework.
Speaker Change: The framework is actually quite similar to what we've discussed previously and we continue to target double digit annual EPS growth kind of normalized MRO market driven by.
Speaker Change: Continued strong top line growth, including four to 500 basis points of annual market also.
Speaker Change: Hi, touch U S business.
Speaker Change: Annual growth in the teens for endless assortment.
Speaker Change: Genuinely stable gross profit margins should normalize from the 'twenty 'twenty four baseline.
D. Meriwether: Operating margin, as we discussed, ranged from 15.3 to 15.8%, leading to expected EPS growth of 3.6 to 10.5% for $38 to $40 and 50 cents per share. From a seasonality perspective, we do expect both revenue and profitability to be more back halfway as we move through the year. This includes a softer sound in January due to the timing of the New Year's holiday and cold weather disruptions experienced mid-month across a large portion of the U.S. Because of this, January sales started slowly but picked up momentum as the month progressed, with preliminary results of 4.4% on a daily organic cost-to-currency of Profitability. With more muted inflation in the year, we won't see the price timing favorability we'd normally capture in the first quarter.
Speaker Change: And SG&A growing slower than sales, while still investing in demand generation activities to drive sustainable long term growth.
Speaker Change: You will notice we made a few tweaks to the uninstalling work, which largely offset.
Speaker Change: First we've widened the topline outlook for endless assortment each business there are some dynamics, making it harder to achieve historical growth.
Speaker Change: But the amount of time at this stage of immaturity. The business has onboard most of the large and mid sized businesses and their market.
The team is tabled women's marketing strategies confirm level customer acquisition.
Speaker Change: End user penetration in an effort to expand total customer share of wallet.
Speaker Change: And Zillow following the post pandemic volume declines from D to C and D to C like customers the businesses refocusing their efforts on PDP customers as they work to build long term profitable relationships with these core with this core customer stack.
D. Meriwether: With this, growth margins will show very little seasonality and remain reasonably consistent with our full year growth margin outlook throughout the year. For SG&A, we expect year-over-year due leverage in the first quarter as we ramp up investment spending in 2024. Average will improve each quarter.
Speaker Change: As the business refocused, we think it's prudent to widen the range of growth outcomes for this segment over the next few years.
Because we still expect to deliver very strong growth through these headwinds and remain confident in the model's ability to continue to take share.
D. Meriwether: Look into a tailwind in the back half of the year. All together, this will drive EPS growth to be flat to slightly down in the first quarter and will ramp thereafter as the year... Before I hand it back to you, I wanted to quickly touch on our long-term outlook and where we expect to take the business over the next several years. As we discussed in our last call, we've made great progress towards the 2025 targets we rolled out at our Investor Day in September 2022. We remain on track to hit our revenue goals that are meaningfully ahead of most of our profitability. With this, we're replacing our 2025 targets with an updated, long-term earnings framework. The framework is actually quite similar to what we've discussed previously.
Speaker Change: Profitable operating scale to the total business overall.
Speaker Change: Second as we foreshadowed last quarter.
Speaker Change: To maintain elevated gross margin in the high Tech solutions segment, which is underpinned by the confidence we have in executing against our two core pricing.
Speaker Change: Meaning market price competitive.
Speaker Change: While maintaining price cost neutrality.
Speaker Change: Adding these together net net we end at roughly the same outlook as we discussed at Investor Day strong earnings.
Speaker Change: Growing in double digits.
When we drive these results the business with considerable amounts of cash.
D. Meriwether: As we continue to target double-digit annual EPS growth in a normalized MRO market given by continued strong top-line growth, including four to 500 basis points of annual market outgrowth in the high-tech U.S. business and annual growth in the teams for endless support. Genuinely Stable Growth Profit Margins We Should Normalize From a 2024 Baseline, and SG&A growing Florida sales are still investing in demand generation activities to drive sustainable long-term growth. You will notice we made a few tweaks to the earnings framework, which is largely outweighed. First, we've widened the top line outlook for endless assortment as each business there is facing dynamics that make it harder to achieve historical growth. With Monetaro, at this stage of its maturity, the business has onboarded most of the large and mid-sized businesses in its market.
Speaker Change: We will allocate to consistent in turn driven approach.
Speaker Change: This includes continuing to invest in the business at an elevated level for the next few years as we add incremental supply chain capacity to continue to build out our technology capabilities.
And all of this up and we think this represents an attractive return profile, we remain well positioned to drive significant value creation for our shareholders.
Speaker Change: With that I'll turn it back to TG for some closing remarks.
D G: Thank you D.
D G: Greater continues to build deep trust with our customers as we partner with them to fulfill their MRO needs.
TG: While we expect the market in 2024 to be more muted. The grainger team will continue to focus on what matters advancing our growth drivers to improve the customer experience and providing the exceptional service. We are known for when we live our principles. We can be successful in a matter of the cycle I have full confidence that we will deliver strong results again this year with that we will open up the line for questions.
D. Meriwether: With this, the team is pivoting its marketing strategy from firm-level customer acquisition to end-user penetration in an effort to expand total customer share volume, and Zorro follows the post-pandemic volume declines from B2C and B2CY customers. The business is refocusing its efforts on B2B customers as it works to build long-term profitable relationships with core customers. As the business refocuses, we think it's prudent to widen the range of growth outcomes for the segment over the next few years. Regardless, we still expect to deliver very strong growth through this segment and remain confident in the model's ability to continue to take share and drive profitable operating scale to the total business overall. Second, as we foreshadowed last quarter, we expect to maintain elevated growth margins in the high-tech solutions segment, which is underpinned by the confidence we have in executing against our two core pricing strategies, Manning market price competitive while maintaining price cost neutrality. Adding these together, net net, we end at roughly the same outlook as we discussed yesterday. Strong Earnings, scoring in double digits, and when we drive these results, the business will cost considerable amounts of cash, which we will allocate to a consistent and return-driven approach.
Thank you we will now be conducting a question and answer session I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset.
TG: Before pressing the star keys.
TG: One moment, please while we poll for your questions.
TG: Our first questions come from the line of Ryan Merkel with William Blair. Please proceed with your questions.
Ryan J. Merkel: Everyone. Thanks for taking the questions I wanted to start with gross margin and I guess, it's a two parter.
Ryan J. Merkel: Gross margins are up about 100 basis points since 2019 and I'm just curious what the drivers are and then for the 24 guide at the high end, you're holding gross margins flat, but I think you mentioned 50 basis points of one time price cost that you're going to have to lap so what backfill that.
Hi, let me start with the first question.
Speaker Change: And then maybe I'll have you re ask the second part of it to make sure I don't forget anything.
Speaker Change: So when we go back to 2019, I think we've done a pretty good job on.
Speaker Change: Just product gross margins.
Speaker Change: In general and being able to profit type customers.
Speaker Change: Customers based upon the services that we provide from the high touch solutions business.
Donald G. Macpherson: This includes continuing to invest in the business at an elevated level for the next few years as we add incremental supply chain capacity and continue to build out our technology capabilities. All this together, and we think this represents an attractive return profile, we remain well positioned to drive significant value creation for our show. With that, I'll turn it back to TG for some closing remarks. Thank you, Dee. Grainger continues to build deep trust with our customers as we partner with them to fulfill their MRO needs.
Speaker Change: In addition to that.
Speaker Change: The pricing strategy change has taken a while to come to.
Speaker Change: To be completely executed as we as we said over a number of years and that included making sure that we could get pricing right on all of our teams for all of our customers. So some of that evidence also flows into our product product GP and then as of late.
Speaker Change: We've continued to gain quite a bit of supply chain efficiencies.
Speaker Change: From coming out of the pandemic as.
Operator: While we expect the market in 2024 to be more muted, the Grainger team will continue to focus on what matters, advancing our growth drivers to improve the customer experience and providing the exceptional service we are known for. When we live our principles, we can be successful no matter the cycle. I have full confidence that we will deliver strong results again this year. With that, we will open up the line. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
Speaker Change: And as well as some other cost efficiencies related to supplier rebates related to negotiation those would be some of the key differences between where we are today and where we were in 2019.
Speaker Change: So can you can you repeat your second part of the question for me. Please.
Speaker Change: Yeah, the guidance for gross margins and 24, it's flat at the high end at 39, four and I think you mentioned, you'll be lapping 50 basis points of one time price cost helped in 'twenty three.
Speaker Change: What are the offsets.
Yeah.
Speaker Change: So.
Speaker Change: Some of the offsets related to the fact.
Speaker Change: That as we go into this year, we're going to have the softer pricing environment.
Operator: You may press star two if you would like to remove your question. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start button. One moment, please, while we poll for your question. Our first question comes from the line of Ryan Merkel with William Blair. Please proceed with the questions. Everyone, thanks for taking the questions. I wanted to start with gross margin, and I guess it's a two-parter. Your gross margins are up about 100 basis points since 2019. And I'm just curious what the drivers are.
Speaker Change: And based upon that.
Speaker Change: He wanted to make sure that we're providing a range such that is realistic for us to hit also in a softer volume environment for the overall business.
Speaker Change: And so those are some of the two primary reasons why being essentially flat.
Speaker Change: We would expect to be closer to that high end.
Speaker Change: We've got some tailwind that will continue.
Speaker Change: To normalize after some of the disruptions that we've had over the past few years, specifically supply chain mix and that'll help as well.
Ryan J. Merkel: And then for the 24 guide at the high end, you're holding gross margins flat, but I think D you mentioned 50 basis points of one-time price costs that you're going to have to lap. So, what backfills that? Hi. Let me start with the first question first, and then maybe I'll have you re-ask the second part of it to make sure I don't forget anything.
Speaker Change: Very helpful. Thank you.
Speaker Change: Thank you our next questions come from the line of Tommy Moll with Stephens. Please proceed with your questions.
Tommy Moll: Good morning, and thank you for taking my questions.
Tommy Moll: Mark.
Tommy Moll: I wanted to expand on the gross margin conversation with what's perhaps the obligatory question here.
Tommy Moll: But I just want to make sure that that that I'm tracking the message correctly over time. So if we go back to your Investor day.
D. Meriwether: So when we go back to 2019, you know, I think we've done a pretty good job on just product gross margins in general and being able to profitably profit customers based upon the services that we provide from the high-tech solutions business. In addition to that, you know, the pricing strategy change has taken a while to come to be completely executed, as we have said, over a number of years. And that included making sure that we could get pricing right on all of our schemes for all of our customers. So some of that evidence also flows into our product, product GP. And then as of late, we've continued to gain quite a bit of supply chain efficiencies from coming out of the pandemic, as well as some other cost efficiencies related to supplier rebates. Those would be some of the key differences between where we are today and where we were in 2019. So can you repeat your second part of the question for me, please?
Tommy Moll: The anchor for your high touch business was in that 40% range since that time, you've outperformed it significantly and indicated that maybe that that was too low a number.
Speaker Change: And if I'm hearing the message correctly today in 2024 at the midpoint, you're somewhere a little bit north of 41% and 25 and thereafter stable around that range. So I just want to make sure I have tracked all that correctly or if there's anything you'd like to amend there. Thank you.
Speaker Change: We've tracked that I think you've tracked that correctly that the only other thing I would add is that when we during the Investor day, when we said 40% of that.
Speaker Change: We probably knew that there was the supply chain efficiencies are that is a big bucket, we probably knew that there was a lot of inefficiency I think we'd probably maybe you've been surprised at how much inefficiency in it.
Ryan J. Merkel: Yeah, the guidance for gross margins in 24, it's flat at the high end at 39.4. And I think you mentioned you'll be lapping 50 basis points of one-time price cost help in 23. So what are the offsets?
Got back to normal that's been a big a big tailwind for us and so we probably if we had known it was just difficult to see all of that we probably would have had a higher number back then as well.
Speaker Change: Sure.
Speaker Change: Pivoting to the the commentary you offered today on service levels.
D. Meriwether: Yeah, so some of the offsets relate to the fact that www.thevenusproject.com And based upon that, you want to make sure that we're providing a range that is realistic for us to hit, also in a softer volume environment for the overall business. And so those are some of the two primary reasons why being essentially flat, we would expect to be closer to that high end. You know, we've got some tailwinds that will continue to normalize after some of the disruptions that we've had over the past few years, specifically supply chain and mix. And that'll help. Very helpful. Thank you. Thank you. Our next questions come from the line of Tommy Moll with Stevens.
Earlier in your remarks D G.
Speaker Change: So it sounds like you're back to roughly your own pre pandemic service levels.
Speaker Change: You've invested and will invest substantially in the capacity and automation.
And the other areas as well so I'm just curious strategically.
Speaker Change:
D G: Do you feel more confident in leaning into these forms of investment versus what you've communicated in the past should we read from today that with the increased confidence you see this as a repeatable and sustainable advantage that you can repeat pretty consistently to take share. Thank you.
Tommy Moll: Please proceed with your question. Good morning, and thank you for taking my question. Mark.
Speaker Change: Yeah and I appreciate the question in terms of returning to near normal service levels I would say everything that we directly control.
Donald G. Macpherson: I wanted to expand on the gross margin conversation with what's perhaps the obligatory question here. But I just want to make sure that I'm tracking the message correctly over time. So if we go back to your investor day, the anchor for your high-touch business was in that 40 percent range. Since that time, you've outperformed it significantly and indicated that maybe that was too low a number. And if I'm hearing the message correctly today, in 2024, at the midpoint, you're somewhere a little bit north of 41% and 25 and thereafter stable around that range. So I just want to make sure I've tracked all that correctly, or if there's anything you'd like to amend there. Thank you. You've tracked that.
Speaker Change: <unk> is back to normal in terms of our own internal cycle times transportation is back to normal there's still some elongated supplier lead times, which is the reason.
Speaker Change: It's still probably a little shy of where we were at from a competitive standpoint.
Speaker Change: All that really matters is the competitive standpoint, we're doing quite well.
Speaker Change: In terms of the investments we're making.
Speaker Change: We're filling in gaps where we've grown to the point, where having buildings in those locations makes sense and they make sense not only to improve service between crude cost. It in some perspective. So if you think about the northwest most of our product today comes out of California asset cleared the mountains and get in there and Thats a long haul we don't have enough volume to be able to improve the service dramatically in the north.
Tommy Moll: I think you've tracked that correctly. The only other thing I would add is that when we said 40% during investor day, I think we probably knew that there was the you know, supply chain efficiency is a big bucket, we probably knew that there was a lot of inefficiency. I think we probably maybe have been surprised at how much inefficiency and as we've gotten back to normal, that's been a big, big tailwind for us. And so, if we had known, it was just difficult to see all that we probably would have had a higher number of.
Speaker Change: And actually lower transportation costs pretty substantially.
Speaker Change: So we look at all those factors service and cost and when we when we make these decisions, but we're very confident in and what we've outlined an announced so far that those are the right things to do for the health of the business.
Speaker Change: Thank you D G I'll turn it back.
Speaker Change: Thanks.
Speaker Change: Thank you. Our next question comes from the line of Jake Levenson with Melius Research. Please proceed with your questions.
Jake Levenson: Good morning, everyone.
Donald G. Macpherson: Moving on to the commentary you offered today on service levels earlier in your remarks, DG, it sounds like you're back to roughly your own pre-pandemic service levels. You've invested in and will invest substantially in capacity and automation and other areas as well. So I'm just curious, strategically. Do you feel more confident leaning into these forms of investment versus what you've communicated in the past? Should we read from today that, with that increased confidence, you see this as a repeatable and sustainable advantage that you can repeat pretty consistently to take share? Thank you.
Jake Levenson: Good morning, Jay.
Jake Levenson: Okay.
Jake Levenson: I know you.
Jake Levenson: You have some margin headwinds here in 'twenty, four and Theres been obviously a lot of programs in the last couple of years, but just on the on the.
Jake Levenson: Productivity side.
Jake Levenson: You touched on a couple of levers.
Earlier in your prepared remarks, but can you just help us get a sense of of the.
Jake Levenson: Or is that you have or maybe where you're most focused parents 24 that can.
Jake Levenson: Offset some of those headwinds.
Speaker Change: Yeah, I mean I'll start in D. If you want to add and you can I think the thing to note is that we.
We tend to look at productivity from our core productivity standpoint, so distribution centers contact centers seller productivity all of those levers and we really see opportunity across the business and I think we're going to see really nice core productivity. This year that the headwinds are more around.
Donald G. Macpherson: Yeah, and I appreciate the question. Now, in terms of returning to near normal service levels, I would say everything that we directly control is back to normal. In terms of our own internal cycle times, transportation is back to normal.
Speaker Change: The growth investments, which we think are absolutely the right thing to do their high return growth investments, but we are spending more money in marketing and we're investing in our sales force and so those things make it.
Donald G. Macpherson: There's still some elongated supplier lead times, which is the reason we're still probably a little shy of where we were. But from a competitive standpoint, you know, that's all that really matters. From a competitive standpoint, we're doing quite well. In terms of the investments we're making, you know, we're filling in gaps where we've grown to the point where having buildings in those locations makes sense. And they make sense, not only to improve service, but to improve costs at some. So if you think about the Northwest, most of our product today comes out of California, has to clear the mountains and get in there, and that's a long haul. We don't have enough volume to be able to improve the service dramatically in the Northwest and actually lower transportation costs pretty substantially.
Speaker Change: The headline number look a little more challenging.
Speaker Change: Yes, it's a time and place and we are investing in those things and do the right thing to do but we're going to continue to get core productivity.
Speaker Change: It's an evergreen initiative for us to look everywhere in the business and I think we've got a whole bunch of things teed up to improve the productivity of the core core of the business.
Speaker Change: Okay that makes sense and.
Speaker Change: And your comment about the.
Speaker Change: 35%.
Speaker Change: From a square footage from and there is quite a fan out square footage isn't everything everywhere.
Speaker Change: Not the best way to measure it but oh.
Speaker Change: Is that is that really.
Speaker Change: You guys catching up to the growth you've seen over the last couple of years.
Speaker Change: Or or preparing for the next couple of years around but maybe its max but just trying to Chris.
Donald G. Macpherson: So we look at all those factors, service and cost, when we make these decisions, but we're very confident in what we've outlined and announced so far, that those are the right things to do for health. For more information, visit www.fema.gov. Thank you, DG.
Speaker Change: Yeah.
It's a mix, it's a mix and it.
Speaker Change: This practically if you thought about it we're allowed to get anymore. In 2019, there was almost no way to actually build buildings productively. During the pandemic you couldn't get things going and so we were a little bit behind we talked about that in 2022. So a part of it is catch up but part of it's planning for the future growth as well.
Tommy Moll: I'll turn it back. Thanks. Thank you. Our next questions come from the line of Jake Levinson with Mellius Research. Please proceed with your question. Good morning, everyone.
Speaker Change: And.
I would say the square footage.
Speaker Change: Isn't exactly.
Speaker Change: City, because bulk or bulk warehouse portion of it is lower cost.
Jake Levinson: . I know you; you have some margin headwinds here in 24. And there's obviously been a lot of poo in the last couple years, but just on the productivity side, I know Deidre you touched on it at a couple of libraries earlier in your prepared remarks, but can you just help us get a sense of the levers that you have or maybe where you're most focused here in 24 that can help offset some of those headwinds. Yeah, I mean, I'll start, and D, if you want to add in, you can.
Speaker Change: Doesn't quite give you as much capacity as does the other buildings, but certainly Houston and Portland are our added capacity similar to the other capacity in the network.
Speaker Change: Great. Thank you good luck this year.
Speaker Change:
Speaker Change: Thank you. Our next question is coming from the line of David Manthey with Baird. Please proceed with your questions.
Thank you and good morning, everyone first off for a couple of quick ones for D.
What specifically is the range of price expectations, you're baking into the 2024 guidance range.
Donald G. Macpherson: I think that the thing to note is that, you know, we tend to look at productivity from a core productivity standpoint. So, distribution centers, contact centers, seller productivity, all those levers, and we really see opportunity across the business. And I think we're going to see really nice core productivity this year. The headwinds are more around, you know, growth investments, which we think are absolutely the right thing to do. They're high-return growth investments. But, you know, we are spending more money on marketing, and we're investing in Salesforce. And so those things make the headline number look a little more challenging.
On slide 20.
Speaker Change: You talk about stable gross margin.
David J. Manthey: Gross margins I'm not clear if you're referring to segment gross margins are consolidated could you help me with that.
Yes so.
Speaker Change: Hey, David I will start with.
Speaker Change: The U S price that will focus on when you think about that when you think about that.
Speaker Change: Outline of flattish.
Speaker Change: We're expecting price to be.
Speaker Change: Between zero to 1% for the year in the U S.
Speaker Change: And on slide 'twenty specifically.
Donald G. Macpherson: And, you know, it's a time and place when we're investing in those things and believe that's the right thing to do. But we're going to continue to achieve core productivity. Yeah, it's an evergreen initiative for us to look everywhere in the business, and I think we've got a whole bunch of things teed up to improve the productivity of the core core of Okay, that makes sense. And your comment about the 35% expansion of square footage in your supply chain, I know, square footage isn't everything, maybe that's not the best way to measure it. But is that really you guys catching up to the growth you've seen over the last couple of years, or, or preparing for the next couple of years, or maybe it's a mix, but just trying to get Yeah, it's a mix. It's a mix. And, and I think it is practically, if you think about it, we're a lot bigger than we were in 2019. There was almost no way to actually build buildings productively during the pandemic; you couldn't get things going.
Speaker Change: Stable gross margins really is applying to the total company.
Speaker Change: And you can also apply that to high touch in some ways as well.
Speaker Change: Okay and then.
D. G could you talk about what opportunistic M&A would look like to Grainger today.
Speaker Change: Yeah.
D. G: First and foremost I would reiterate that we are an organic growth company and that that's where we're focused on all most of our energy.
D. G: We get a lot of looks at things and opportunities I would say that.
D. G: We get two types of books of the distributors, which probably haven't been as interesting to US and then there are some potential technology investments and things that might be more interesting to us. So we continue to look at a wide range of opportunities in areas that we think are really important to the success of the business.
D. G: Particularly some some specific domains that we think we need to be really good at going forward and we might invest in those areas but.
Donald G. Macpherson: And so we were a little bit behind; we talked about that in 2022. So part of it's catch up, but part of it's planning for future growth as well. And, you know, I would say the square footage isn't exactly capacity because the bulk warehouse portion of those is lower cost and doesn't quite give you as much capacity as the other buildings, but certainly Houston and Portland are adding capacity similar to the other buildings.
D. G: As I said, we're primarily an organic growth company at this point.
Speaker Change: Good to hear thank you.
Speaker Change: Yeah.
Thank you our next questions come from the line of Chris Snyder with UBS. Please proceed with your questions.
Chris Dankert: Thank you.
Chris Dankert: I wanted to ask on the investments that the company you are making in DJ I. Appreciate all the all of the color that you provided and Theres a lot going on.
Chris Dankert: But is there any way that you could maybe bucket or.
Chris Dankert: Or talk about the investments between the two.
Chris Dankert: Paucity additions and the efficiency drivers that you're making versus the the more demand generative investments like the sales coverage and the marketing of any way to just kind of think of those two respective buckets. Thank you.
Jake Levinson: Great. Thank you. Good luck this year.
Donald G. Macpherson: Thank you. Thank you. Our next questions come from the line of David Manthey with Baird.
David J. Manthey: Please proceed with your question. Thank you. Good morning, everyone.
Yeah. So so.
David J. Manthey: First off, a couple of quick ones for Dee. What specifically is the range of price expectations you're baking into the 2024 guidance range? And second, on slide 20, you talk about stable gross margins. I'm not clear if you're referring to segment gross margins or consolidated. Could you help me with that?
Chris Dankert: Without getting overly detailed I would say that the demand generation investments are typically SG&A investments in marketing and seller address G&A investments, whereas a lot of the capacity investments, we're making are productivity investments our AI investments are or technology investments most of that show.
Chris Dankert: <unk> capital some shows up in expense for sure, but if you think about when we talk about spending.
D. Meriwether: Yeah, so I will start with the US price that we're focusing on. When you think about that, when you think about that outline of sladish, we're expecting the price to be between zero and 1% for the year in the US. And on slide 20 specifically, stable gross margins really apply to the total company. And you can also apply that to high touch in some ways as well.
450 $550 million in capital.
Chris Dankert: Vast majority of that comes from supply chain investments and capacity increases and in technology.
Chris Dankert: And so I would think think of it in those terms.
Chris Dankert: And technology is building capabilities, and an advantage and information assets.
David J. Manthey: Okay, and then DG, could you talk about what an opportunistic M&A would look like for Grainger today? Yeah, I mean, first and foremost, I would reiterate that we are an organic growth company. And that's, that's where we are focused on most of our energy.
Chris Dankert: And supporting that growth initiatives in the core business as well.
Chris Dankert: Versus marketing until our more direct spend that go into into demand generation.
Speaker Change: Thank you I appreciate that and then.
Donald G. Macpherson: You know, we get a lot of looks at things and opportunities. I would say that, you know, we get two types of looks: other distributors, which, you know, probably haven't been as interesting to us. And then there are some potential technology investments and things that might be more interesting to us. So we continue to look at a wide range of opportunities and areas that we think are really important to the success of the business. www.thevenusproject.com. Good to hear. Thank you. Thank you.
Speaker Change: If we think of the SG&A investments.
Speaker Change: Net or kind of more of that demand generation can you just maybe talk about the ability to leverage those and grow operating margin over time.
Speaker Change: In 2024 is guided to be a pretty supportive year for gross margin.
Speaker Change: Operating margin is kind of flattish despite despite the topline growth and the stable gross margin because it seems like in some capacity these investments that you're making.
Chris Dankert: Our next questions come from the line of Chris Snyder with UBS. Please proceed with your question. Thank you. I wanted to ask about the investments that the company is making and D.J. I appreciate all the color that you provided, and there's a lot going on.
Speaker Change: Do you think that over time, you are able to leverage those and grow operating margin and maybe 24 is just kind of a pause year. Thank you.
Donald G. Macpherson: But is there any way that you could maybe bucket or, or, or talk about the investments between, you know, the capacity additions and the efficiency drivers that you're making versus the, you know, the more demand-generative investments, like the sales coverage and the marketing of anyway, just kind of think of those two or, Yeah, so, without getting overly detailed, I would say that the demand generation investments are typically SG&A investments. So marketing and seller ads are SG&A investments. Whereas a lot of the capacity investments we're making in productivity investments, or AI investments, or technology investments, most of those show up in capital; some show up in expense, for sure. But if you think about when we talk about spending, you know, 450 $550 million in capital, the vast majority of that comes from supply chain investments in capacity increases and in technology. And so I would think of it in those terms. And and, you know, technology is building capabilities and an advantage in information assets, and and supporting the growth initiatives in the core business as well versus, you know, marketing and selling, more direct spend that goes into demand generation Thank you.
Speaker Change: Yeah.
Talked about it yeah, we do expect to get SG&A leverage over time.
Speaker Change: And we are probably making more incremental investment in this year than others.
Speaker Change: Yes, so that that is probably true. We're also just I would just point out in a fairly flat price environment.
Speaker Change: That that SG&A is more difficult to get SG&A leverage as well so theres a number of factors going on but do you have any.
Yeah. The other thing I would point to is just our improvement in return on invested capital and I think that one of the reasons why that's one of the metrics that we talk about track and are focused on is ensuring that the investments we make whether their capex.
Speaker Change: And so our SG&A based upon how we calculate ROIC.
Speaker Change: We're very focused on ensuring that they help us deliver.
Speaker Change: And grow at least you know.
Speaker Change: It's not operating margin operating dollar growth as well for us.
Speaker Change: Yes, and the other thing I'd add to that is that both in marketing and seller coverage. We are very well measured. So we are everything is tested and we don't make the investments lightly we know exactly what returns are getting so if they're positive return we will make that even even if in the year, they might slow down or SG&A leverage.
Chris Dankert: I appreciate that. And then, you know, if we think of the SG&A investments, which are kind of more of that demand generation, can you just maybe talk about the ability to leverage those and grow operating margin over time? Because, you know, 2024 has got to be a pretty supportive year for gross margin. But, you know, operating margin is kind of flattish, despite the top line growth and the stable gross margin. Because it seems like, in some capacity, these investments that you're making, do you think that over time, you will leverage those and grow operating margin? And maybe 2024 is just kind of a pause? Yeah, Dee talked about it.
Speaker Change: It's the right thing to do for the profit overall profitability business.
Speaker Change: I appreciate that all makes sense.
Speaker Change: One last one in.
Speaker Change: When I look at price mix in the quarter for high touch an English only up 40 basis points.
Speaker Change: I have to think that customer mix was a drag on that.
Speaker Change: I guess any color on what that customer mix headwind was in any way to maybe think about what price I understand alone was in Q4. Thank you guys.
Donald G. Macpherson: Yeah, we do expect to get SG&A leverage over time. And we are probably making more incremental investments this year than others. Yeah, so that is probably true.
Speaker Change: Yes.
Speaker Change: It was really small and I think if you go back to the.
Speaker Change: We forecast it.
Speaker Change: Should be no surprise without price cost.
Chris Dankert: We're also just, I would just point out, in a fairly flat price environment, you know, that SG&A is more difficult to get SG&A leverage as well. So there's a number of factors going on. But Dee, do you have any?
Outcome will be in Q4, we've been looking at this and talking about it for the last two years. If you go back to 2022, we've noted that we.
Speaker Change: We were gonna be significantly price cost positive in that year and it would unwind in 2023 and it did and we saw that an experienced that in the.
Donald G. Macpherson: Yeah, the other thing I would point to is just our improvement in return on invested capital. You know, I think that's one of the reasons why that's one of the metrics that we talked about, tracked, and are focused on ensuring that the investments we make, whether they're CapEx investments or SG&A, based upon how we calculate ROIC, we're very focused on ensuring that they help us deliver and grow, at least, you know, it's not operating margin or operating dollar growth for us. Yeah, and the other thing I'd add to that is that, you know, both in marketing and seller coverage, we are very well measured. So we are everything is is tested.
The second half of.
Speaker Change: 2023.
Speaker Change: So a lot of it is timing as we know we've talked about price and cost in our business is very lumpy being.
Speaker Change: North of 70% of our business with contract customers and the timing of those things.
Speaker Change: And so.
Speaker Change: And I know that to your two year stack being essentially neutral in exiting this year.
Speaker Change: Starting 2024, and the neutral footing I think is what's really important.
Speaker Change: Thank you really appreciate it now.
Speaker Change: Thank you. Our next question is come from the line of Deane Dray with RBC capital markets. Please proceed with your questions.
Chris Dankert: We don't make the investment slightly; we know exactly what returns we are getting. So if they're positive returns, we will make them even if, in the year, they might slow down our SG&A leverage, because it's the right thing to do for the overall profit. I appreciate that. All makes sense. Um, if I could squeeze one last one in, um, when I look at price mix in the quarter for high touch, I think it was only up 40 basis points. Um, I have to think that the customer mix was a drag on that.
Deane Dray: Good morning, everyone.
Deane Dray: Good morning, It love to.
Deane Dray: Go a little bit deeper on the comments about January getting off to a slower start and we've heard this recently from a number of companies pointing to the weather.
Deane Dray: As I really hampering some of the activities. So if you could size for us what you think that weather impact was and a related question is the underlying assumption of MRO for activity for 2020 for the down a half a percent.
Chris Dankert: Um, can you give me any color on what that customer mix headwind was in any way to maybe think about what price you would charge as a standalone? Thank you, guys. Yeah, I mean, it was really small.
D. Meriwether: And I think if you go back to the, you know, we forecasted, it should be no surprise what our price costs. Q4. We've been looking at this and talking about it for the last two years. You know, if you go back to 2022, we noted that we were going to be significantly price cost positive in that year, and it would unwind in 2023, and it did. And we saw that and experienced that in the second half of 2023.
One and a half just given the trends we're seeing now in the I S M coming back new orders going back above 50, just.
Deane Dray: It seems like you could see a risk.
Deane Dray: The rest of the upside in that and maybe that's a bit conservative.
Deane Dray: And just take us through that assumption as well please.
D. Meriwether: And so we're looking at that. And so a lot of it is timing, as we know price and cost in our business are very lumpy, being north of 70% of our business with contract customers and the timing of those things. And so, um, and on a two-year, two-year stack being essentially neutral and exiting this year and starting 2024 on a neutral footing, I think is what's really important. Thank you. I really appreciate it.
Yes sure so.
Speaker Change: I can take the diamond I can try to take both of them I guess the first one I think there were two factors that made January so let's start one was that most of the schools were shut which does some activity in the first week of January which last year schools opened in midweek and we noticed that and we noticed that in and some of the schools, we serve as well as just the.
Speaker Change: Broader economy, and then obviously the cold weather weather weak what I would say is that you know the last two weeks of January were very normal for us and so while there was some slowness it wasn't it.
Deane Dray: Thank you. Our next question has come from the line of Deane Dray with RBC Capital Markets. Please proceed with your question. Thank you. Good morning, everyone.
Deane Dray: Good morning, Dean. Hey, I'd love to go a little bit deeper on the comments about January getting off to a slower start. And we've heard this recently from a number of companies pointing to the weather as really hampering some of the activity. So if you could size for us what you think the weather impact was.
And of course of the quarter it will be very very small in terms of the impact but noticeable in a month of course, because it's a.
Speaker Change: Many weeks, but it's not huge in the Grand scheme of things its just noise and so we don't we won't focus too much on that.
Donald G. Macpherson: And a related question is the underlying assumption of MRO for activity for 2024, the down half a percent to up one and a half. Just given the trends we're seeing now in the ISM coming back, new orders going back above 50, it seems like you could see, you know, a risk to the upside in that. And maybe that's a bit conservative.
Speaker Change: I think any forecast for the MRO market any year I think you could argue it could be.
Speaker Change: Risk to the upside or downside I don't know this is our current.
Speaker Change: Forecasts and we Havent you know.
Speaker Change: Economist internally and externally we look at and this is the forecast they have right now. So that's that's what we're doing with it that that too will always change and it will never be right until we know that so again, we want to over index on the forecast got it and then for D. A.
Deane Dray: And just, you know, take us through that assumption as well. Yeah, sure. So, you know, I can take the I mean, I can try to take both of them. I guess that the first one, I think there were two factors that made January so bad. One was that most of the schools were shut, which shows some activity in the first week of January, which last year, schools opened in midweek. And we noticed that, and we noticed that, R W E A K E R A S E, And so we don't, we I don't know. This is our current, um, current forecast. And we have a, you got it. And then for D, or actually DG, either.
Speaker Change: D G either.
The outlook for an expected increase in buybacks for 2020 for the uptick there just what's the expectation in terms of the pace of the buybacks through the year.
Speaker Change: Yeah.
Speaker Change: We've been fairly consistent for a number of years.
Speaker Change: And our buyback practices generally under the veil of overall capital allocation strategy and we look to be in the market all the time base.
Speaker Change: Based upon.
Deane Dray: The outlook for an expected increase in buybacks. For 2024, the uptick there, just what's the expectation in terms of the pace of the buybacks through the year? Yeah, you know, we've been fairly consistent for a number of years in our buyback practices, generally, under the veil of an overall capital allocation strategy. And we look to be in the market all the time, based upon, you know, what the price of shares is; we don't try to time the market from a price perspective, but we are always looking to be in the market buying shares.
Speaker Change: With the price of shares or we don't try to time the market from a price perspective, but always looking to be into the market bancshares.
Speaker Change: And so generally we have pretty stable pace across the year for the share buybacks.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: Thank you our next questions come from the line of Christopher Glynn with Oppenheimer. Please proceed with your questions.
Christopher Glynn: Thanks, Scott Good morning, and congrats on all the significant workplace culture recognitions.
D. Meriwether: And so generally, we have a pretty stable pace across the year for share buybacks. Thank you. Thank you. Our next questions come from the line of Christopher Glynn with Oppenheimer.
Christopher Glynn: Good indicator of your durability.
Christopher Glynn:
Christopher Glynn: So I was curious what you're seeing in terms of product costs.
Christopher Glynn: Please proceed with your question. Thanks. Good morning and congrats on all the significant workplace culture recognitions. A good indicator of your durability.
Christopher Glynn: Deflation that you always try to drive.
Christopher Glynn: As distinct from I think you called out there's some.
D. Meriwether: So I was curious what you're seeing in terms of product cost, deflation that you always try to drive as distinctive from. I think you called out there are some continuing benefits from the, you know, macro level supply chain normalization So, this is Dee. You know, we've gone from, as you know, over the last year or so, a highly cost inflationary environment to something that is much more muted today or coming down today and much more reasonable or normalized, the term I would use is what we're seeing. I would say our Product Management Team utilizes the same sets of strategic and tactical activities with our supply base.
Christopher Glynn: Continuing benefits from the.
Christopher Glynn: Macro level supply chain normalization.
Christopher Glynn: So.
Christopher Glynn: This D.
Christopher Glynn: No.
Christopher Glynn: We've gone from a as you know over the last year is a highly cost inflationary environment. So something that is much more muted.
Christopher Glynn: Today.
Christopher Glynn: Coming down today and much more reasonable normalized with the tomo. We use is what we're seeing.
I will say our.
Christopher Glynn: <unk>.
Christopher Glynn: Product management team utilizes the same set of strategic and tactical activities with our supply base, we want to remain to be.
Christopher Glynn: We want to remain, you know, a customer of choice for them, and so we're working to ensure that we continue to have the best price and advantage access to products at the best price possible. So things are getting to a more normal level for us today. Great, thanks. And then, on the B to C side of Zorro, I think you mentioned that the unwind there would be first half weighted and, you know, suggest more neutral comps in the back half.
Christopher Glynn: You know a customer of choice for them and so we're working to ensure that we continue to have the <unk> price and advantaged access to products.
Christopher Glynn: At the best price possible.
Christopher Glynn: Things are getting to more normal level for us today.
Speaker Change: Great. Thanks, and then.
Speaker Change: On.
And the BDC side of zero I think you mentioned that unwind there the headwind would be first half weighted.
Speaker Change:
Speaker Change: And.
Speaker Change: Suggests more neutral comps in the back half so.
D. Meriwether: So does that mean you're exiting 23 at about the sustainable mix? Yeah, so I think what I would say there is that obviously, as the B2C and B2C like volume shrinks, it becomes less of an impact on the rest of the business, and our business customer activity has actually been reasonably healthy through the entire quarter. We do expect some of the decline to be less impactful in the back half of the year. So we should have less drag in the back half of the year than we have in the first half of the year from the decline of BTC. That makes sense. Thank you, guys.
Speaker Change: Does that mean, you're exiting 'twenty three at about the sustainable mix.
Speaker Change: Yes, so I think what I would say there is that obviously as the D to C and D to C like volume.
Speaker Change: Drinks it becomes less of an impact on the on.
Speaker Change: The rest of the business and our business customer activity has actually been reasonably healthy through the entire quarter.
Speaker Change: We do expect some of that decline to be less impactful in the back half of the year. So we should have less drag in the back half of the year than we have in the first half of the year from from there quite a BDC like point.
That makes sense. Thank you guys. Thank you.
Christopher Glynn: Thank you. Our next questions come from the line of Ken Newman with KeyBank Capital Markets. Please proceed with your question. Hey, good morning, guys.
Speaker Change: Thank you our next questions come from the line of Ken Newman with Keybanc capital markets. Please proceed with your questions.
Ken Newman: Hey, good morning, guys. Thanks for squeezing me in.
Ken Newman: Thanks for squeezing me in.,,,, Uh, you know, I know there's a lot of moving pieces here, but I am wondering if, you know,., www.youtube.com.au Um, so on the Red Sea, we don't have much volume going through those lanes.
Ken Newman: Good morning.
Ken Newman: I know, there's a lot of moving pieces here, but I am wondering if you are seeing or have seen any impact from some of the red Sea shipping dynamics and how are you thinking about shipping and freight expenses in 'twenty four and how that flows through your Opex guide for the year.
Speaker Change: So on the on the Red Sea, we don't have much volume going through that those lanes.
Donald G. Macpherson: Most of our shipping volume comes out of Asia through to the West Coast, and then it is railed to our network. And so that has often affected us. But we really have seen nothing there.
Speaker Change: Most of our shipping volume comes out of Asia through to the West Coast and then it's railed to our network and so that is often impacted so we really see nothing there could you repeat the second half of your question.
Ken Newman: Could you repeat the second half of your question? Yeah, just curious, you know, as a follow up to that, how you're thinking about, , , , , , , http://TheBusinessProfessor.com, Yeah, I mean, much of our freight, most of our freight actually goes into our gross profit line, and but you know we we are forecast haven't changed much given the activity we've seen given the length we're in certainly things like fuel increases can have an impact and but you know who knows how that's going to play out but right now we're actually still in a favorable position relative to a year ago on on certainly on ocean freight at this point so we expect that to continue through the first part of the year and then Got it. And then if I could just squeeze one more in here.
Speaker Change: Yeah, just curious you know as a follow up to that how youre thinking about.
Speaker Change: Freight expenses in general I feel I think most companies are seeing those kind of come up here and how do you see that flowing through your Opex line.
Speaker Change: As it relates to your guide for the year.
Speaker Change: Yes.
Speaker Change: Much of our Frameless are afraid actually goes into our gross profit line.
Speaker Change: And that we are forecasts haven't changed much given the activity we've seen given the range we're in.
Certainly things like.
Speaker Change: Fuel increases can have an impact.
Speaker Change: And who knows.
Speaker Change: How that's going to play out but.
Speaker Change: Right now, we're actually still in a favorable position relative to a year ago on on certainly on ocean freight at this point. So we expect that to continue through the first part of the year and then we'll see what happens.
Speaker Change: Got it and then if I.
Donald G. Macpherson: You know, the I think you mentioned in the new framework that you expect Zorro and Montero to get back to that low teen type of growth range. It's been a tougher couple of years here recently. As I think about seasonality comments on the first half here kind of unwinding, is it reasonable to think could you get back to that double-low double-digit range here it was in the back half of 24, or is that more of a 25 type of aspiration? It's probably more of a 25. So to be clear, Montero this year will be hitting, The that already we think it's low, you know, low, low double So that'll be close to that for the year, and then Zora will start the year lower than that.
Speaker Change: Could just squeeze one more in here.
Speaker Change: The.
Speaker Change: I think you've mentioned in the new framework that you know you expect zoro and monetize and kind of get back to that low teens type of growth range. So it's been a tougher couple of years here recently.
Speaker Change: As I speak about the seasonality comment on the first half year kind of unwinding in the first half is it reasonable to think that you get back to that double low double digit range here. It was in the back half of 'twenty four or is that more about 25 type of aspirational target.
Speaker Change: Yes, it's probably more of a 'twenty so to be to be clear amount of taro. This year will be hitting the that already we think it is low low low double digits low teens, so that'd be close to that.
For the year, and then zoro will start the year lower than that and we expect them to get a bit better as the year goes along we probably won't get there by this year, but that would be more in out years, we think that that's the target.
Ken Newman: And we expect them to get a bit better as the year goes along. But we probably won't get there by this year. But that would be more in our years. We think that's that's very helpful. Thanks. Thank you. Our next questions come from the line of Patrick Baumann with JP Morgan. Please proceed with your question. Oh, good morning, DJ, and D. Congratulations on a great year. Just had a couple questions for D on the price timing comments that you noted. Maybe you could help us better understand first what you said with respect to slide 13.
Speaker Change: Very helpful. Thanks.
Okay.
Speaker Change: Thank you. Our next question is coming from the line of Patrick Baumann with Jpmorgan. Please proceed with your questions.
Patrick M. Baumann: Good morning D. J D. Congrats on the great year.
Just had a couple of questions for Dan on the price timing comments that you noted maybe if you could help us better understand first what you said with respect to slide 13.
Patrick M. Baumann: Did the market take up price in the fourth quarter, and you waited for the new year? Or was this something like the comps that caused that disparity? No, no.
Speaker Change: Did the market.
Patrick M. Baumann: Take up price in the fourth quarter and you waited for the new year or was this something like in the comps that caused that disparity.
Speaker Change: No no.
D. Meriwether: I think you're on slide 13, you're kind of looking at what we have listed as what we think the market performance has been by quarter. It was about the fourth quarter you had you noted a volume volume share gain of 475. 475, yeah.
I think your slide 13, you're kind of looking at what.
Speaker Change: Well, we have listed as what we think the market performance has been by quarter.
Speaker Change: It was about the fourth quarter you had like you noted like a volume shipped volume share gain of $4 75, and 79 and <unk>.
Patrick M. Baumann: And so that difference is really that our price in the quarter was, you know, lower than the PMI print in the quarter. And so we were just highlighting for you that if you just look at the volume for IP versus our volume, our share gain would have been 475. So there's a difference in the market price as published today in Q4 versus what we realized from a price perspective. And the comments I was making earlier about timing are that our timing is not always going to be in line with the timing of price in the market. And this quarter was just one example of that.
All.
Speaker Change: That difference is really that our price in the quarter was.
Speaker Change: Lower than that.
Speaker Change: The PMI print.
Speaker Change: Quarter and so we were just highlighting for you that if you just look at the volume for IP versus our volume that our share gain would have been 475. So there's a difference in the market price as published today.
Speaker Change: And in Q4 versus what we realize from a price perspective, and the comments I was making earlier about timing is that our timing is not always going to be in line with the timing of price in the market and this quarter was just one example of that but you also have other.
D. Meriwether: But you also have other examples if you look back, you know, over the course of several other quarters as we've outperformed the market. So we try to look at it on a two-year stack trying to get to neutral over a longer period of time. Okay, and then my follow-up question, as it relates to the first quarter, I think you also mentioned price timing as a factor for gross margins being kind of down year over year. So curious if you can give some more color on that, too. Like, did you put in a price early last year, and aren't doing the same thing this year? Or is it something else?
Examples if you look back.
Speaker Change: Over the course of several other quarters.
Speaker Change: Output outperformed the market.
Speaker Change: So we try to look at it on a two year stack trying to get a neutral over a longer period of time.
Speaker Change: Okay, and then my follow up as it relates to the first quarter. I think you also mentioned something about price timing is a factor for gross margins being.
Speaker Change: Down year over year. So curious if you can give some more color on that too like did you put through price early last year and youre not doing the same thing this year or is it something else yeah. So yeah.
Patrick M. Baumann: Yeah, so, yeah, no, we always put through price if price is warranted early in the year, but it's more like a seasonality question. So I'll probably respond to it in that way. You know, we do expect a lot of the outlook that we've given for 2024 to be back. We talked a little bit about pieces of it, which were sales starting slower, tougher comp, you know. Q1 last year was a very strong year for us, which included a lot of things, but it's not something that we're looking at right now. It's been a very strong year for us, which included a whole lot of price increases in that quarter.
No we always put through price.
Speaker Change: If prices warranted.
Speaker Change: Earlier in the year, but it's more like a seasonality question. So I would probably respond to it in that way.
Speaker Change: We do expect a lot of the the outlook that we've given for 2024 to be back end weighted.
Speaker Change: <unk> talked about a little bit about pieces of it which was sales starting slower tougher comp Q1 last year was a very strong year for us which included a whole lot of price in that quarter.
Speaker Change: With a price outlook of zero to one of course, our price for this year the quarter will be more muted versus that.
D. Meriwether: With a price outlook of zero to one, of course, our price for this year, the quarter will be more muted, you know, versus that. And we expect prices to become more favorable throughout the year and for gross margins to be relatively stable, you know, versus the outlook that we have given. And so that's what I mean when you talk about kind of sales and price in the first quarter versus the prior year. Just to add to that, I think that the practical reality was that if you think back to 2022, we took a budget price mid-year that from a 2023 Q1 to 2022 Q1 comparison made 2023 have very high price increases relative to the year, because we took them in the middle of the year and those So it Yeah, Q1 and for a year.
Speaker Change: And we expect price to become more favorable.
Speaker Change: Throughout the year and for gross margins to be relatively stable versus the outlook that we have given.
Speaker Change: And so that's what I mean, when you talk about kind of sales and price and acute in the first quarter versus the prior year.
Speaker Change: Just to add to that I think the practical reality was that if you think back to 2022, we took a bunch of price mid year that from a 2023 Q1 2022 Q1 comparison made 2023 have very high price increases relative to the year before because we took them in the middle of the year and does.
Speaker Change: So it wasn't all taken January one last year, but all the inflation that up in 2022 made last year looked a little unusual for the first quarter price increase.
Okay. It makes it easier.
Speaker Change: Well Q1, and full year do you want to.
Patrick M. Baumann: Yeah, absolutely. Great, thanks a lot. Thank you. Our final questions will come from the line of Nigel Coe with Wolf Research. Please proceed with your questions. Thanks.
Speaker Change: For your casual.
Speaker Change: Great. Thanks, Thanks, a lot.
Speaker Change: Thank you our final question will come from the line of Nigel Coe with Wolfe Research. Please proceed with your questions.
Nigel Coe: Thanks, Good afternoon.
You sound like you're suffering with so I feel.
Nigel Coe: So I feel a little bit guilty making you repeat yourself here. But just on the seasonality comment, are you saying, you know, gross margins are much flatter from quarter to quarter through the year? Obviously, normally, we see a bit of a seasonal pattern there. So is that the comment? And does that therefore imply that as we go from, you know, 4Q to 1Q, we've got a pretty flat Q by Q gross margin structure then? And if it is flat, I just want to understand why that is.
Nigel Coe: Okay.
Nigel Coe: Repeat yourself lets say it but.
Nigel Coe: Just on the seasonality comment are you, saying.
Gross margins much closer from quarter to quarter through the year, obviously normally we see a bit of a seasonal pattern. There. So is that the comments on.
Nigel Coe: Does that therefore imply that as we go from.
<unk>, we got a pretty flat Q over Q.
Nigel Coe: Gross margin structure than and if it is factored in I just want to understand why that is I mean, I get the fact that prices coming through but stronger through the year.
D. Meriwether: I mean, I get the fact that price is coming through a bit stronger this year, but any other factors we need to consider? Well, like we've talked a little bit about freight, we'll continue to get freight and supply chain efficiencies and some product innovation, but, but again, it all starts with the fact that we don't expect to have a lot of price in the market this year, just generally. So, um, we expect gross margins to be reasonably consistent with what we've talked about all through the year. So that's the basic reason for that muted price.
Nigel Coe: Here, but any other factors we need to consider.
Nigel Coe: Well.
Nigel Coe: Like we've talked a little bit about freight will continue to get freight and supply chain efficiencies and some product mix.
Nigel Coe: Uh huh.
Nigel Coe: Again, it all starts with the fact that we don't expect to have a lot of price in the market. This year just generally so.
Nigel Coe: We expect gross margins to be regionally because assistant.
Nigel Coe: So from what we've talked about all through the year.
Nigel Coe: So that's the basic reason for that new did price okay.
Nigel Coe: Okay, that's clear. And then the comment you made about SG&A, I think you mentioned some SG&A deleverage in the first quarter. So again, it sounds like the model this year is going to be pretty clean in terms of it sounds like SG&A is going to be pretty flat across the quarters, maybe. Is that the way you're seeing it? We've got some front-end loaded investments here.
Okay. That's clear and then the comments you made about SG&A.
Nigel Coe: I think you mentioned some SG&A deleverage in the first quarter. So again it sounds like the model that he is going to be pretty clean in terms of it sounds like SG&A it can be pretty flat across the quarters maybe.
Nigel Coe: Is that the way you're seeing it because some front end loaded investments this year.
D. Meriwether: So, yeah, so yes, SG&A is going to deleverage in the first quarter because we're going to continue, as DeeDee noted, to ramp up our investments and marketing and sellers and others and the like. But we do expect leverage will improve as the year progresses, you know, flipping to more of a tailwind in the back half of the year for us. And then just if you kind of move down a little bit, we think operating margin, you know, in Q1 will be at its lowest point as well, and EPS will be flattish year over year in the first quarter as well.
Nigel Coe: So yes, so yes, SG&A deleverage in the first quarter, because we're going to continue or do you know that to ramp our investment and marketing.
Nigel Coe: And sellers and others and the like.
Nigel Coe: But we do expect leverage will improve as the year progressed flip into more of a tailwind in the back half of the year for us.
Nigel Coe: And then just if you kind of move down a little bit we think operating margin in Q1 will be at its lowest point as well.
And EPS will be flattish year over year in the first quarter as well.
Nigel Coe: Okay, got it. And since I'm the last question, I feel like maybe I can just squeeze one more in if I can. Just to clarify the customer mix comment from earlier in the call. I mean, I noticed that medium-sized customers outgrew large customers. So I'd assume that customer mix would have been positive. But if I'm wrong on that, please, please let me know.
Speaker Change: Flattish year over year, Okay got it.
Speaker Change: Some of the last question I feel like maybe I can just squeeze one more in if I can.
Speaker Change: It's just that we're not just.
Clarify the customer mix comment familiar to everyone in the call I mean, I noticed the medium size customers that grew large customers. So I'd assume that mix would have been positive, but it's a broken up pieces. Please let me know.
Nigel Coe: I missed that last part. I heard you say that. Can you repeat it?
Speaker Change: I missed that last part I heard I heard I think.
Speaker Change: Could you repeat it.
Nigel Coe: The customer mix. I assume that the customer mix was slightly positive, you know, given that medium size versus large size dynamic, but if I'm wrong there, please let me know. Yeah, I think I think it was basically neutral. We did have, you're right, midsize customers did go faster than the largest customers. Overall, it was not a meaningful impact, as I understand it.
Speaker Change: The customer mix.
Speaker Change: That then maybe customer mix was slightly positive.
Speaker Change: Given that medium size that large size dynamic, but if im wrong that please let me know.
Yeah, I think I think it was basically a neutral we did have you write in midsize customers to grow faster than that the largest customers overall it was not a meaningful impact as I understand it.
Speaker Change: Yes, yes.
Donald G. Macpherson: D and I are in different rooms, and she's sequestered, so we're looking at each other through a camera here. Thanks, guys. I appreciate it. Thank you. We have reached the end of our question and answer session. I would now like to turn the floor back over to DG McPherson for closing. All right, sorry, we're a few minutes over. Thanks for joining the call. You know, what I would say is that we're certainly proud of the results we had in 2023. We are very focused on continuing to drive forward and create value for our customers in 2024. And a lot of that's really the same despite the more muted growth in the market; a lot of that's just a continuation of driving forward the initiatives that matter both from a growth perspective and from a productivity standpoint. And we remain very, very positive about the outlook and our ability to gain share profitably for years to come.
Yes, yes, okay.
Speaker Change: In a different room since you've sequestered. So we're looking at each other through a camera here okay.
Speaker Change: Alright, Thanks, guys I appreciate it thank.
Speaker Change: Thank you.
Speaker Change: Thank you we have reached the end of our question and answer session I would now like to turn the floor back over to D. G. Macpherson for closing remarks.
Speaker Change: Alright, sorry, we're a few minutes over thanks for joining the call.
Speaker Change: But what I would say is that and we're certainly proud of the results. We had in 2023, we are very focused on continuing to drive forward and create value for our customers in 2024 and a lot of that is really the same despite the more muted growth mi in the market that a lot of that's just a continuation of driving forward the initiatives that matter both from a growth perspective, and a part of it.
Speaker Change: Perspective, and we remain very very positive about about the outlook.
Speaker Change: And our ability to gain share profitably for years to come. So thanks for thanks for the time I Hope you all have a great weekend take care.
Donald G. Macpherson: So thanks for your time. Hope you all have a great weekend. Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect at this time. Enjoy the rest of your day.
Speaker Change: Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect at this time enjoy the rest of your day.
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