Q2 2024 W.W. Grainger Inc Earnings Call

Greetings and welcome to the W. W. Grainger second quarter 'twenty 'twenty four 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 cash.

Keypad. Please note. This conference is being recorded I will now turn the conference over to Kyle Bland, Vice President of Investor Relations. Thank you you may begin.

Operator: Good morning. Welcome to Grainger's second quarter earnings call. With me are D.J. MacPherson, Chairman and CEO, and Dean Merriweather, Senior Vice President and CFO. Please remember that we have also included a daily organic constant currency sales growth metric within these materials to normalize for the divestiture of our E&R industrial sales subsidiary, which was sold at the end of 2023. As a result, the numbers disclosed will differ from Monetaro's public.

Speaker Change: Good morning, welcome to <unk> second quarter earnings call with me are D. G Macpherson, chairman and CEO and Dean Meriwether Senior Vice President and CFO.

Speaker Change: As a reminder, some of our comments today may include forward looking statements that are subject to various risks and uncertainties.

Information regarding factors that could cause actual results to differ materially is included in the company's most recent form 8-K and other periodic reports filed with the SEC.

Speaker Change: This morning's call will focus on the adjusted results for the second quarter of 2024, which exclude 16 million of pre tax restructuring cost incurred in the quarter. Please.

Speaker Change: Please remember that we have also included a daily organic constant currency sales growth metric within these materials to normalize for the divestiture of our <unk> industrial sales subsidiary, which was sold at the end of 2023.

Speaker Change: Definitions and full reconciliations of this and any other 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.

Speaker Change: We will also share results related to monitor them. Please remember that monitor was a public company and followed the Japanese GAAP, which differs from U S GAAP and as reported in our results one month in arrears.

Speaker Change: As a result, the numbers disclosed will differ from monetary public statements.

D G: Now I'll turn it over to D G.

D G: Thanks, Kyle good morning, and thank you for joining the call as.

D.J. MacPherson: As we pass the midpoint of 2024, I'm proud of the way the team continues to show up for our customers, and engage our internal EDI ePro team, who worked with the customer to connect their purchasing platform to Grainger. Together, through enterprise-wide integration and training, we were able to move nearly all of the customers' MRO transactions to a digital channel, helping them to consolidate orders, lower PO processing costs, and drive several $100,000 in annual savings. Moving on to our second quarter performance, we delivered another solid quarter of results amidst a slow, yet generally stable demand environment.

Speaker Change: As we pass the midpoint of 2024 I'm proud of the way the team continues to show up for our customers, providing a flawless experience on each transaction. Our team members are consistently leading in the principles outlined by the Grainger edge and in doing so we've become a trusted partner for our customers, creating tangible value each day.

D G: One of the best examples of the value that we create for our customers by simplifying their purchasing processes complicated and high cost purchasing processes are common in our space wasting our customers time and money.

D G: Fortunately, we are well equipped to help customers solve this challenge by assisting them in choosing the right digital solution setting up necessary workflows, and approvals and providing systems training to maximize the benefits.

Speaker Change: Recently during negotiations in a multiyear agreement one of our national account managers identified opportunities, where our team can help the customer to meet their process improvement goals, most notably and streamlining their procurement systems engaged your internal <unk> protein, who work with the customer to connect their purchasing platform. The grandeur together through enterprise wide integration and training we were.

D G: To move nearly all of the customers MRO transactions to digital channels.

D G: Moving them to consolidate orders lower P O processing costs and driving several hundred thousand dollars of annual savings. These.

Speaker Change: These process improvements are part of a broader engagement with this customer. We also help them reduce inventory levels and drive product standardization further saving them time and money.

Speaker Change: This example is just one of many where our team works to understand the customers' operations tailor our solutions to meet their needs and drive lower cost.

Speaker Change: Moving onto our second quarter performance, we delivered another solid quarter of results amidst a slow it generally stable demand environment.

D G: Total company reported sales were up three 1% or five 1% on a daily organic constant currency basis with positive contributions from both segments.

D G: And the high touch solutions segment, we remain focused on our growth engines and deliver tangible value for our customers, resulting in another quarter of solid performance within.

D.J. MacPherson: Within the endless assortment business, our focus on gaining new customers and increasing repeat purchase rates is paying off, and we continue to make progress with these initiatives. Beyond the P&L, we achieved ROIC at 42.6%, and operating cash flow remained healthy in the quarter, allowing us to return a total of $345 million to Grainger shareholders through dividends and share repurchase. While 2024 is playing out largely as expected, further yen devaluation and continued pockets of demand stoppages in the U.S. remain a setback.

D G: Within the endless assortment business, our focus on gaining new customers and increasing repeat purchase rates is paying off and we continue to make progress with these initiatives.

D G: From a profitability standpoint total company operating margin of 15, 4% remains strong, but as anticipated was down 40 basis points versus prior year.

D G: E. P. S finished the quarter at $9.76 up five 2% versus the prior year.

D G: Beyond the P&L, we achieved ROIC see at 42, 6% and operating cash flow remains healthy in the quarter, allowing us to return a total of $345 million to greater shareholder should dividends and share repurchases.

D G: Overall, the business continues to perform well as we stay focused on the customer and the things that matter.

D G: 2024 is playing out largely as expected further yen devaluation continued pockets of demand sops in the U S remain as headwinds with this we've trimmed the top end of our earnings guidance range, which Steve will discuss in a bit.

D G: Now I'll turn it over Steve.

Steve: Thank you <unk> turning to slide seven you can see the high level second quarter results for the total company, including five 1% growth on a daily organic constant currency basis.

Gigi: Thank you, Gigi. Turning to slide seven, you can see the high-level second quarter results for the total company, including 5.1% growth on a daily organic constant currency basis. The quarter played out largely as anticipated, despite the persistent demand softness DG experienced. Gross margins were flat year-over-year as a number of items were offset within the period, and SG&A delevered 40 basis points as we ramped our demand generation investment.

Steve: The quarter played out largely as anticipated despite the persistent demand softness D. G mentioned.

Speaker Change: Operating margins were down 40 basis points year over year.

Speaker Change: Generally following normal seasonal trends.

Speaker Change: Gross margins were flat year over year as a number of items offset within the period and SG&A Deleveraged 40 basis points as we ramp our demand generation investments.

Steve: In total we delivered diluted EPS for the quarter of $9, 76%.

Speaker Change: Five 2% or 48.

Speaker Change: Over the prior year period.

D G: Moving on to segment level results. The high touch solutions segment continues to perform well with sales up three 1% on a reported basis.

D G: Or three 7% on a daily organic constant currency basis.

Dean Merriweather: Results were driven by strong volume growth and moderate price contribution across all geographies in the period. In the U.S. specifically, nearly all customer end markets were up year over year with warehousing, contractors, and healthcare customers having the largest gain, flat versus the prior year. When excluding the unfavorable impact of non-recurring rebate, price-cost was roughly neutral in the quarter.

Speaker Change: Results were driven by strong volume growth and moderate price contribution across all geographies in the period.

Speaker Change: In the U S. Specifically nearly all customer end markets were up year over year with warehousing contractors and health care customers, having the largest game.

Speaker Change: For the segment gross profit margin finished the quarter at 41, 7%.

Speaker Change: Flat versus the prior year.

Speaker Change: In the quarter, we experienced an unfavorable lap of roughly 40 basis points from the nonrecurring rebate benefit captured in Q2 of 2023.

Speaker Change: This was offset by several small tailwind in the current year period.

Speaker Change: When excluding the unfavorable lap of nonrecurring rebate price cost was roughly neutral in the quarter.

Speaker Change: SG&A SG&A Deleveraged 40 basis points in Q2.

Speaker Change: D C capacity came online and we continue to turn back on demand generating activities like marketing and seller head count.

Speaker Change: Annual American Crisp creases that went live in April were offset by productivity actions and lower variable compensation expense within the period.

Speaker Change: Overall, it was a solid quarter of growth and profitability or the high type solutions.

Dean Merriweather: Looking at market outgrowth on slide 9, we estimate that the U.S. MRO market, including volume and price, grew in the quarter between 2.5 and 3 percent, with price contributing nearly all of the growth within our High Tech Solutions U.S. business. Growing at 3.6% organically, our mathematical market outgrowth in the quarter was roughly 100 basis points in total. This includes approximately 300 basis points of volume outgrowth contributions netted against the continued price headwinds when comparing our price contribution to PPI.

Speaker Change: Looking at market outgrowth on slide nine we estimate that the U S MRO market, including volume and price within the quarter between two 5% and 3%.

Speaker Change: With price contributing nearly all of the growth.

Speaker Change: But then our high Tech solutions U S business.

Speaker Change: Growing at three 6% organically, our mathematical market outgrowth in the quarter was roughly 100 basis points in total.

Speaker Change: This includes approximately 300 basis points of volume outgrowth contribution netted against the continued high cat loans, when comparing our price contribution to PPI.

Dean Merriweather: As we've said before, there is no perfect way to measure the MRO market, and we're currently in a cycle where the headline PPI and IP metrics don't completely reflect what we're seeing in the MRO-specific. With the differences in product and customer mix, these disconnects happen from time to time and cause short-term noise within our external market share gain calculation. Given the current dislocation we're seeing this year, it's unlikely we will mathematically achieve our market outgrowth target in 2024.

Speaker Change: As we've said before there is no perfect way to measure the MRO market and we were currently in a cycle, where the headline PPI and IP metrics don't completely reflects what we're seeing in the MRO specific space.

Speaker Change: But the difference is in product and customer mix.

Speaker Change: These disconnects happen from time to time on costs short term noise within our external market share count calculation.

Speaker Change: Given the current dislocation, we're saying this year, it's unlikely we would mathematically achieve a market outgrowth target in 2024. However, we have several different ways, including both internal and external data point to understand our relative clicks on it and now we're performing quite well in the current environment.

Dean Merriweather: However, we have several different ways, including both internal and external data points, to understand our relative performance and know we're performing quite well in the current environment. We're still generating strong, strong returns on our demand-generating investment, which gives us confidence that over the long term, we will continue to outload the market by 400 to 500 basis points annually. Now turning to the endless assortment segment. Sales increased 3.3% or 11.7% on a daily cash-in-currency basis, which adjusts for the impact of the depreciated Japanese yen. Federal U.S. was up 8.7%, with Montero achieving 13.2% in local days, local currency.

Speaker Change: History would suggest that this dislocation will normalize over a multiyear period and we believe this metric remains useful in tracking our relative performance over time.

Speaker Change: We're still generating strong returns on our demand generating investments, which gives us confidence.

Speaker Change: But over the long term, we will continue to outgrow the market by four to 500 basis points annually on average.

Speaker Change: Now turning to the endless assortment segment.

Speaker Change: Sales increased three 3% or 11, 7% on a daily constant currency basis, which adjusts for the impact of the depreciating Japanese yen.

Speaker Change: They're all U S was up eight 7% with monarch tower, all achieving 13, 2% in local days local currency.

Dean Merriweather: At a business level, Zorro saw improved growth from core B2B customers who were up mid-teens in the quarter. Performance was driven by B2B customer acquisition and improved repeat purchase rates, which were aided by service enhancements to increase same-day shipping and better communicate delivery dates. Headlines from the continual unwind of non-core business, including B2C and B2C-like volumes, started to dissipate in the quarter, but remained down low double digits year over year. We expect these B2C headwinds to continue to subside as the year progresses.

Speaker Change: At a business level, they're also improved growth from core <unk> to be customers, who were up mid teens in the quarter.

Speaker Change: Performance was driven by a b to B customer acquisition and improved repeat purchase rate, which were aided by service enhancements to increase same day shipping and better communicate delivery date.

Speaker Change: Cat one is from the continued unwind of noncore business, including B to C and B to C. Like buying started to dissipate in the quarter, but remained down low double digits year over year.

Speaker Change: We expect these DTC headwinds to continue to subside as the year progresses.

Dean Merriweather: At Monetaro, sales were strong from continued growth with enterprise customers coupled with solid acquisition and repeat purchase rates with small and mid-sized businesses. However, on a reported basis, these results were all upset by continued foreign exchange rate pressures as the yen continued to show incremental weakness against the dollar. On profitability, operating margins for the segment declined 70 basis points to 7.9%. This decline was driven by lower growth margins at Montero from product and customer McHetland.

Speaker Change: That mine is how sales were strong from continued growth with enterprise customers, coupled with solid acquisition and repeat purchase rates with small and midsized businesses.

Speaker Change: On a reported basis. These results were all upset by continued foreign exchange rate pressures as the yen continues to show incremental weakness against the dollar.

Speaker Change: Profitability operating margins for the segment declined 70 basis points to seven 9%.

Speaker Change: This decline was driven by lower gross margins at monetize from product and customer mix.

Speaker Change: Wins.

Speaker Change: Combined with SG&A deleverage at Zoro, as the business ramps and marketing investments and re baselines on lower B to C and D to C like volume.

Dean Merriweather: As these volumes normalize, this should create a better baseline to re-lever the business going forward. Overall, for Endless Assortment, we're encouraged by the strong progress in the quarter and are on track to finish the year at or above our regional expectations. Now moving to the updated outlook for the remainder of 2024. I want to note, while we continue to remain diligent in managing expenses and measuring returns given the softer top line, our ability to generate leverage is challenged this year as we invest in our growth engines to power long-term share gains.

Speaker Change: As these volumes normalize this should create a better baseline to re lever the business going forward.

Speaker Change: Overall for endless assortment, we're encouraged by the strong progress in the quarter.

Speaker Change: And are on track to finish the year at or above our original expectation.

Speaker Change: Now moving to the updated outlook for the remainder of 2024.

Speaker Change: As D. G mentioned at the beginning of the call. We are trimming the top end of most estimates to reflect continued market softness as macroeconomic uncertainties persist in the U S.

D. G: With that we're now expecting total company daily organic constant currency sales to grow between four and 6% for the full year of 2024.

Speaker Change: When including the continued deterioration of the Japanese yen. This translates to an updated recorded sales range between 17, and $17 3 billion and an EPS range between $38 and $39 55.

D. G: So as you can see on this slide we flow. These changes and have also made slight tweaks to the margin outlook based upon how we're plus one how we're performing in the first half.

Speaker Change: I want to note, while we continue to remain diligent on managing expenses and measuring returns given the softer top line our ability to generate leverage as challenge. This year as we invest in our growth engines to power long timeshare.

Speaker Change: Setting that aside we remain strongly committed to Brian SG&A slower than sales over time and have a track record of doing so.

Dean Merriweather: Supplemental guidance ranges, including increased operating cash flow and share repurchase expectations, can be found in the appendix of this presentation. There are some puts and takes from a profitability perspective, but we anticipate operating margins and earnings to remain healthy and relatively consistent in the third quarter when compared to the second. All together, at the total company level, we're performing well, and we are confident in our ability to drive solid growth and strong profitability in the second half of the year.

Speaker Change: Supplemental guidance ranges, including increased operating cash flow and share repurchase expectation can be found in the appendix of this presentation.

Speaker Change: On seasonality.

Speaker Change: If we move to the second half of the year, we expect relatively normal sequential growth from Q2 to Q3 and into the fourth quarter.

Speaker Change: There are some.

Speaker Change: Puts and takes from a profitability perspective, but we anticipate operating margins and earnings to remain healthy and relatively consistent in third quarter when compared to the second.

Speaker Change: As we start the third quarter, a number of external factors have impacted our results in July.

Speaker Change: Sales started to ramp in the final few days of the month.

Speaker Change: This led preliminary July sales results to finish up roughly 2% on a total company daily organic constant currency basis.

Speaker Change: Of note. This number would be approximately 100 basis points higher if you normalize for the tough comp caused by an elevated level of project related service engagement in July of last year.

Speaker Change: All together the total company level, we're performing well and are confident in our ability to drive solid growth and strong profitability in the second half of the year.

D G: With that I'll pass it back to D G.

D G: Thanks, Steve as we head into the second half of 'twenty 'twenty four a number of macroeconomic uncertainties remain ahead, but our teams are committed to focusing on what matters, most meeting our customers' needs and creating value for their business.

D.J. MacPherson: We know that our ability to serve our customers better than our competitors relies on having a strong culture where team members can have a meaningful and fulfilling career. Among several other recognitions this year, Grainger was recently named the best workplace for millennials. These awards are a testament to the well-rounded culture we've built to help us fulfill our purpose. I'm confident that Grainger will continue to be recognized as an employer of choice because of the emphasis we put on living our potential.

Speaker Change: We know that our ability to serve our customers better than our competitors relies on having a strong culture, where team members can have a meaningful and fulfilling career.

Speaker Change: Amongst several other recognitions. This year granted was recently named a best workplace for millennials.

Speaker Change: These awards are a testament to the well rounded culture, we've built to help us fulfill our purpose.

Speaker Change: I'm confident the grandeur will continue to be recognized as an employer of choice because of the emphasis we put on living our principles.

D.J. MacPherson: One of those principles, starting with the customer, is key to achieving great results for all stakeholders, and I'm confident that we will continue to do that in 2024 and for years to come. And with that, we will open the line to questions.

Speaker Change: One of those principles, starting with the customer is key to achieving great results for all stakeholders and I am confident that we will continue to do that in 2024 and for years to come and with that we will open the line for questions.

Operator: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 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 before pressing the star keys.

Speaker Change: Thank you if he would like to ask a question. Please press star one on your telephone keypad.

Speaker Change: Confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participating.

Speaker Change: As Vince using speaker equipment, it may be necessary to pick up your handset before pressing the star T. As well, yes that you. Please limit to one question and one follow up question.

Operator: We ask that you please limit yourself to one question and one follow-up question. Our first question is from Tommy Moll with Stevens Inc. Please proceed. Good morning,

Speaker Change: Our first question is from Tommy Moll with Stephens Inc. Please proceed.

Tommy Moll: Good morning and thank you for taking my questions. I wanted to start on the high touch business where once again, the midsize customers outgrew the large. And my question is really, how much do you think this is a function of share gain versus some other factor? How important to the midsize customers is the digital capability versus that level of importance for the larger customers? And what do you think the runway is ahead on these favorable trends for the midsize? Thank you. Yeah.

Tommy Moll: Morning, and thank you for taking my questions.

Tommy Moll: Good morning.

Tommy Moll: I wanted to start on the high touch business, where once again, the midsize customers outgrew the large.

Tommy Moll: And my question is really how long how much do you think this is a function of share gain versus some other factor how important to the midsize customers as the.

Speaker Change: Digital capability versus that level of importance for the larger customers and what do you think the runway is ahead on these.

Speaker Change: Favorable trends for the mid size. Thank you.

Speaker Change: Yeah. Thanks.

Speaker Change: Most of almost all of the growth in midsize customer and the outgrowth would be share gain.

D.J. MacPherson: You know, the reality is that, and I think most of them know the story, we were close to $2 billion in revenue at one point. We got down to $800 million. Now we're back up to where we were.

Speaker Change: The reality is that and I think I think most of another story. We at one point were close to 2 billion in revenue, we got down to $800 million of back up to where we were we think there's a long runway ahead.

D.J. MacPherson: We think there's a long runway ahead. We believe that the digital capabilities we've built and the customer and product information assets we've built help us with midsize customers significantly. And so really, we think it's what we're doing to build relationships with them through digital capabilities. And a lot of those customers, when you look at how they buy, start with digital, and that's their main channel.

Speaker Change: We believe that the digital capabilities we've built.

Speaker Change: And the customer and product information assets, we built help us with midsize customers significantly and so really we think it's a it's what we're doing to build relationships with them through digital capabilities and a lot of those customers and how they buy start digital and that that's their main the main channel.

Speaker Change: Yeah.

Speaker Change: Shifting gears.

D.J. MacPherson: Shifting gears, DG, last quarter, you referenced inflation being stickier than expected and talked about some corrective price actions slated for early May. I'm just curious for an update there, how is realization going? And do you still think you'll land in price cost neutrality by the end of this year? Thanks.

Speaker Change: D G last quarter, you referenced inflation being stickier than expected and talked about some corrective price actions slated for early May I'm, just curious for an update there how its realization.

Speaker Change: And do you still think you'll you'll land in price cost neutrality by the end of this year. Thanks.

D.J. MacPherson: Yeah, yeah, we do believe we'll land in price pass neutrality by the end of the year. The price realization, the realization of the pricing actions on May 1st, had been basically as expected. We, you know, we talked about at the beginning of the year that we were a little bit behind on price increases. We are making some of that up as the year progresses, and notably, gross profit remains strong. So we are not concerned about ending the year as we expect.

Speaker Change: Yeah, Yeah, we do believe we'll land in price cost neutrality by the end of the year the price realization the realization of the pricing actions on may 1st and then basically as expected.

Speaker Change: We talked about the end of the year, we were a little bit behind on price increases we are.

Speaker Change: Making some of that up as year progresses, and notably gross profit remains strong. So we are not concerned about any of the years, we expect.

Operator: Our next question is from Dave Manthey with Baird. Please proceed.

Speaker Change: Our next question is from David Manthey with Baird. Please proceed.

Dave Manthey: Yeah, thank you. Good morning, everyone.

David Manthey: Yes. Thank you good morning, everyone.

Operator: You may have mentioned this, but June average daily sales were running up seven. After sort of four to five all years, is there anything we can read into that? And again, I apologize if you mentioned it, but did you make any comments on trends in July so far?

David Manthey: You May have mentioned this but June average daily sales running up seven <unk>.

David Manthey: After a sort of four to five all years are there anything we can read into that and again I apologize. If you mentioned it but did you make any comments on the trends in July so far.

D.J. MacPherson: Yeah, in the reporter remarks, we noted that preliminarily July is rolling up around 2%. However, if you recall, we believe if you normalize for some project-related service revenue,

David Manthey: Yeah.

Speaker Change: Our reported remarks, we noted that preliminarily July as well.

Speaker Change: Rolling up around 2%. However, if you recall, we believe if you normalize for some project related service revenue outside project related service revenue, we had last year that would that would put us north of 3% four four in July.

David Manthey: Yeah.

D.J. MacPherson: Yeah, I would just say that Dave, that I think that, you know, June, July, the differences are probably, no, we actually don't think there's anything we look at daily run rights, we're concerned about anything, and there's nothing that I would say that would necessarily cause those other Uh, yeah, makes sense. Thank you for that.

David Manthey: Okay.

David Manthey: I would just say that Dave that I think that.

Dave: June July the differences are probably noise.

Dave: We actually don't think there's we look at daily run rates, we are concerned about anything and there's nothing that I would say that wouldn't necessarily causes other than noise.

Dave: Oh, yes, it makes sense. Thank you for that.

Speaker Change: And then I know other international is small, but we're talking 300 million Bucks.

Operator: I know other international is small, but, um, we're talking 300 million bucks. Drag on overall profitability may be a distraction. I don't know. Could you could update us on the other international operations and what you're targeting there medium-term?

Speaker Change: Drag on overall profitability may be a distraction I don't know could you could you update us on the the other international operations and.

Speaker Change: What you're targeting there.

Speaker Change: Medium term.

D.J. MacPherson: Yeah, the majority of that, you know, it's Crownell plus some other charges and so on, but the Crownell business has been working towards profitability. And if you recall our results last year, they exited the year profitable, and they continue to see profitability this year. Now, in this quarter, they had a little bit of a challenge with their gross margin related to customer mix, but we expect them to end this year profitable as well.

Speaker Change: Yes. The majority of that are you know its crown Royal plus some other charges in other.

Speaker Change: But the Cromwell business has been working towards profitability and if you recall our results last year, they exited the year profitable and they continue to see profitability. This year now and this quarter they had a little bit of a challenge with some gross margin.

Speaker Change: Margin related to customer mix.

Speaker Change: But we expect them to end this year profitable as well and we felt like the U K is an important market for us and we just you know with Brexit and some other challenges over the last couple of years is kind of delayed some of our strategic plans in that business, but that we feel that business is doing really well and has outgrown the market.

D.J. MacPherson: And we feel like the UK is an important market for us. And we just, you know, with Brexit and some other challenges over the last couple years, it's kind of delayed some of our strategic plans in that business, but we feel that business is doing really well and we have outgrown the market in the last six quarters.

Speaker Change: The last six quarters.

Operator: Our next question is from Ryan Merkel with William Blair. Please proceed.

Speaker Change: Our next question is from Ryan Merkel with William Blair. Please proceed.

Ryan Merkel: Hey everyone, I wanted to go back to pricing. What do you expect for 24 now? And any more color you can provide on the May and September increases? Was that on specific products, or was that across the board?

Ryan Merkel: Hey, everyone I wanted to go back to pricing what do you expect for 'twenty for now and any more color you can provide on the man September increases.

Speaker Change: Was that on specific products or is that across the board.

D.J. MacPherson: So I guess what I'd say is that, you know, we follow two tenets. We want to make sure that we are priced competitively, and we want to make sure that, over time, we're shooting for price cost neutrality. I think we will do that this year. Our price increases this year will be modest overall. Our cost increases will be modest overall on product costs, but we are making adjustments both at May 1st and September 1st, and those adjustments aren't meaningful, and aggregate, we would expect to be you know that one percent range that we talked about roughly at the beginning of the year, one to two.

Speaker Change: Yeah. So I guess, what I'd say is we you know we saw a few tenants we want to make sure that we are priced competitively and.

Speaker Change: And we want to make sure that over time.

Speaker Change: We're shooting for price cost neutrality, I think we will do that this year our price increases this year will be modest overall, our cost increases will be modest overall product cost.

Speaker Change: But we are making adjustments both it may firsthand September 1st.

Speaker Change: And those adjustments are arent meaningful in aggregate, we would expect to be.

Speaker Change: Of that 1% range that we talked about roughly a year to year and wanted to women to yeah.

D.J. MacPherson: Okay, got it. It's helpful. And then just back to the macro, DG, any factors you would point out that caused you to lower the second half or maybe just rank the things that drove that? And, generally, what are you hearing from customers about the outlook?

Speaker Change: Okay got it that's helpful. And then just back to the macro D. G. Any any factors you would point out that caused you to lower the second half or maybe just rank.

Speaker Change: The things that drove that and generally what are you hearing from customers about the outlook.

D.J. MacPherson: Yeah, I think that, you know, what we're seeing is what everybody's saying. If you look at sort of the general demand environment, it's pretty slow. It's consistent though. There's not a lot of panic. There are certain industries that have had significant challenges this year. Pockets of the automotive industry, pockets of others, I won't get into too many details about those, but certainly there are pockets of weakness that have been significant, and some pockets of strength, and I think that just continues to be the case.

Speaker Change: Yes.

Speaker Change: What we're seeing is what everybody's everybody's seeing if you look at.

Speaker Change: Sort of the general the general demand environment, it's pretty slow it is.

Speaker Change: Consistent though there's there's not a lot of panic. There are certain industries that have had significant challenges. This year pockets of automotive pockets of other I won't I won't get into too many details about those but certainly there are pockets of weakness that had been significant and some pockets of strength and I think that just continues.

D.J. MacPherson: You know, we expect, I think we came in thinking that volume this year would be flat in our market, roughly, you know, something like that, and it's probably going to be down one now, so that's probably, given what we've seen, that's probably the biggest change we have in our portfolio.

Speaker Change: To be the case, we we expect I think we came in thinking that volume this year would be flat and our market roughly you know something like that and it's probably going to be down one now so that's probably given what we see and that's probably the biggest change we have.

Speaker Change: Oregon, our projections.

Operator: Our next question is from Jacob Levinson with Mealy's Research. Please proceed.

Speaker Change: Our next question is from Jacob Robinson with Melius Research. Please proceed.

Jacob Levinson: Good morning, everyone. Morning. On the marketing investment, I know you guys have a tight feedback loop there and understanding where to push the accelerator or not, but is that spend something that you would look to actually flex up and sort of swap your macro environment, or is it really not? demand-dependent, if you will.

Jacob Robinson: Good morning, everyone.

Jacob Robinson: Jacob.

Jacob Robinson: On the on the marketing investment.

Speaker Change: You guys have a tight.

Speaker Change: Tight feedback there and understanding where.

Speaker Change: Where to press the accelerator or not but is that is that spend something that you would look to actually flex up in sort of a sloppier macro environment or is it really not.

Speaker Change: Demand dependent if you will.

D.J. MacPherson: So the way we measure marketing, we look at, we run tests all the time, and that guides us on how much to spend. So you could argue that in certain macro environments those tests might show different results, but in general, that's not going to change how we think about spending. We're spending the levels that give us a marginal return that we expect, and none of that, none of that's changed, and I wouldn't expect that to change.

Speaker Change: So the way the way we measure marketing we look at we run tests, all the time and that guides us on how much to spend so the.

Speaker Change: You could argue that in certain macro mark set in that macro environment. Those tests might show different results, but in general that's not going to change how we think about spending were spending to levels that give us a marginal return that we expect and none of that none of that's changed and I wouldn't expect that to change through that through time.

Jacob Levinson: Okay, that makes sense. And then just on the distribution investments that you're making, and I know that's been pretty well telegraphed back to your analyst a few years ago, can you just help us understand where you are in that in that cycle? And maybe just give us a sense of maybe what the utilization rate is.

Speaker Change: Okay that makes sense.

Speaker Change: And then just on the.

Speaker Change: On the distribution investments that you're making in <unk>.

Speaker Change: So that's been pretty well telegraphed back at your analyst day, if years ago can you just help us understand where you are in that and that are in that cycle and maybe just give us a sense of maybe what the utilization rates look like today in Europe and your network.

D.J. MacPherson: Yeah, the network's pretty busy, I'd say. You know, we probably, we talked about this in 2022, we were probably a bit behind. It was difficult to actually build anything during the pandemic to get materials and finish things. We have remedied some of that situation.

Speaker Change: Yes.

Speaker Change: The network's pretty busy I'd say.

Speaker Change: We we probably we maybe talked about this in 2022, we were probably a bit behind it was difficult to actually build anything during the pandemic to get materials and finish things we have with revenue some of that situation. We've put in three of bulk warehouses.

D.J. MacPherson: We've put in three new bulk warehouses, the building in the northwest, the shell of the building's up, and we will start receiving by the end of this year and start shipping next year. We have a building in Houston that's just land now, but that's going to go up as well. So we've talked about those two and announced those two buildings. I would say that the biggest bulge in capital right now, we would project, would be probably next year as we finish those two buildings out, and then we expect to be in more normal times after that and be in a little bit better shape from a capacity perspective. But, you know, the plan has just been executed exactly as it was intended.

Jacob Robinson: On the building in the northwest shell of the building up and we will start receiving by the end of this year.

Jacob Robinson: Start shipping next year, we were building in Houston that fits that is just land now, but that's going to go up as well. So we've talked about those two and announces two buildings.

Jacob Robinson: I would say that the biggest bulge in capital right now we would project would be probably next year as we build finished those two buildings out and then we expect to be in probably more normal times after that and it being a little bit better better shape from a capacity perspective, but the plan has been executed exactly as we expected the timing really hasn't changed.

Jacob Robinson: Neither.

Operator: Our next question is from Deane Dray with RBC Capital Markets. Please proceed.

Jacob Robinson: Our next question is from Deane Dray with RBC capital markets. Please proceed.

Operator: Good morning, this is Jeff Reeve on behalf of Deane. My first question is on the MS Assortment segment. Pretty nice organic growth this quarter. I know one of your peers had some e-commerce stumbles recently. Curious if you are winning share there or if that maybe created an opportunity to do so.

Jeff Reive: Good morning. This is Jeff Reive on for Deane. My first question is on the MFS assortment segment pretty nice organic growth. This quarter I know one of your peers had some ecommerce stumbles recently.

Jeff Reive: Curious, if you're winning share there or that may be created an opportunity to do so.

D.J. MacPherson: Um, I you know, I wouldn't necessarily tag what happens to us to any specific competitor, the market's quite big, that Zorro in the US plays in. I think what's happened with us is we've gotten much better at getting better repeat rates. And we've been able to get better acquisition this year. So the two things we focus on have gone better, but I wouldn't necessarily tag it to any specific competitor.

Speaker Change: I wouldn't I wouldn't necessarily tag what happens to us to do any specific competitor the market's quite big that zoro in the U S plays in I think what's what's happened with us as we've gotten much better at getting better repeat rates and we've been able to get better acquisition also this year. So the two things we felt.

Speaker Change: On have gone better, but I wouldnt tag it to any competitor.

Operator: Got it. And then Just on guidance, the kind of trimming the high end, I think you called out kind of the weaker macro and EN devaluation. If you had to kind of peg it by percentage to each of those buckets, how should we think about it?

Speaker Change: Got it and then.

Speaker Change: On guidance kind of trimming the high end. Thank you called out kind of a weaker macro in the yen devaluation. If you had to kind of peg it percentage to each of those buckets kind of how should we think about it.

Operator: Can you repeat that? I'm trying to make sure I'm following your question.

Speaker Change: He he repeat that I'm trying to make sure I'm. Following your question around Guy, Yes, yes. So you trimmed the guidance and basically called out it's a combination of a weaker macro and then also the yen devaluation I was curious if you could just kind of point to kind of give a percentage to each one into the kind of the reasons behind the trimming of.

Operator: Yes, yes, you trimmed the guidance and basically called out it's a combination of a weaker macro and then also the yen devaluation. I was curious if you could just kind of point to kind of give a percentage to each one of the reasons behind the trimming of the guidance. It's more macro, more yen. Yeah. Okay, so more macro, so probably two thirds of the macro and probably a third.

Speaker Change: The guidance is.

Speaker Change: Sure Matt Yeah, yeah, Okay. So more macro so probably two thirds macro and probably a third yen.

Operator: Our next question is from Christopher Glynn with Oppenheimer. Please proceed.

Speaker Change: Our next question is from Christopher Glynn with Oppenheimer. Please proceed.

Christopher Glynn: Thanks. Yeah, just slide 19 you show the verticals for HTS and really pretty remarkable balance across there with just a couple flat, everything else up. I was curious about the double-digit categories warehousing and other and then contractor up high single digits. I think others are a bit of a grab bag, but those numbers for those sectors seem a little incongruous with general macro, so curious if you could opine

Christopher Glynn: Thanks, Yeah, just slide 19, you show the verticals for HTS and really really pretty remarkable balance across there was just a couple of flat everything else up I was curious about the double digit categories warehousing and other and then contract are up.

Speaker Change: High single digits.

Speaker Change: The other is a bit of a grab bag, but those.

Christopher Glynn: Bruce to those sectors seem a little incongruous with general macro so curious if you could opine there.

D.J. MacPherson: Yeah, I mean, for contractors in particular, I'd also make the point that we're pretty small, so we start with a pretty small base, so I'm not sure that you can compare that to what's going on in the broader market. You know, warehousing, there are some comparisons with last year with some customers that are positive right now, that's driving that. I wouldn't read too much into those, just to be fair. I think that we're performing fairly consistently across the segments, and then you have sort of in-year impacts that are a little unusual.

Speaker Change: Yeah. So for contractors are particularly I'd also make the point that were pretty small.

Speaker Change: So we start with a pretty small base. So I'm not sure that that you can compare that to what's going on in the broader market.

Speaker Change: Warehousing theres some comparisons to last year with some customers that are positive.

Christopher Glynn: Right now that's driving that I wouldn't read too much into into those just to be to be fair I think I think that we're performing fairly consistently across the segments. And then you have sort of in your impacts that are unusual and with some of them.

Christopher Glynn: Okay, and then second question on Zorro. Could we get an update on the path to margins? Clearly, demand gen is going very well there, back to mid-teens for the B2B. But, you know, kind of low single-digit margins. How do we maybe just want to revisit the path there to get to target margins?

Speaker Change: Okay, and then second questions on Zoro, two we get an update on the <unk>.

Speaker Change: Path to margins clearly demand Jens going very well theyre back.

Speaker Change: Back to mid teens for the B to B, but.

Speaker Change: Kind of low single digit margins how should we.

Speaker Change: Maybe just want to revisit the path there to get to target margins.

D.J. MacPherson: Yeah, what I would say is that, you know, probably the lowest point was probably the fourth quarter or last last end of last year. We think from now on, we're going to get better consistently, and we'll be able to get SG&A leverage as we move forward, given the growth rates we're seeing. So it'll start to get better through the back half of this year, and we think into next year as well. And so we're pretty confident that we'll start the rise. It's not going to be fast, but it's going to be very consistent in terms of getting improved margins.

Speaker Change: Yes, what I would say is that I'm, probably low point. It was probably fourth quarter was last last end of last year. We think from now on we're going to get better consistently and we'll be able to get SG&A leverage as we move forward.

Speaker Change: Given the growth rates, we're seeing so it'll it'll start to get better through the back half of this year and we think into next year as well and so we're pretty confident that we will start start to rise it's not gonna be fast it's going to be very consistent in terms of getting improved margins into the business.

Operator: Our next question is from Patrick Baumann with J.P. Morgan. Please proceed.

Speaker Change: Our next question is from Patrick Baumann with Jpmorgan. Please proceed.

Patrick Baumann: Good morning. Maybe for D, can you talk about the external factors that you mentioned impacting the July growth rate and you mentioned a ramp back toward the end of the month and something about sequential growth from the second quarter to the third quarter? My line cut out, so just wondering if you could rehash what you were saying on that.

Patrick Baumann: Good morning.

Speaker Change: Quick one maybe for <unk> can you talk about the.

Speaker Change: External factors that you mentioned and impacting the July growth rate and.

Speaker Change: You mentioned a ramp back.

Speaker Change: Towards the end of the month and something about sequential growth from second quarter to third quarter, but my line cut out. So just wondering if you could rehash, what you were saying on that.

D.J. MacPherson: Yeah, well, you know, if you look at just... [inaudible] And then there was just some general holiday softness. This is really unique because a lot of it happened around the same time, so really hard to measure.

Patrick Baumann: Yeah.

Speaker Change: Well you know if you look at just.

Speaker Change: July Youre talking about July now not the entire Florida right.

Speaker Change: When we started this month.

Speaker Change: The non started a little slow there were a number of things that happen. You know there was some weather related impacts that didn't go in our favor.

Speaker Change: There was also a well known I T outage that impacted a number of our customers since we cover a lot of people in the U S. And then there was just some general holiday softness you know this is really unique because a lot of it happened around the same times are really really hard to measure I'll say the good news is you know the last week of the month.

D.J. MacPherson: I'll say the good news is that the last week of the month was really strong for us, and so that is a good sign. So those are some of the impacts that we noted on a go forward basis. I think you're asking the next question, sequentially, sequential sales, am I correct, from this quarter to the next? If you look at that from a top-line perspective, we expect that to be reasonably consistent from Q2 to Q3 and through the fourth quarter.

Speaker Change: Ben was really strong for us and so that that is a good sign. So those are some of the impacts that we noted on a go forward basis.

Speaker Change: I think you're asking the next question sequentially sequential sales am I correct from like this quarter to the next.

Speaker Change: If you look at that you know from a topline perspective.

Speaker Change: We expect that to be a reasonably consistent Q2 to Q3, and then through the fourth quarter.

D.J. MacPherson: And then as it relates to some of our other metrics from a sequential perspective, we're expecting profitability and sequential growth from the revenue number that I just talked about. As it relates to net profitability, there's going to be some puts and takes there, but we anticipate operating margins and EPS to also remain relatively consistent through the balance of the year.

Speaker Change: And then as it relates to some of our other metrics from a sequential perspective.

Speaker Change: We're expecting our profitability.

Speaker Change: <unk> growth from that revenue.

Speaker Change: Number that I just talked about we expect profitability you know there's going to be some puts and takes there, but we anticipate operating margins and EPS to also remain relatively consistent through the through the balance of the year.

Patrick Baumann: Okay, and then I may have missed it, but you talk about the restructuring you did in the quarter. Was it just kind of what it was and what the expected benefit from it is, and is there more to come in terms of the restructuring, or was it kind of isolated just to the second quarter?

Speaker Change: Okay, and then I may have missed but did you talk about the restructuring you did in the quarter was it.

Speaker Change: Just kind of what was it and what is the expected benefit from it or is there more to come in terms of the restructuring or was it kind of isolated just to the second quarter.

D.J. MacPherson: Sure, you know, as we've talked about making sure that we can continue to invest in the cycle to ensure that, you know, we have long-term share gains. A part of that is making sure that, you know, we're paying for some of those investments through productivity actions. And so our entire business is really focused on continuous improvement and looking at how we can drive productivity. So a lot of those actions were focused on voluntary actions with team members. And that happened both in the U.S. and internationally quite a bit. We see that as a one-time specific incident.

Speaker Change: Sure you know as we've talked about making sure that we can continue to invest in the cycle to ensure that we.

Speaker Change: We have long term share gain.

Speaker Change: A part of that is making sure that we're paying for some of those investments through productivity actions.

Speaker Change: So our entire business is really focused on continuous improvement and looking at how we can and drive productivity. So a lot of those actions were focused on a voluntary actions with team members and that happened both in the U S and.

Speaker Change: Internationally are quite a bit we see that as a one time.

Speaker Change: <unk> incident, however, our focus on continuous improvement is longer term and we and in doing those things we are gaining scale on our non demand generating expenses and we expect that to continue through the cycle as we continue to invest in demand generation.

D.J. MacPherson: However, our focus on continuous improvement is longer term, and in doing those things, we are gaining scale on our non-demand-generating expenses. And we expect that to continue through the cycle as we continue to invest in demand generation.

Speaker Change: We have reached the end of our question and answer session I would like to turn the conference back over to D. G for closing remarks.

D.J. MacPherson: All right, thanks for joining us. It must be a busy day because we didn't get as many questions as usual, but I appreciate you joining us.

D. G: Alright, thanks for joining us it must be a busy day because it didn't get in as many questions as normal but.

D. G: I appreciate you joining and I would just reiterate that we are we feel really good about where we're at we're going to continue to invest in the core capabilities that we need to build to make sure that we can serve customers better than our competitors. That's really what we're focused on and we're also focused as he said on driving productivity through the business. We think doing both of those things at the same time is absolutely critical for long term success.

D.J. MacPherson: And I would just reiterate that we feel really good about where we are. We're going to continue to invest in the core capabilities that we need to build to make sure that we can serve customers better than our competitors. That's really what we're focused on, and we're also focused, as Dee said, on driving productivity into the business. We think doing both of those things at the same time is absolutely critical for our long-term success.

Operator: So I hope you enjoy the rest of your summer, and thanks for joining us on our call. Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation. Related Posts Jul 2, 2018 David M. Glynn, Deane Dray, Stephen Volkmann, Donald Macpherson, Nigel Coe, Ryan Merkel, Quinn Fredrickson, David Manthey, Tyler Voigt, Ken Newman, W W Grainger Inc

Speaker Change: So hope you enjoy the rest of your summer and thanks, Thanks for joining our call.

Operator: Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation. Thank you for watching!

Speaker Change: Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

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