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Edited Transcript of GWW earnings conference call or presentation 18-Apr-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 W W Grainger Inc Earnings Call

LAKE FOREST Apr 19, 2017 (Thomson StreetEvents) -- Edited Transcript of W W Grainger Inc earnings conference call or presentation Tuesday, April 18, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Donald G. MacPherson

W.W. Grainger, Inc. - CEO and Director

* Laura D. Brown

W.W. Grainger, Inc. - SVP of Communications & IR

* Ronald L. Jadin

W.W. Grainger, Inc. - CFO and SVP

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Conference Call Participants

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* Adam William Uhlman

Cleveland Research Company - Partner and Senior Research Analyst

* Andrew Edward Buscaglia

Crédit Suisse AG, Research Division - Senior Analyst

* Charles Matthew Duncan

Stephens Inc., Research Division - MD

* Christopher Belfiore

UBS Investment Bank, Research Division - Equity Research Associate Analyst of Industrials

* Christopher D. Glynn

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Christopher M. Dankert

Longbow Research LLC - Research Analyst

* David John Manthey

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Deane M. Dray

RBC Capital Markets, LLC, Research Division - Analyst

* Evelyn Chow

Goldman Sachs Group Inc., Research Division - Research Analyst

* Justin Laurence Bergner

G. Research, LLC - VP

* Nigel Edward Coe

Morgan Stanley, Research Division - MD

* Robert Barry

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Robert P. McCarthy

Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst

* Robert Scott Graham

BMO Capital Markets Equity Research - Analyst

* Ryan Merkel

William Blair & Company L.L.C., Research Division - Research Analyst

* Wing Lau

Deutsche Bank AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to W.W. Grainger's First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to Laura Brown, Senior Vice President, Corporate Communications and Investor Relations. Thank you. Please go ahead.

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Laura D. Brown, W.W. Grainger, Inc. - SVP of Communications & IR [2]

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Good morning, everyone, and welcome to Grainger's Q1 Quarterly Earnings Call. With me is DG MacPherson, CEO; and Ron Jadin, Senior Vice President and CFO.

As a reminder, some of our comments today may be forward-looking based on our current risk of future events and our actual results may differ materially as a result of various risks and uncertainties, including those detailed in our SEC filings. These documents are available on our IR website together with reconciliations of any non-GAAP financial measures mentioned on today's call with the corresponding GAAP measures.

Now DG will be making some opening comments regarding the performance of the company with a deeper dive on our pricing actions, specifically in the U.S. He will then turn the call over to Ron to discuss the financial implications of our pricing actions, along with updated 2017 and 2019 guidance. After closing remarks, we'll open the call for questions. DG, to you.

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [3]

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Thanks, Laura, and thanks, everyone, for joining us today. So the main event, as Laura implicated, was price for the quarter. And as we discussed in November, we are laser-focused on creating value for our customers. Customers value our product breadth and delivery capabilities. They value our sales and service model for large customers and they value our strong customer service capabilities overall. But we all know that our prices have been a significant source of dissatisfaction for our customers. And we really haven't been able to leverage digital capabilities like digital marketing to acquire new customers and to grow with existing customers.

As a result, we've taken action to improve our pricing so that we can grow share with existing customers and attract new customers. Now in the quarter, the volume response to the pricing changes was faster, more immediate and stronger than we anticipated. Given this response, we've made the decision to accelerate our pricing actions this year. This is absolutely the right thing to do for the business and it provides Grainger with a sustainable, long-term platform for future growth. It allows us to market our offer more aggressively.

The decision to accelerate involves a large GP write-down in the short-term but it is accretive to earnings over the long term. Ron is going to talk about the changes to guidance as a result of this acceleration later in the call.

Before I go into more detail on pricing, I'm going to talk about company results for a few minutes. Now as a reminder, this morning's call is going to focus really entirely on adjusted results, which exclude restructuring.

So revenue in the quarter was up 1%. Volume was healthy at up 5%. Our gross profit and our operating margin were significantly impacted by the pricing actions, which we've mentioned before. Operating earnings were down 14%. Operating cash flow was actually up 13% driven mostly by working capital.

So I'm going to talk about non-U. S. businesses first. So our other businesses, which includes our online model and our businesses in LATAM, Europe and China performed as expected. Other Business sales were up 12% and that includes a 3% headwind from foreign exchange. Operating earnings for this segment were up 45%. Now the online businesses, driven by MonotaRO in Japan and Zoro in the U.S., continued to deliver strong sales growth of 23% and the operating margin in those businesses expanded by 100 basis points. So great progress with the online model.

Switching to Canada for a moment. Our sales increased 1% in local currency. The good news here is that our service levels have stabilized and we're hearing very good things from our customers in terms of those service levels. We started pricing actions in Canada where contract customers were implementing additional price increases that really are going to offset currency-related COGS inflation. As you might recall, during the ERP implementation, we did not take price increases that related to currency translation we otherwise would have. The service stabilization took longer than anticipated and that has delayed the realization of our price increases.

For non-contract customers, we are introducing -- also introducing market-based pricing similar to that in the U.S. In the quarter, gross margin in Canada declined 270 basis points versus the prior year. And while price increases have lagged our plans, we have seen sequential improvement month-by-month in the first quarter.

Year-over-year in Canada, our operating expenses were up and that's really impacted by 2 things. The first is 2016 had the sale of the old Toronto distribution center. That obviously did not repeat this year. So that was a gain or a benefit in 2016 that did not repeat in 2017. And the others, we reinstated the annual sales meeting this year, which did not take place as we went through the ERP implementation in 2016.

Based on continued service improvements, based on the pricing actions we are taking and starting to see some progress on and based on the strong cost actions we will put in place, we still plan to breakeven as we exit 2017. And as we go forward, we'll more fully describe our actions and progress in Canada in the coming months.

So turning to the U.S. The U.S. results are really all about the strategic pricing actions that we are taking. Sales in the U.S. were down 1%. The volume was up 4%, entirely driven by price.

So let's talk about pricing. As we discussed in November, our price structure has been a barrier to growth across the business. With midsized customers, it has hurt our ability to acquire new customers and it also hurt our ability to penetrate midsized customers. With large customers, pricing has been a barrier to capturing all the volume with customers. Our customers tell us time and again that they want to consolidate their purchases with us, but our price has been a barrier to that spot buy. So we took action in the quarter to lay the foundation for sustainable share gain and customer acquisition. In January, we adjusted list prices to support large customers consolidating their purchases. That resulted in some list prices going up and some going down. That was a huge change from a list price perspective in the quarter.

In early February, we introduced web pricing for about 450,000 SKUs, which is essentially market-based pricing. To get that pricing, customers today have to opt-in to that price online or on the phone. We also continued to negotiate large customer contracts with the updated pricing structure. That's a process that we started in the fourth quarter of 2015. As a reminder, large contract customers generally have competitive prices. We're adjusting the structure to make it more attractive for them to consolidate all of their volume with Grainger.

So our initial results from the pricing actions have been positive. We saw stronger than expected price elasticity on the list price changes. That means both places where we've raised price and places where we've lowered price. For large and midsized non-cost -- contract customers, who opted into our web pricing program, volume had been declining at double digits and is now growing at mid-single digits. Now this is off a relatively small base, but it is a representative base. It represents only 1/3 of our assortment and we have not yet been able to market web prices aggressively given the requirement for customers to opt-in to the new pricing.

For contract customers where we had implemented pricing changes for their spot buy purchases, our results are quite encouraging. Total volume growth for these customers has increased from 4% to 9%. We've now worked through enough contracts to get a feel for how customers will respond to these changes and these customers are very supportive of these changes.

Overall, we've also seen customers buying at the new price points versus requesting quotes. This is a good sign that affirms that more relevant pricing simplifies the process and makes Grainger easier to do business with.

So spending a moment on volume. We've seen the strongest volume growth in 2 years for the quarter. And we expect to see volume grow in the U.S. about 6% for the year. And while some of this is certainly a slightly improved market, our volume performance this year should be improved on a relative basis. So we're excited about the volume trends.

Now based on these results, we've made the decision to accelerating our -- accelerate our pricing actions into 2017. The actions will begin in the third quarter and will include 3 things. We will introduce web prices on the entire assortment of SKUs and eliminate the opt-in requirement at that time. We will add digital marketing under the Grainger brand. So we are going to use digital marketing to acquire customers under the Grainger brand, which we've not been able to do. And we're going to accelerate the large contract customer negotiations during the period between now and the third quarter.

We are excited about these actions and we expect them to speed up customer retention efforts, to accelerate our customer acquisition and to help us gain back the spot buy volume. It will also help us simplify our pricing structure and accelerate our ability to lower expenses relative to our price complexity today. And it also allows to put the pricing change behind us faster, enabling stronger sales growth and improved operating margins.

With these changes, there's obviously an impact this year Ron will talk about. But we do expect to be back on track to hit our 2019 guidance, operating margin of 20 -- of 12% to 13%. Importantly, we're going to eliminate a significant barrier for our customers. While we won't have the lowest price in the market, we will be competitive, which will be very attractive for our customers given our industry-leading supply chain and service model.

Ron is going to talk about guidance in a minute. But our expectation is that the pricing acceleration will allow us to change our trajectory and get back to our long-term operating margin guidance by 2019. To do that, we're going to have to continue on the cost leverage path that we've been on for the last few years. Now to be clear, this is a huge change for Grainger. It's not an easy one to execute but this is absolutely the right thing to do. We will be more competitive. We will provide a much better customer experience. And we're going to allow Grainger to compete, leading with our strengths. So with that, I will turn it over to Ron.

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Ronald L. Jadin, W.W. Grainger, Inc. - CFO and SVP [4]

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Thanks, DG. As DG noted, we've decided to accelerate the pricing actions in the U.S. this year versus spreading them out over a multiyear period to drive faster volume growth across all customers and enable more aggressive marketing to new and existing customers.

On Slide 12, we explained the effect of our Q1 pricing actions and the acceleration. We'll post additional reference slides to the IR site after the call. The top of the slide, the pie charts, represents the U.S. large and medium business, where $7 billion of the approximately $8 billion total U.S. segment, which includes specialty brands and intercompany sales to Zoro. The numbers below the line represent the U.S. segment. Today, of the total $7 billion in U.S. large and medium business, 60% or roughly $4 billion is competitively priced. And we will adjust prices as appropriate with inflation and other factors. $2 billion is less competitively priced and will be addressed through our contracting process. Previous guidance anticipated this taking multiple years. We've since found a way to expedite the process, removing the barrier to accelerating web pricing. This also enables us to regain some of the spot buy business we were losing. We expect this work to be complete by the end of 2018. So as you move to the pie charts on the right, you see that slice of the pie goes away over the course of '17 and '18. The $1 billion is also less competitively priced and it is a part -- it is not part of the contract. With the web price acceleration in the third quarter of '17 and more aggressive marketing, we'll reverse the share decline and acquire new customers. When you look at the full year '17, that slice of the pie will be competitively priced.

The first quarter pricing actions, as DG mentioned earlier, drove price deflation of 4% and GP margin decline of 190 basis points for the U.S. segment. With the acceleration of our pricing actions from 2018 into the third quarter of '17, we now expect U.S. price deflation of 5% for the year and a gross margin decline of 210 basis points in 2017. GP declines at a lesser rate than price in '17 due to a benefit from COGS deflation as well as favorable mix. In 2018, the pie chart on the far right and the numbers on the bottom right corner, our pricing strategy will be fully deployed and the negative impact on price and GP rate will be complete.

Now let's take a look at our 2017 guidance. Our first quarter results generated a higher customer volume response at lower price points versus our expectations. Accordingly, we recognized the need to lower our 2017 guidance. The middle column illustrates our 2017 assumption based on our learnings from the first quarter. This would put us at the low end of our January EPS guidance after removing the $0.13 benefit from the accounting change noted in the earnings release. Footnotes A and B on this slide reflect this point.

The last column highlights the midpoint of our revised guidance, including price acceleration. It anticipates an incremental operating earnings write-down of $75 million comprised of $60 million in gross margin decline and $15 million in marketing expense to support the newly visible web pricing. The corresponding EPS write-down is $0.80, getting us to a midpoint of $10.65. Please reference our earnings release supplement for the new sales and EPS guidance ranges.

On Slide 14, the price acceleration is a headwind to 2017 and '18 gross profit margin but enables us to recover operating margin by 2019. Our 2019 operating margin expectations of 12% to 13% remained consistent with what we shared at our Investor Day last November. Favorable mix and continued strong cost productivity and volume leverage allow us to stay on track and better positions us for stronger volume, share gain and margin growth well into the future.

Now I'll turn it back to DG for closing remarks.

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [5]

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Thank you, Ron. Since cost productivity is a key component to making sure that we achieve our forward-looking goals, I think it's important to understand the progress that we've made on cost. So the chart shows that over the last 4 years, we've demonstrated an ability to manage expenses and to drive productivity and we're going to continue to do so going forward. We generally look at both expense to sales and expense to COGS, which is more of an activity metric to measure our progress. And you'll hear more from us as we go through the year on how we're going to get to 2019. But continuing this cost leverage path is going to be a very important part of that story and we feel like we've got strong momentum here to continue to improve our cost structure.

So overall, it was a challenging quarter. But we are very focused on what matters to drive value. We continue to be encouraged by the growth and the profit improvement of our online businesses. We've stabilized service levels in Canada. We need to do a lot more to improve both price realization and the cost structure of the business. In the U.S., the pricing acceleration is going to allow us to be more aggressive in our marketing efforts to drive market share gains and to allow new customer acquisition with the Grainger brand. Most importantly, we are completely focused on creating a flawless customer experience. So a change of this nature is challenging and it's complex. We know this is the right thing to do for the long-term success of the business, and we are committed to making the changes needed to accelerate growth and to get back to the profitability that we expect.

So with that, I will open it up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first questions come from the line of David Manthey with Robert W. Baird.

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David John Manthey, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

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First question is as it relates to this trade-off between price and volume, they have significantly different impacts on overall profitability given that prices, it reads through at such a high rate. So what I'm thinking about here is, as you look at these efforts, do you think that several years down the road, you'll be able to break even in terms of profit dollars? Or does your profitability take a secular step down in the process here?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [3]

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Thanks, Dave. I think it's a great question. And our expectation now is that we will more than break even in terms of profit dollars as we get the volume growth and improve our cost structure to get the operating margins back to our expectations. So it's a significant challenge in 2017 and 2018. But by 2019, we feel like our profit dollars will be at or higher than they would otherwise have been.

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David John Manthey, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4]

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Okay. I guess we don't have the slides here, I guess other than the webcast, so I'll have to take a look at those later. But at your Analyst Day, you shared with us some data that showed how more competitive pricing leads to faster growth among medium and larger customers. What happened in the first quarter that surprised you relative to that data? It sounds like something happened that you didn't expect here in the first quarter. But you had that data lined up. It seemed like you had a pretty good bead on it initially. What was different?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [5]

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Yes, so that's a great question. So I would say that the behavior at a customer level-- so if you think about large customers who go on the new pricing model or small and midsized customers that opt-in to web pricing was exactly as we would have expected. I think the web pricing uptick was maybe a little higher without doing any marketing that we expected. But generally, those 2 were as expected. The big change was when we altered the list prices. That had a big impact -- a bigger impact than we expected, both on prices that we raised and prices that declined. And so that had an immediate impact that we were not fully expecting and that has been the biggest part of the surprise. Now that's long term not particularly relevant because we will get out of the list price game and we will go to web prices, and so web prices are going to be the full story. But in the short term, that has been the biggest surprise that we had.

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Operator [6]

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Your next questions come from the line of Ryan Merkel with William Blair.

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Ryan Merkel, William Blair & Company L.L.C., Research Division - Research Analyst [7]

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First, is the 2019 long-term operating margin guidance of 12% to 13%, is that the new long-term range? Or is that just a signpost to the 2021 guidance that you had previously at 13% to 14%?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [8]

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Yes, that's just a guidepost for where we're heading, Ryan. So that's -- we're not saying anything new about 2021.

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Ryan Merkel, William Blair & Company L.L.C., Research Division - Research Analyst [9]

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Got it, okay. And then what gross margin are you assuming in the 2019 guidance?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [10]

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You want to go ahead, Ron?

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Ronald L. Jadin, W.W. Grainger, Inc. - CFO and SVP [11]

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Sure. So we have guidance for '17 and '18 on the pie chart. And for the U.S. segment, we'd expect the U.S. segment and the company going with it, probably a GP margin improvement of 25 to 50 basis points. So that's where you start to see the volume of the favorable mix outpace the pricing because you get the pricing behind this in '18.

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [12]

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Yes, and I will just add a point. We have been talking for probably close to 10 years about unfavorable customer mix. And when we make these changes, our expectation is by 2019, that's not going to be the story, that we're going to have favorable mix and start growing parts of the business that haven't been growing that are actually more profitable.

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Ryan Merkel, William Blair & Company L.L.C., Research Division - Research Analyst [13]

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Okay, I don't have the slide deck either. But it sounds like you're saying that 2017 is a bottom for gross margin and that you could actually expect it to rise in '18 and '19?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [14]

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No, we expect '18 to be the bottom because the changes we make in the second half of this year will also flow through to 2018.

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Ronald L. Jadin, W.W. Grainger, Inc. - CFO and SVP [15]

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Right.

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [16]

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We currently expect it to rise in '19, Ryan.

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Ryan Merkel, William Blair & Company L.L.C., Research Division - Research Analyst [17]

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Okay, got it. And then lastly on price, just two-part question. Was the 2-year plan always for lower prices around that 4% level? And then secondly, can you unpack how you arrived at the price down for? What are the pieces?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [18]

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Well, so the short answer, Ryan, is that it's not -- it's very similar to what we always expected in terms of the price impact overall. So we -- the difference here is we had talked about moving the large customer contracts over 3 to 4 years. And so we had spread out that impact over a longer period of time than we are talking about now. But the overall impact is very similar to what we've always expected. And most of the impact is repricing, resetting the price for customer acquisition and for spot buy for large customers. And given the mix of our business, the spot buy for large customers initially is actually probably the bigger impact, what is the bigger impact. But none of the total expectation of impact has changed at all.

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Operator [19]

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Our next questions come from the line of Robert McCarthy with Stifel.

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Robert P. McCarthy, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [20]

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Okay, so 2 questions, one of substance and probably one of form. The substance is first. I mean, could you talk about then your OpEx and operating structure and may be thinking about your store footprint and your overall footprint. In the context of, what has profoundly different change in business model given these pricing actions?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [21]

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Yes, sure. So let me talk about the cost structure maybe broadly. So on the branch issue, I think most people are familiar, we've gone from 420 to 250 branches in the U.S. So we're relatively pleased with what we're actually seeing from a volume perspective in those remaining 250 branches. And that's been a big shift from the recent past. The other thing to consider here is that these price changes are likely to have an impact on volumes through those 250 branches because a lot of those customers find sticker shock in our branches when they -- especially the small ones when they walk into them. So we want to watch that very closely. But we have a very well-developed muscle for evaluating branch profitability. Overall, I would say that more of our volumes go into eCommerce, no question. Winning based on eCommerce capabilities is absolutely critical. More of our volume is being shipped. Continuing to invest in our physical distribution capabilities outside of distribution center is important as a way to create competitive advantage and widen our competitive advantage. There's some changes we're making to areas like the contact centers where we are consolidating contact centers and lowering our cost in contact centers. And to my point earlier, we are getting rid of cost, really, in every part of the business. Our expectation is that we will get more productive in the sales force, more productive in the distribution centers, more productive in the branches and headquarters. All of that needs to improve and that's going to be a big focus for us.

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Robert P. McCarthy, Stifel, Nicolaus & Company, Incorporated, Research Division - Senior Analyst [22]

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The second question is a little tougher. I'm going to try to be politic as I possibly can given the environment we're talking about here. But obviously, DG, these are trends that we've seen with this change that are not particularly surprising, particularly for some investors and particular for some bears on Grainger. I guess you stepped into the new role of CEO in kind of in the October time frame. You had an opportunity to maybe address those concerns in November and kind of reset the bar for where we think pricing actions could take and maybe you get one swing at the bat for kind of doing that. And now you're in a situation where you had to reduce guidance. And at least near term, I think it's appropriate to say that management credibility is spent, right, in terms of the near-term operating environment and what you're seeing in terms of price. How are you going to restore that credibility over time and what should we think about in terms of your feel for how the business is going to go over the next 18 months? What signpost can we look at to say that how you feel the business is going to shake out, bottom in '18 going into '19. What should we be looking for to give us some confidence that what you've reset is kind of the appropriate trajectory?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [23]

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Right. So we are going to overcommunicate on what we're seeing from the changes we make. My expectation is that we will see the volume growth that we're talking about. That will be a signpost. The expense to COGS will be a signpost and we'll talk a lot about what actions we're taking, what we're seeing from a productivity perspective. But I appreciate your comment and your question. The reality is that this is the biggest change and we had not changed enough prices yet in November to exactly know what was going to happen. And it wasn't prudent at that point to talk about acceleration. We didn't know if we were going to accelerate. Now we do. It is a change. I recognize that it's a difficult change. But we're going to basically track very closely what we're seeing from the volume, from an expense to COGS perspective, from a customer satisfaction perspective, from a customer acquisition perspective. The reality is we have not been able to acquire a customer into the Grainger brand for years, and we are now going to start acquiring customers for the Grainger brand starting in the third quarter. And so that's a big shift for us and one that we're really excited about and we're confident we're going to get the results that we need.

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Operator [24]

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Our next questions come from the line of Adam Uhlman with Cleveland Research.

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Adam William Uhlman, Cleveland Research Company - Partner and Senior Research Analyst [25]

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Ron, I guess first on the gross margin guidance for the year. We started in the first quarter down 160 basis points. And then I guess we're expected to stay at that pace for the rest of the year. But at the same time, pricing is expected to deteriorate. I guess why does the gross margin get worse as the year progresses?

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Ronald L. Jadin, W.W. Grainger, Inc. - CFO and SVP [26]

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A couple of things. We expect that the COGS deflation will continue to be a partial offset. And we've seen some favorable product mix. The interesting thing is that even though we've reduced the pricing on 450,000 SKUs and, of course, 1.5 million of them by the middle of the year, we're seeing some nice volume lift on those products, still at GP rates that are above the company average. So we take a big price hit upfront. But then we get that volume and that shows up in mix on those higher margin products. So that -- we've seen some of that in the first quarter and we expect to see more of that as the year goes on.

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Adam William Uhlman, Cleveland Research Company - Partner and Senior Research Analyst [27]

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Okay, got you. And then after you've adjusted price on that first 450,000 SKUs, could you help us out with the magnitude of the reductions that are planned for the remaining product set?

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Ronald L. Jadin, W.W. Grainger, Inc. - CFO and SVP [28]

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Look -- well, in terms of SKU count? I'm not sure what your question is exactly?

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Adam William Uhlman, Cleveland Research Company - Partner and Senior Research Analyst [29]

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Yes, the size of the reduction and price across the remaining SKUs.

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Ronald L. Jadin, W.W. Grainger, Inc. - CFO and SVP [30]

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So the $75 million is the price reduction for the acceleration in the third quarter of the remaining SKUs. So it's $75 million price reduction, we expect some volume response from that, which is about $35 million. And so it's -- because the net of those is kind of the top line. We'll get a little bit of a GP benefit. If you think of that $35 million at 40% adds another $15 million to margin, the GP margin dollars, so the net at GP, we set at $60 million. So price write-down is $75 million. You get $15 million of it back in the short term. You don't get it all back right away so the -- we said the GP dollar impact to $60 million, and we're going to spend about $15 million in marketing across the board of these SKUs. So we put that in there too.

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Operator [31]

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Our next question comes from the line of Andrew Buscaglia with Crédit Suisse.

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Andrew Edward Buscaglia, Crédit Suisse AG, Research Division - Senior Analyst [32]

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Can you talk a little bit about -- at your Analyst Day, you said that this wouldn't be a race to the bottom. How are you thinking of the competitors in your space listening to these price actions? None of them are really talking about this. And how do you guys discuss internally what you think the implications are of your pricing actions as it pertains to competitors in the race to the bottom?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [33]

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So we certainly don't-- our experience with prices that we change would suggest that we are absolutely not in a race to the bottom. When we have competitive prices and they're in the ballpark, we are winning the business and it allows our customers to consolidate their purchases with us. So we -- I'm not going to talk about specific competitors. I would say, there are a lot of competitors in the online space who have competitive prices, some of which are growing. Many of which are growing. So when we look at the entire competitive landscape for us and going forward, we feel like having competitive prices, at least in the ballpark on list price, is really, really important to be able to leverage the full suite of tools that we have to grow the business, to create the customer experience we need. And so there's just so many different types of competitors out there in our space that I don't think you can sort of talk about one. The whole market we have to understand. And as we look at the whole market, we are going to have prices that are competitive, that makes sense and it is going to enable us to acquire new customers and to grow with existing customers.

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Andrew Edward Buscaglia, Crédit Suisse AG, Research Division - Senior Analyst [34]

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I guess you just see yourselves, I guess, as different from some of your competitors in terms of the actions you have to take. Is that correct? Or is that like your different end markets, I don't know, what do you see is like the main -- you're just getting there, I guess?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [35]

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We're broader, for one, I guess, than most of the competitors. And I'm not sure who exactly you're talking about specifically, but certainly, we are broader. I would also say that some of those competitors may not be talking about it but they've already taken action in some of the things that they've done to try to mitigate it as well. So it just depends. It depends who you're talking about. But we're confident in the decision we're making and it's the right thing to do. We aren't going to have the lowest price. We're going to be competitive. We're going to be in the ballpark. And that's going to give us the opportunity to grow the business.

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Ronald L. Jadin, W.W. Grainger, Inc. - CFO and SVP [36]

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I will just add. We've had a great opportunity to benchmark Zoro, our own brand, in this space. So we've great visibility obviously to that and it's helped us prepare better for what we're doing with our Grainger brand now.

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Operator [37]

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Our next questions come from the line of Scott Graham with BMO Capital.

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Robert Scott Graham, BMO Capital Markets Equity Research - Analyst [38]

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Really, just 2 questions. How do you get comfortable with the pricing guidance for the year? Because we saw this really great volume response indicating success of the strategy in the first quarter. But obviously, much more disruptive to margins than you thought. And you've got more price actions coming. So kind of how do you bracket your full year guidance of minus 4% on price, given what happened in the quarter?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [39]

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Yes, without getting into too many details, Scott, we -- the good news is we know the impact of the list price change, the open web change, the changes that we've made, and so we can quantify those. We would expect, of course, the second quarter to look similar to the first quarter in the sense that we're not making changes until the third quarter. And then the changes we made -- make in the third quarter are similar to some of the changes we made in the first. So we are able to get reasonably comfortable with a range and that's where that comes from.

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Ronald L. Jadin, W.W. Grainger, Inc. - CFO and SVP [40]

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Yes, and if you thought about it in terms of price percent, it's minus 4% for the U.S., minus 4% in the first and second quarter. It's minus 5% for the year. So implicitly, it's minus 6% in each of the third and fourth quarter, to DG's point, when we finished the web price changes in the third quarter.

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Robert Scott Graham, BMO Capital Markets Equity Research - Analyst [41]

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Yes, that makes a lot of sense, Ron, thank you. The other question I have is now you've kind of advertised this now. So how do you guard against volume disruption between now and the third quarter?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [42]

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Well, I mean, I think that, frankly, we -- everybody who competes against us knew this was happening, I would say, anyway, based on what we announced in November. So that's not new. We aren't seeing competitive reaction that is unusual, given our price changes. And so we've talked to all of our customers. We basically had great conversations with our large customers. They're excited about the change we're on and the path we are on, and we think we're going to continue to gain volume. So we don't see anything that would suggest that the announcement is going to hurt volume in the short term, we actually think it's going to help.

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Operator [43]

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Our next questions come from the line of Chris Dankert with Longbow Research.

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Christopher M. Dankert, Longbow Research LLC - Research Analyst [44]

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I guess, I'm just trying to back in to some of what you're talking about, it sounds like, did the Red Pass program go away entirely in the third quarter since it doesn't sound like it's going to be any more opting in?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [45]

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So it doesn't entirely go away and we'll provide more information as we go. Red Pass is a program that also includes a free freight component for customers that will stay. And depending on the type of customer, there may be specific pieces of the program that makes sense to different types of customers based on the segment. So it doesn't go away entirely. Certainly, once we have open web, the price difference between Red Pass and what customers see will be very, very small. So that is a big difference.

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Christopher M. Dankert, Longbow Research LLC - Research Analyst [46]

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Okay, okay. And then I guess, perhaps on (inaudible), I guess, looking at the 2017 market guide and kind of your implicit 2018 numbers for EBIT margin, it suggests like a 300% -- or excuse me, a 300 basis point recovery into 2019 to kind of get to the midrange of your target. I guess, what gives you confidence of being able to drive that kind of leverage because we haven't seen that in the model to quite that degree in the past?

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Ronald L. Jadin, W.W. Grainger, Inc. - CFO and SVP [47]

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Probably half of that is cost leverage. Some of it's structural in nature. Some of it is volume leverage because we anticipate driving volume that's going to be up in the mid to high single digits. Feels like that was a long time ago. But that wasn't that long ago and our pricing ought to put us back in that range. So that's probably at least half of it and the other half is some of the mix and volume that we're going to get from higher margin customers. DG mentioned before, it's been a decade. We always talk about negative mix with growth -- with faster growth of large customers. We should be talking a little bit differently by 2000 -- even some of that in '18, but for sure, in '19 overall.

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Operator [48]

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Our next questions come from the line of Christopher Glynn with Oppenheimer.

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [49]

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Just -- so the acceleration seems clearly a response to market and probably what's emerged over the past couple of years is a little bit more parity on the service and supply chain edge that you've enjoyed historically. So just wondering where you draw the comfort that what you're describing in the body of your pricing actions actually has, as defined, of a terminus, as is implied in the multiyear outlook?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [50]

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So Chris, I would say a couple of things. First of all, when we track 20 competitors on customer service metrics and on their perceptions of us, I would not actually say that our service advantage has been diminished. I would actually say we are stronger now than we've been in the tenure that I've been at the company on that dimension. The ability to get complete orders to customers quickly, the ability to provide great experience on the website, on eCommerce channels, and our sales force and service model with large, complex customers, get very, very high marks and actually higher than they've gotten historically. So I don't -- I wouldn't necessarily say that's true. In terms of terminus, we're confident that we're in the ballpark from a pricing perspective. We're going to be able to grow the business. We've done a lot of work to understand what those price points are. We've analyzed it. As you might guess, quite a bit. And so we're pretty comfortable that we're going to be in a place to expand margins, operating margins assuming we continue to get the cost leverage we've got and we will continue to do that. But we're pretty confident of the price points were likely to end up at.

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Christopher D. Glynn, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [51]

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Okay. And then could you just clarify, crystallize again, just what the difference in substance is when you talk about web pricing versus list pricing?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [52]

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Well, historically for us, list price has been web price because the list price has been what's been on the website. When we talked about open web, the complexity right now is that if you go online and you try to buy something and it's a SKU that we have an open web price on, you will see the list price and you will see the web price. And you will have the option to opt-in to that web price. When we remove, by the end of this year, in the third quarter, we will put everything on web price. We will not have a need to show a list price online at that point. So they will again be one and the same, but only at a new level.

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Operator [53]

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Our next questions come from the line of Matt Duncan with Stephens.

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Charles Matthew Duncan, Stephens Inc., Research Division - MD [54]

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So DG, one of the things I think you've been hinting at is there's been some price increase maybe even on certain product categories. So I'm trying to get a sense of sort of where you are having to cut price the most and what categories that you're still seeing sort of stronger pricing? And where were you priced appropriately and where were you off?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [55]

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So from a list price perspective, when we made the changes, January 1, about 2/3 of the prices changed. There were more downs than ups at that time. But there certainly were items where we were not priced high enough and we made those decisions as well. We feel like the web price -- we've obviously done all the work already to know where web price needs to be. There are some items that we were just priced incorrectly. But in general, we will be more competitive and we will be in the ballpark and that's the strategy that we have.

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Charles Matthew Duncan, Stephens Inc., Research Division - MD [56]

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Can you talk at all about product categories? Are you just trying to stay away from that?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [57]

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Well, it's less typically around product categories than SKUs within categories, actually, where we will see the changes that we had to make. So they weren't broad categories that we had to lower a bunch or increase a bunch in general. And most of it was actually within the category where the numbers were interesting.

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Charles Matthew Duncan, Stephens Inc., Research Division - MD [58]

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Okay. And then second question I've got is just around the '18 profitability. I'm trying to make sure I understand all the stepping stones here. So if U.S. gross margin is down 120 basis points, what is happening with total company gross margin? Are you expecting a fairly good level of SG&A leverage next year such that by the time we get to operating margin in 2018, is it down versus 2017? Or is '18 kind of the same and then you get the big jump in the '19 with volume? Just trying to make sure we understand the step function here.

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Ronald L. Jadin, W.W. Grainger, Inc. - CFO and SVP [59]

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Yes, we should see higher operating margin in '18 for the company than we do in '17. And certainly, some of that will come from the cost side, the volume leverage as well as structural changes.

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Operator [60]

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Our next questions come from the line of Chris Belfiore with UBS.

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Christopher Belfiore, UBS Investment Bank, Research Division - Equity Research Associate Analyst of Industrials [61]

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So I just wanted to kind of talk a little bit more about the 40%, like the spot buy that you guys pointed out in November of the large customer. In terms of that, I know you said that it definitely improved with all the pricing measures. But is there like a certain group of those customers that you guys saw, like heavy manufacturing or a specific kind of category that kind of came back? And then do you think there's -- do you see like other groups that maybe didn't see the price or didn't kind of react to the pricing? Are they going to come back later? Or kind of is there any dynamic there that you can kind of share?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [62]

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We -- so we've set the new pricing for a fairly broad swath of customers and we have not seen anything particularly interesting by customer end market. So we haven't seen differences for manufacturing, health care or commercial. At this point, we have not seen big differences in terms of the reaction.

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Christopher Belfiore, UBS Investment Bank, Research Division - Equity Research Associate Analyst of Industrials [63]

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Okay. And then, I guess, just kind of maybe change things up a little bit, a lot about U.S. and pricing. In Canada, you guys noted that there's -- the freighting was an issue in terms of freighting cost from the direct-to-customer kind of shift. Where are you guys in terms of percentage of that kind of shift right now? And I think you mentioned in November that basically, once you hit kind of around 70% direct-to-customer is when you kind of neutralize the effect of the higher freighting cost? So I'm just trying to get an idea of where you guys are in that process.

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [64]

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Yes. So we're -- and we're going to talk a lot more about Canada over the next couple of months. But they're over 50% direct-to-customer today. And given the ERP change, there's still some fairly inefficient things that are happening to serve customers today. We will improve that over the next 6 months. So we've got a lot of room to improve and we still feel like 70% is probably where we're going to end up in terms of direct-to-customer in Canada. That's still a fairly reasonable number for us to land.

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Operator [65]

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Our next questions come from the line of Deane Dray with RBC.

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Deane M. Dray, RBC Capital Markets, LLC, Research Division - Analyst [66]

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Hey, I just want to go back to a couple of questions that we got on competitive pricing dynamics. And DG, back in November at the analyst meeting, you shared the assumption that you thought price competition somehow levels off next year. So people have asked this question here, but maybe just to come back to it. What do you think the competitive response is, as you cut cost -- cut pricing, why aren't you also assuming that there will be a competitive response here and this does turn into another race to the bottom?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [67]

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Well, I would say, primarily, because for our large, complex customers, they have competitive prices already. What we're doing is trying to give reasonable prices in the spot buy. And that is unlikely to drive significant competitive response when you do that. That's really the way we're thinking about this. The other thing is we just look at prices and what's happening with pricing in the market over time. Our need to reset price is not really based on competitive changes in the marketplace. It's really based on our own pricing and what our customers are asking for and how they buy. So we don't see the market racing to the bottom in general. And we really haven't seen that over the last few years.

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Deane M. Dray, RBC Capital Markets, LLC, Research Division - Analyst [68]

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Okay. And then second question, also outside of the U.S. I was hoping you could comment on the U.K. business, Cromwell. And I know you kind of avoid commenting on specific customers, but you did have a very -- competitors. But you do have a very big competitor that Amazon this month launched their U.K. business as a direct competition to Cromwell. So update on Cromwell and competitive dynamics there, please.

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [69]

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Yes. So competitive dynamics, we're pleased with what we're seeing out of that business. We've started the Cromwell direct business, part of the thesis for buying that business was they had the supply chain and product range that allowed us to build the online model. We're seeing very nice growth with that portion of it. Currency and Brexit has had an impact on the U.K. economy. But the business is actually performing quite well. I would say Europe, generally, Fabory actually saw some decent growth in the first quarter as well. So really, the entire international portfolio right now, I'd say, we feel like there's lots of opportunity to grow and grow margins. And so in the U.K., we're happy with our position right now.

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Operator [70]

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Our next questions come from the line of Hamzah Mazari with Macquarie.

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Unidentified Analyst, [71]

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This is (inaudible) filling in for Hamzah. I have a few question for you guys around inventory levels. Do you guys think they are where they need to be, given the current demand environment? And what's your outlook?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [72]

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So we manage inventories to service level expectations generally. And so we have very good service levels right now in the U.S. and in most of our businesses. So in general, we're pretty happy with our inventory levels. Obviously, as you grow the business, you have to add some inventory. Typically, we get some productivity out of the inventory pool and don't have to add as much inventory as the growth requires. So I think we're still in that situation. Ron, do you have anything to...

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Ronald L. Jadin, W.W. Grainger, Inc. - CFO and SVP [73]

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Yes, our inventory turns, our working capital turns had been very consistent for quite some time so we'd expect those to continue that way. I had given a comment earlier about GP rate decline on Slide 12, which was the pie chart slide, and it mentions on the far right the U.S. segment declining 120 basis points. For the company, it's difficult to give guidance for 2018 at this point, but certainly, we'd expect the company to move in a similar direction to the U.S. So I'd expect it to be down 120 basis points for the company as well and that depends on what happens in the other parts of the business. But we should expect to see that kind of a decline in '18. So I hope that answers that question. I guess I commented mostly on the U.S. and not at the company at the time.

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Operator [74]

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Our next questions come from Robert Barry with Susquehanna.

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Robert Barry, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [75]

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I hope you're not already having any regrets about doing these calls. I think on a day like today, actually, it's particularly useful. So just back to the kind of price volume trade-off, which you expect to turn into a net benefit. It sounds like you expect a lagged effect to price cuts to see the volume response, maybe also a larger mix response growing over time in reaction to kind of the given price cuts you're making today, is that right? And why would it kind of grow over time without cutting price more?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [76]

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Right. So, well, so yes, that's right, that's our expectation. So in any period that's a fairly narrow period of time, if you reduce price, you will not get the volume back right away. Customers have to realize and, particularly, customers have to realize that our prices are now more reasonable in order for them to start buying with some frequency. So we've done a number of trials over the last 3 years to get comfortable with this, both with smaller customers, mid -- through Zoro, midsized customers through Red Pass, large customers by contract negotiations and every one of those, when you change price right away, you don't get enough volume to make up for it. But over time, it's actually quite attractive. So that gives us a lot of confidence in the path we're heading now.

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Robert Barry, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [77]

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Got you. And there was an expectation, I know at the Analyst Day that part of the response was that customers would not only raise the volume with Grainger but kind of mix up into higher margin categories. I mean, is that happening?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [78]

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Yes.

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Robert Barry, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [79]

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And also, why would that necessarily happen?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [80]

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Well, so I think it's best to talk about large, complex customers on that dimension. So large, complex customers often have contracts. They might have specific items that are under the contract, they might have categories that are under the contract. But they also have a discount off of list for their slow-moving items. When we talk about mix, one of the things we're trying to do is to make sure that we are attractive for the entire bundle and the entire bundle would include slow-moving items and those would be better than the average margin for us, but also very attractive prices for them because they don't buy those items very frequently. So we're trying to make the price structure makes sense so that we can consolidate the entire purchasing for customers and we find customers respond very, very well when we get there.

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Operator [81]

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Our next questions come from the line of Joe Ritchie with Goldman Sachs.

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Evelyn Chow, Goldman Sachs Group Inc., Research Division - Research Analyst [82]

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This is actually Evelyn Chow in for Joe. You've taken a lot of very proactive actions on pricing in 2017, but there's also a lot of moving parts. So maybe you can help us understand, when you think about your various initiatives that you're targeting in '17 and '18, what would you consider as the lower-hanging fruit versus what do you believe will take more concerted effort to drive?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [83]

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Well, I don't know that there's really any -- I mean, with the change as complex and challenging, I wouldn't say there's any lower-hanging fruit, necessarily. I would say that we have built muscles around 2 areas that I think are going to be very exciting for us. One is when we get the price set right with large customers driving that volume, our sales and service model with large complex customers is very effective. The other is our digital capabilities. And when we get prices that are reasonable and we can start marketing those prices digitally, that's going to help drive volume and we're very confident about that too. So those are the 2 things that we're doing that I think is going to be very, very helpful to driving growth into the business. And so we're going to track our performance against those 2 very, very closely to make sure that the price strategy translates into growth and translates into the customer experience and into margin.

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Operator [84]

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Our next questions are from the line of Justin Bergner with Gabelli & Company.

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Justin Laurence Bergner, G. Research, LLC - VP [85]

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I wanted to start by asking, for your 2019 margin guidance, are you assuming a lower gross margin for 2019 than you were assuming at the Investor Day, offset by lower SG&A? Or how does the margin component sort of line up in 2019 versus what you laid out in November?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [86]

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It's not that different. I think even -- we had that in Q&A, if I remember, in November. We talked about kind of GP being in that -- for the company at 39% range, falling below 40% but not below 39%. It probably falls below 39% next year and then bounces back in '19, right? As the volume -- as the mix and the volume benefit from mix outweighs the pricing changes which we kind of lap as we exit '18.

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Justin Laurence Bergner, G. Research, LLC - VP [87]

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Okay. And then the second pricing question just relates to -- relative to the November investor event, it seemed like that focus was more on the noncontract business. So is it essentially most of the incremental price impact coming from that $2 billion of less competitive contract business now being fast forwarded into 1 year versus...

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [88]

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Yes, that's exactly right. That's the right way to think about it. So we are being much more aggressive, much faster in terms of getting the prices reset on that volume.

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Operator [89]

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And our next question is coming from the line of John Inch with Deutsche Bank.

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Wing Lau, Deutsche Bank AG, Research Division - Research Analyst [90]

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It's Karen Lau dialing in for John. Just curious on how much of the volume would you say is kind of locked in within contracts? Because when you think about competitive response, especially on the spot market, you're now pricing more competitively. But your competitors can also come back and be even more competitive. So I'm just trying to get a sense of how much of the incremental volume that you have baked in are coming from contract volume where the accounts are kind of locked in? And so once you get the incremental product purchases, they are sort of more guaranteed to come through in 2018 and '19?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [91]

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So if I understand your question correctly, I would say that the volume growth is a mix of getting that spot buy volume with large customers and acquiring new midsized customers and penetrating them. And we think we're going to get volume out of both. I would say that our experience with the online model would suggest both of those are actually pretty sticky when you've got a strong supply chain, you provide great service. So our expectation is that we'll be able to get growth both for our large contracts and through new customer acquisition with the changes we're making.

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Operator [92]

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Our next questions come from the line of Nigel Coe with Morgan Stanley.

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Nigel Edward Coe, Morgan Stanley, Research Division - MD [93]

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We've covered a lot of ground. Ron, maybe we've talked about the gross margin in part, but I was just wondering, can we maybe just reconcile what control perhaps the price decline, I think you have guided 4 points of price down, I think 50 bps of COGS deflation. So the remaining, I guess it's -- you guided 160 down so the remaining 150, how does that split between cost reductions through bookings?

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Ronald L. Jadin, W.W. Grainger, Inc. - CFO and SVP [94]

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I'm sorry, which period are you asking about?

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Nigel Edward Coe, Morgan Stanley, Research Division - MD [95]

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Sorry, this is FY '17.

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Ronald L. Jadin, W.W. Grainger, Inc. - CFO and SVP [96]

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'17. So there's the price decline. There's the -- favorable mix is probably one of the biggest offsets that's helping us this year. From a GP perspective, when you think about a 4% price decline this year, that's about $400 million of price. The impact on that for GP is maybe 2.5%, right, when you do it on a GP basis. There's a fair amount of volume though, right, that we're driving, just in general. At prior year GP rates, that's a volume component that's pretty sizable. And then the cost deflation, you mentioned, and then the favorable mix really helps. So if you think about the price impact, that $400 million driving about 2.5% negative, we're down a little bit less than that for the company overall in our guidance and it's because of that deflation and mix partially offsetting. So we end up down about 160 basis points for the company on GP rate. And similar for our margin rate, maybe 10 basis points or so of cost leverage.

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [97]

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Yes, I would also add that the cost leverage is in a world where you have that much price decline. We are getting significant cost leverage on an activity basis on a COGS basis. But it's a challenge obviously when you have that much price deflation.

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Ronald L. Jadin, W.W. Grainger, Inc. - CFO and SVP [98]

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Yes, that 10 basis points was a percent of sales not a percent of COGS. A percent of COGS will be a much bigger improvement.

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Nigel Edward Coe, Morgan Stanley, Research Division - MD [99]

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And then just on the favorable mix impact. When you take pricing actions of this magnitude, the profitable mid-tier customer and the spot purchases from the large customers, does that still increment at 40% plus? Or is it more like a 30% type of volume impact?

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [100]

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It's higher. Yes, it's 40% plus. Yes.

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Operator [101]

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This concludes today's question-and-answer session. I would like to turn the floor back to Mr. DG MacPherson for closing comments.

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Donald G. MacPherson, W.W. Grainger, Inc. - CEO and Director [102]

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So thanks, everyone, for joining the call. Obviously, it was a challenging quarter. I just want to conclude by saying that we are facing into the challenges that we have. We're facing into them with the information that we have now, and we are confident this is the right thing to do for the long-term health of the company. We obviously wouldn't be taking these actions if we didn't think they were right for our customers and for creating value over the long haul. And so it's difficult. There's no question about that. And -- but we are aligned as a team. We are fully committed to making this work to driving the volume growth and to getting the margins back to where they need to be. So appreciate your time today and we'll see you soon. Thanks.

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Operator [103]

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Thank you, ladies and gentlemen. This concludes the teleconference. You may disconnect your lines at this time, and thank you for your participation.