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WW Grainger Inc (GWW) Q1 2019 Earnings Call Transcript

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WW Grainger Inc  (NYSE: GWW)
Q1 2019 Earnings Call
April 22, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the W.W. Grainger First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder this conference is being recorded.

I would now like to turn the conference over to your host, Irene Holman, VP, Investor Relations.

Irene Holman -- Vice President-Investor Relations

Good morning. Welcome to Grainger's Q1 earnings call. With me are DG Macpherson, Chairman and CEO and Tom Okray, CFO.

As a reminder, some of our comments today may be forward-looking based on our current view of future events. Actual results may differ materially as a result of various risks and uncertainties, including those detailed in our SEC filings. Reconciliations of any non-GAAP financial measures mentioned on today's call with their corresponding GAAP measures are at the end of this slide presentation and in our Q1 press release, which is available on the IR website.

Looking at our reported results for the year, we had adjustments resulting in a $2 million impact to operating earnings and a $0.03 impact to EPS. Adjustments included restructuring related to Canada. This morning's call will focus on adjusted results which exclude the items outlined in our press release.

Now, I'll turn it over to DG.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Thanks, Irene. Good morning and thank you for joining us today. I'll share an overview of the business, including how we deliver value for our customers and a discussion of our results, then Tom will provide details on the quarter, and we'll open it up for questions.

First, let me tell you what we're seeing with our customers. We spent a lot of time with our customers to understand their needs and that's not just with the C suite but with the people who buy our products and the people on the shop or who use them. That way we can deliver relevant solutions that help solve their problems better than anyone else. And what always excites me are the relationships that we have. Our relationships are a unique competitive advantage and they are getting stronger.

I recently spent time with a spice manufacturing company. This is a very successful business. It's been around for over 100 years. And we have very strong relationships throughout the business, including with the safety manager, the operations manager and the plant controller. And those relationships helped make our two-hour long visit very productive. We discussed a solution to optimize their spend on hearing protection. We had a roundtable with all the plant leadership that surface new opportunities and we spent time documenting the value Grainger provides to the plant controller.

Now, as customers experience our broad product line, our technical expertise, our great service and our fast and dependable shipping, we're getting more opportunities. Our goal is to accelerate the pace and intensity with which we demonstrate value to our customers so that we can take advantage of those opportunities. Our team is up for that challenge.

As I mentioned before, we create value for customers through two business models. The first is the high-touch solutions model that serves customers with complex needs. Our Grainger U.S., Canada and Mexico businesses plus Cromwell and Fabory all fit within this model. The second is the endless assortment model that is focused on customers with less complex needs. This model includes Zoro and MonotaRO and delivers value through a streamlined and simple transaction experience. In each model, we are laser-focused on executing a strategy designed to expand our competitive advantage.

So let's move on to our performance in the quarter, and I'll start with the U.S. The U.S. market was choppy to start the year due to the uncertainty around tariffs, the government shutdown and the inclement weather. While we continue to see growth across all of our end markets, we did see market grow slow versus 2018. We estimate that the US market grew about 2% to 2.5% in Q1, including approximately one point in price. As a reminder, we lapped a majority of the pricing changes in the U.S. in the fourth quarter of 2018. In the past, we have used COGS as a proxy for volume to measure our growth with large and midsize customers. Moving forward, we're going to use daily sales growth to simplify our communication around large and midsize performance.

In the first quarter, U.S. large customer daily sales growth was 5% and 11% on a two-year stack. U.S. midsize customer growth was 9% with volume growth of about 8%. On the two-year stack, midsize revenue grew 24%. In the quarter, we continued to refine our approach with midsize customers, including more aggressive marketing and some market-based pricing adjustments. Given what we've seen so far, we are confident in our continued growth with midsize customers. We expect both large and midsize customer growth to accelerate on a two-year stack in the second quarter.

First quarter sales growth in the U.S. included 1.5 percentage points of price as we pass through both tariff and non-tariff related cost inflation. The uncertainty around tariffs made predicting price a bit more difficult to start the year and we're continuing to adjust prices up and down to ensure that we're market relevant. We spent a lot of time last year executing our pricing changes. We've now shifted to spending more time with customers talking about the value that we create.

Our focus is on a few core initiatives that will help us drive growth both through increasing share of wallet and new customer acquisition. With our large complex customers, we're continuing to work with our sellers and other service representatives to get them information that helps them have better conversations. We launched a value documentation tool last year to help sellers demonstrate the value we bring to customers through activities such as inventory management, energy management and safety solutions.

When I visit our large customers, I'm routinely reminded of our opportunity to gain share. These customers love working with Grainger and there's definitely room to grow relationships with them. For the midsize business, we're seeing growth both with existing and new customers. We are expanding our relationships with these customers through pricing programs, including our Red Pass program which has a free freight component, midsize customers with attractive profiles are getting covered by inside sales teams, and that team continues to drive growth with these customers. Across the U.S. business, we are actively working on improving our merchandising capability, and we will be adding products to our assortment as an outcome of this work. We are also increasing our marketing dollars and seeing very strong returns on those investments. Overall, we remain confident in our position relative to the market in the U.S., including our ability to grow 300 basis points to 400 basis points faster than the market this year.

In Canada, we continued on our path to stem the volume losses and drive toward sustainable profitable growth. With the cost takeout largely behind us, our focus is squarely on initiatives that will help drive top line performance. We believe our service levels have stabilized and we're starting to hear from customers that our service has improved. We have reworked our sales coverage model and our sellers are excited about driving growth. Finally, we're starting to gain traction as we leverage our U.S. assortment in Canada and improve our website functionality.

We've seen early signs that our volume is starting to stabilize, which is encouraging. We continue to expect Canada to be profitable for the year. For other businesses, our top line performance was driven by the strength of the endless assortment model. MonotaRO in Japan and Zoro in the U.S. together drove daily sales growth of 22% for the quarter.

On the fourth quarter call, I mentioned that we would be investing to accelerate growth for the Zoro business in 2019. We made incremental investments in systems, marketing, and talent in the first quarter, and we expect these investments to accelerate growth in the next year and beyond.

Looking at our international portfolio, Cromwell continue to be challenged in the first quarter due to several factors, including the Brexit dynamic in the United Kingdom. The other businesses in the portfolio performed well. For the Company, we performed largely in line with expectations in the quarter. As I mentioned, revenue was a little softer than we'd like, and profitability was strong. Gross profit was down 15 basis points after normalizing for the timing of the North American sales meeting, and we drove strong expense leverage across the business.

Total Company operating margin grew 80 basis points after normalizing for the timing of the sales meeting. We are reiterating our 2019 total Company guidance.

Now, I'll turn it over to Tom who will discuss the quarter's results in more detail.

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Thanks, DG. Total Company sales in the quarter were up 3% daily and up 4% daily on a constant currency basis. Sales in the quarter included a negative 0.5% impact from the lapping of a prior-year change in accounting estimate. More specifically, a small group of US customers were transitioned from cash to accrual basis accounting as a result of their improved credit profile. Excluding the change, daily sales were up 4.5% on a constant currency basis. Volume was up 3% and price was up 1.5%.

Moving to gross profit, our Q1 gross profit rate was impacted by the timing of our North American sales meeting. Suppliers provide funding for our sales meeting, and this funding benefits gross profit margin. We spread the benefit over three consecutive months beginning in the month of the sales meeting. In 2018, the sales meeting occurred in February, and in 2019 the sales meeting occurred in March. Normalizing for this impact, gross profit margin declined 15 basis points driven primarily by the other businesses. We drove operating earnings growth of 6% in the quarter and operating margin expanded by 80 basis points versus the prior year after normalizing for the timing of the sales meeting. We continued to drive SG&A leverage as a result of our expense management and productivity improvements, including the 2018 cost takeout actions in Canada. Operating cash flow was down 14% primarily due to the payout of 2018 incentive compensation in the first quarter of 2019.

Now let's take a look at our performance in the U.S. As DG mentioned, the demand environment was a bit weaker than expected. Daily sales were up 3.5% and up 4.5% after normalizing for the prior year change in accounting estimate. Sales growth was comprised of volume growth of 2.5%, price inflation of 1.5% and intercompany sales growth of 0.5%. Our normalized GP rate increased 35 basis points after adjusting for the timing of the sales meeting. Freight was favorable in the quarter versus the prior year due to less reliance on the spot market and better-than-expected spot rates. Favorable mix also contributed to the increase in gross profit margin.

Including the contract implementations, price cost spread was neutral in the quarter. Operating margin normalized for the timing of the sales meeting was up 50 basis points. SG&A grew at half the rate of sales and incremental margin for the U.S. business was a strong 31%. In Canada, daily sales were down 24% and down 20% on a constant currency basis. Price was up 4% and volume was down 24%. Gross profit margin was down 125 basis points in the quarter due to a higher E&O writedown, which is tied to our lower volume. SG&A improved by more than 30% in the quarter due to our cost takeout actions in 2018.

We stem the losses versus the prior year, and operating margin improved 240 basis points. We expect performance in Canada to continue to improve throughout the year as our top line initiatives begin to take shape.

Moving on to other businesses. As a reminder, other businesses include our endless assortment model in our international businesses. Daily sales were up 9.5% in the quarter and up 12% on a constant currency basis on strong revenue from our endless installment model. Gross profit margin declined 190 basis points driven by unfavorable customer mix at Cromwell and freight headwinds in Japan.

Operating margin declined 160 basis points for the other businesses. As DG mentioned, we are making investments in Zoro U.S. to drive long-term growth. Those investments, plus performance at Cromwell, led to the decline in the operating margin versus the prior year.

Slide 13 covers our guidance for the year. We are reiterating our 2019 total Company guidance, which we shared in January. As a reminder, we are not going to update guidance unless we expect to be outside of the range.

A few noteworthy comments on guidance for the total Company. On the top line, we expect sales growth to be driven by U.S. share gains of 300 basis points to 400 basis points for the year, and the continued strong growth of our endless assortment businesses. With regard to GP, we did not expect the Q1 U.S. gross profit favorability to repeat. U.S. price cost spread, including the impact of the remaining contract implementations, is still expected to be negative flat for the remainder of the year. From a profitability perspective, we continue to drive expense leverage at the total Company level and are confident in our operating margin guidance for the year.

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

Donald G. Macpherson -- Chairman and Chief Executive Officer

Thanks, Tom. Overall, our results in Q1 were largely in line with our expectations. In the U.S., we're confident in our ability to continue to gain share. We believe we have the right initiatives and the right people in place to drive increasing share of wallet with our existing customers and to attract new midsize customers. In Canada, the cost takeout is behind us and our focus is on stemming the volume loss. We believe we will achieve profitability in 2019.

Our online model continues to drive strong revenue growth, and we are driving strong expense leverage and are on track to achieve our productivity targets. Our strategic initiatives position us well for the long term.

Now, I will open it up for questions.

Questions and Answers:

Operator

At this time, we will be conducting a question-and-answer session. In the interest of time, please limit yourself to one question and one follow-up question. (Operator Instructions)

Our first question comes from the line of David Manthey with Baird. Please proceed with your question.

David Manthey -- Robert W. Baird & Co. -- Analyst

Hi, everyone. Good morning. The first question is on corporate expense, which seemed a little bit low this quarter. And I know there's a lot of factors that play in there, but can you talk about what impacted the first quarter? And then how we should think about the second quarter and the rest of the year if there's any anomalies to consider?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Yeah. Nothing really unusual. Corporate expense for the first quarter, anything that's lower is just due to the productivity initiatives that we have in place, but nothing significant that shouldn't repeat throughout the rest of the year.

David Manthey -- Robert W. Baird & Co. -- Analyst

Okay. Thank you for that. And lately, I think, in terms of the medium customer growth, you've been mentioning you thought it could stabilize in the double-digit range. I'm not sure if that was revenues or volumes, but has your expectation for medium customer growth changed at all given this quarter?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Thanks, Dave. Yeah, I don't think our expectation has changed. I would say that as a reminder, we have a very low share of midsize customers. We have about a two share. There's a lot of room to grow. It's still relatively new to us in terms of the initiatives we've got focused on midsize customers. We continue to improve our ability to use marketing to drive new customer acquisition and penetration and our inside sales team continues to learn to get traction, and we're still understanding how to use pricing programs to drive growth. We still believe that we can hit that low double digit number over time and it's just a matter of how fast we can learn and grow.

David Manthey -- Robert W. Baird & Co. -- Analyst

Got it. Thank you.

Operator

Our next question comes from the line of Nigel Coe with Wolfe Research. Please proceed with your question.

Nigel Coe -- Wolfe Research -- Analyst

Thanks. Good morning. Just wanted to clarify the comments on corporate expense. Again, I don't want to spend too much time on corporate expense, but -- yeah, analyzing it's about $104 million in 1Q and you've been in the $140 million to $150 million range for the last couple of years. So just want to clarify that 1Q was a good base for the full year.

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Yeah. 1Q was a good base for the entire year. I mean, there's always some lumpiness in terms of corporate expense, but nothing -- nothing unusual that's happening there.

Nigel Coe -- Wolfe Research -- Analyst

Okay. And then, the other margins were down. You obviously called out Cromwell, and you called out investments. I'm just trying to delineate the impact between the two buckets. Can you maybe just call out what was more impactful? And then, just thinking about then on top of that, the minority line was down slightly, which implies a bit of margin pressure in Japan. Is that the case?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

So, let me start with the investments in Zoro. Most of those investments are of the shape that we are giving that business more independence allowing them to add products on their own. They added about 200,000 SKUs in the quarter and there's about 800,000 SKUs in the pipeline. So they're really stepping on the accelerator. Those are significant in terms of the margin drag in the quarter. I would say, for us Cormwell is a bit of a wildcard, given what's going on with that market and what we're seeing. It was significant but we were a little less certain about how that's going to progress as the year plays out given all the uncertainty there. But both were significant, I think notable we continue to invest very heavily in getting Zoro some of the independence it needs to drive growth going forward.

Nigel Coe -- Wolfe Research -- Analyst

Right. And no comments on MonotaRO?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

I'm sorry. MonotaRO -- comments on MonotaRO.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Oh, MonotaRO business continues to perform well. There were some freight headwinds in the business, but we're pretty -- we're pretty confident in the ability of that business to grow and to have very strong operating margins going forward.

Nigel Coe -- Wolfe Research -- Analyst

Okay. Thank you.

Operator

Our next question comes from the line of Scott Graham with BMO Capital Markets. Please proceed with your question.

Scott Graham -- BMO Capital Markets -- Analyst

Hi. Good morning. I want to maybe wrap the previous questions together with a little bit more on the guidance. We come out of the chute with our sales slower. You're saying your operating margin in the U.S. is probably going to be flattish for the rest of the year. We started Canada slow and you're calling Cromwell a wildcard. I guess I'm just wondering you have indicated that even though you're not going to update during the year, do you think you're maybe tracking toward the middle end? Is the high end of EPS guidance now out of reach, because I think the only thing that's going against what I just said would be lower corporate?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

I think -- to be clear, I think we're only two months into the quarter. We still feel confident in our ability to gain share in the U.S., obviously with the U.S. earnings rate that's the biggest impact on both sales and earnings for the year. And then, the uncertainty around the -- the market growth in the U.S. is a pretty big uncertainty. Obviously if the market bounce back and was significantly higher than 2% (ph), we feel like we could hit the high end of the range. If it stays at the low end of that, that becomes hard to do.

Scott Graham -- BMO Capital Markets -- Analyst

Okay. So you would argue right now that the change, the delta in the U.S. businesses are more because of the market or equally to that price cost? Is that a fair way to think of (ph) the U.S. changes?

Donald G. Macpherson -- Chairman and Chief Executive Officer

(multiple speakers) Well, the uncertainly is more around the market and our ability to gain share. We feel pretty confident and we still feel confident in the profitability range for the U.S. (technical difficulty)

Scott Graham -- BMO Capital Markets -- Analyst

Okay. Last question for me. I was under the impression that the midsize customer thinking was mid-teens, not double digit. Was -- am I wrong on that?

Donald G. Macpherson -- Chairman and Chief Executive Officer

Yeah. When we talked in the fourth quarter, we talked about double-digit. Again, that'll depend a lot -- in large on the market growth rates. But like I said, we're still learning. We've got a long way to -- long runway to grow with midsize customers. We're still learning what's working and we're going to continue to make adjustments and we think we can continue to grow very strongly with midsize customers.

Scott Graham -- BMO Capital Markets -- Analyst

So that 9% (ph) should convert into double digit the rest of the year is kind of within our clients (inaudible)?

Donald G. Macpherson -- Chairman and Chief Executive Officer

Yes.

Scott Graham -- BMO Capital Markets -- Analyst

Very good. Thank you.

Operator

Our next question comes from the line of Joe Ritchie with Goldman Sachs. Please proceed with your question.

Evelyn Chow -- Goldman Sachs -- Analyst

Good morning, guys. This is actually Evelyn Chow from Goldman Sachs. Maybe just starting out, I noticed you -- you have the U.S. price cost guide the same. But now that tariffs haven't really stepped up to the 25% rate, I just wanted to clarify, would you expect to maybe get some pricing back as we go through the year and that's partly what's driving the maintained U.S. price cost guidance?

Donald G. Macpherson -- Chairman and Chief Executive Officer

So, I would say that we continue to look at competitive market prices and we will continue to adjust. We would not expect necessarily the 1.5 (ph) price to stay at 1.5 (ph) as you see in our forecast going forward. But certainly the adjustments we're making are fairly minor, and they are based on just market competitiveness.

Evelyn Chow -- Goldman Sachs -- Analyst

Understood, DG. And then, just returning to your comments on the demand environment being weaker than expected, when I actually look at your sales growth by customer vertical, only government really stands out having decelerated versus prior quarter. So is that really where you're seeing the most weakness in your end markets or does that maybe mask some underlying things that aren't coming out in just the total vertical growth?

Donald G. Macpherson -- Chairman and Chief Executive Officer

Yeah. So we saw some weakness in government as you highlight. I would say in light manufacturing, we've also seen some weakness in terms of market growth rates. And overall, it's been slightly less than our projections and obviously there's a lot of uncertainty if you look sort of at the forward-looking -- what people are talking about there's anything from deceleration to acceleration coming in the back half of the year depending on what you're looking.

Evelyn Chow -- Goldman Sachs -- Analyst

All right .Thanks guys. I'll get back in queue.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Thanks, Evelyn.

Operator

Our next question comes from the line of Ryan Merkel with William Blair. Please proceed with your question.

Ryan Merkel -- William Blair & Company -- Analyst

Hey, thanks. So my first question is on the U.S. gross margin. Just want to make sure I heard the commentary right. So it sounds like the big change for the rest of the year is going to be the government contract, the price resetting there, so then price cost is going to turn to flat to maybe slightly down. Is that correct?

Donald G. Macpherson -- Chairman and Chief Executive Officer

No. The government contract has already started to be implemented, so you saw a lot of that in the first quarter. There will be modest price changes that we continue to make to be competitive with market, but we still feel like the original guide on GP is the right guide for us and effectively for the rest of the year. So that's all we're saying.

Ryan Merkel -- William Blair & Company -- Analyst

Okay. So just you had a strong start, you just don't expect it to continue and you're sort of referencing it.

Donald G. Macpherson -- Chairman and Chief Executive Officer

We don't think (multiple speakers) that necessarily. Yeah.

Ryan Merkel -- William Blair & Company -- Analyst

Okay.

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Yeah. Look, sequentially we normally see gross profit go down throughout the year. We have freight favorability, not sure that that will continue, we had some mix pickup as well. So, we're comfortable with the guide that we gave at the beginning of the year.

Ryan Merkel -- William Blair & Company -- Analyst

Okay. And then, just turning to Canada, it sounds like you still expect improvement in volume through the year. Can you just run through the initiatives again? And then, more importantly, are you seeing any signs that these initiatives are gaining traction, because it looks like so far in the first quarter we're not seeing too much improvement, but maybe help us out there.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Well, we -- what we are seeing -- what I'd say, we are seeing, Ryan, is we're seeing the volume stabilize when we look at the run rate. So we've seen some benefit. I would say that the initiatives that are being tractioned (ph) for sure, we've added a number of products from U.S. to the assortment, and that has gotten a nice pickup and we're starting to see some benefits from that. We expect to add as many as 100,000 items from the U.S. assortment that can help serve customers in Canada so that that's pretty exciting. We're seeing some sales force effectiveness work. We retrained all the sellers in the first quarter and we're starting to get some traction with what our sellers are doing in the marketplace, and that's important. I think the most important one is on the service side. We are starting to see some stabilization with service improvements, closing that many branches, just frankly, had a very significant impact on service in that market and we're starting to see some of that stabilize. And so, we feel like those three are very, very important and we see those things will start to see the benefits we talked about.

Ryan Merkel -- William Blair & Company -- Analyst

Got it. Okay. Thanks. I'll pass it on. (ph)

Donald G. Macpherson -- Chairman and Chief Executive Officer

Thanks, Ryan.

Operator

Our next question comes from the line of Deane Dray with RBC Capital Markets. Please proceed with your question.

Deane Dray -- RBC Capital Markets -- Analyst

Thank you. Good morning, everyone. Was hoping that you could comment on the impact of weather this quarter and just I wanted to also point out that there was -- you did not use it as an excuse. There were a number of distributors who complain about the weather. Your comment did not constitute an excuse. So I appreciate that. So, talk about the weather, ***#13***

Unidentified Participant -- -- Analyst

***#14*** talk about the weather, quantify it if you could. And then also, was there any effects of pull-forward where some demand might have been lost in the first quarter and pulled into the fourth quarter? Do you see any evidence of that? Thanks.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Yeah. So, on the second question, we don't see real evidence that there was pull-forward in the markets we serve and the way we serve them, we don't typically see that. We typically are the ones that are stocking items for customers. You don't see -- you don't see customers pre-ordering typically. In terms of weather, I mean the weather events were fairly notable in the news. They had a minor impact and there is a lot of noise in any given quarter and we just -- holiday timing was favorable, for Easter weather was a little negative, but none of that was really worth talking about in the quarter. So we didn't (technical difficulty).

Deane Dray -- RBC Capital Markets -- Analyst

Appreciate that. And did I see that Tom provided more precision in volume and price this quarter and increments of 50 basis points, is that going to be a go-forward practice?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Well, we're always looking to improve, Deane, and sharpen the pencil wherever we can. So, appreciate you noticing that.

Deane Dray -- RBC Capital Markets -- Analyst

Thank you. Yes, that's helpful. And then just last one, did I notice that freight was less of a drag in the U.S.? You're not using spot market as often and then spot rates were better. Maybe just some color there and that's it for me. Thanks.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Yeah. That's correct, Deane. We saw favorable economics in the overall freight market. We didn't use as much in terms of spot rates using more truck loads -- full truck loads, all of that contributed to favorability in the U.S.

Deane Dray -- RBC Capital Markets -- Analyst

Got it. Thank you.

Operator

Our next question comes comes from the line of Robert Barry with Buckingham Research Group. Please proceed with your question.

Robert Barry -- Buckingham Research Group -- Analyst

Hi, everyone. Good morning.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Good morning.

Robert Barry -- Buckingham Research Group -- Analyst

Just wanted to clarify on the comments about prices. It sounds like there are some places where prices in the market are going down. Is that the case and is that commodity driven or what's driving that?

Donald G. Macpherson -- Chairman and Chief Executive Officer

No, I wouldn't say that prices are going down. I would say, given the uncertainty around tariff, there was a lot of movement in prices. And prices are always adjusting in a minor way up and down, but we don't see any downward pressure on prices in general, that's not what we're seeing.

Robert Barry -- Buckingham Research Group -- Analyst

Got it. And then, I guess, a question on the SG&A growth. So, in the adjusted model, only 2% in the quarter, just how should we think about that kind of going through the year? Maybe it doesn't sound low given the sales growth, but just in the context of the rest of the year, would you expect that to accelerate or do you think you can hold that kind of growth?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Yeah. I mean, we continue to say we're going to grow SG&A at half while we grow sales and that's what we're shooting for. We've got a good productivity culture in the Company. So that's what we expect to tract to for the remainder of the year.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Yeah, I would also highlight that we talked about sort of north of $50 million (ph) in terms of productivity, and we still fully expect to get that. So we're -- we feel like we're on track with what are our plans.

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Yeah. One of the things that's really helping out Q1 is, if you look at the commitment that was made, $150 million to $210 million, if we look at what we've achieved to-date, we're already tracking at the high end of that. So that's certainly helping us in the SG&A area.

Robert Barry -- Buckingham Research Group -- Analyst

Got it. Just lastly, could I clarify the comments on the large and medium growing? You talked, I think, about them growing -- the growth accelerating on a two-year stack basis second quarter. Do you also expect it to accelerate just on an annual basis?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

On an -- so we talked about the two-year stack, and obviously last year I think we grew 20% in midsize customers. So we do expect to continue to see strong growth in the second quarter and we don't give quarterly guide, but our expectation is continue to see strong growth.

Robert Barry -- Buckingham Research Group -- Analyst

Okay. Thank you.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Thanks, Rob.

Operator

Our next question comes from the line of Josh Pokrzwinksi with Morgan Stanley. Please proceed with your question.

Josh Pokrzwinksi -- Morgan Stanley -- Analyst

Hi. Good morning, guys.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Good morning.

Josh Pokrzwinksi -- Morgan Stanley -- Analyst

Just a follow-up on that last question on midsize customer. I cannot but notice that the convention changed a little bit in the slides where you're doing sales instead of volume now. So I appreciate the color on 8% volume growth in the quarter. But just thinking about that flip on price from negative to positive, how should we expect that to trend going forward? Is that something that should be a lot more stable going forward? Or if we hit kind of a lack of acceleration here through the balance of the year, could that start going the other direction again?

Donald G. Macpherson -- Chairman and Chief Executive Officer

Now we feel like -- we've talked about this before. As we've made the pricing changes, we feel like we're competitive now. So we should be in a much more stable price and price cost environment than we've been in the last couple of years, and we would expect that to continue.

Josh Pokrzwinksi -- Morgan Stanley -- Analyst

Got it. That's helpful. And then, I think, related to Deane's earlier question about pull-forward, I guess, maybe to look at it from a different direction, I think distributors in general added a bit more inventory in the fourth quarter, yourselves included. Is there any impact that we should think about in terms of the rebate outlook for 2019, especially in light of maybe a bit softer first quarter where you guys are de-stocking a little bit or managing inventory a little bit more tightly, and you're not purchasing as much or is that something that you feel like you're contemplating in the guidance already?

Donald G. Macpherson -- Chairman and Chief Executive Officer

So, just for everybody's benefit, we manage inventory typically to service levels. We did pull forward some inventory buy in the fourth quarter. Our service levels are very strong. Our expectation is that we will continue to have very strong inventory levels. It's too early to comment on any impact to the rebate. And right now, I would say, there's very little chance that the rebate will be impacted by last year's pull-forward.

Josh Pokrzwinksi -- Morgan Stanley -- Analyst

Got it. It's helpful.

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

It was a small pull-forward last year.

Josh Pokrzwinksi -- Morgan Stanley -- Analyst

All right. Appreciate it. Thanks, guys.

Operator

Our next question comes from the line of Christopher Glynn with Oppenheimer. Please proceed with your question.

Christopher Glynn -- Oppenheimer & Company -- Analyst

Hey, good morning. I wanted to follow up on, I think, Evelyn's question. Talked about medium and large customers doing some market-based pricing adjustments. So I think the prior view was no more resets were needed and you're also seemingly saying very stable price cost environment. So just wanted to drill down into the fresher comments about some further market-based pricing adjustments.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Yeah. Some of those will be up, some of those will be down. We will always be adjusting our prices. We're always going to make sure that we're market competitive. The one thing I would highlight from this quarter was that given the expectation of tariff rates going in and what actually happened, there's probably more market-based adjustments. It's not a price strategy change. It's just making sure that we're competitive going forward.

Christopher Glynn -- Oppenheimer & Company -- Analyst

Okay, that helps. Thanks. And then, the accounting change, that comparison is just a one-off in the first quarter?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

It is. We mentioned it in the call last year in Q1 as a tailwind. So we just, for completeness, wanted to mention it as a headwind in Q1, then we're done with it.

Christopher Glynn -- Oppenheimer & Company -- Analyst

Okay. And then lastly, as you look at April playing out and your share strategies with the medium, et cetera, do you expect the second quarter top line to be consistent with the full-year range?

Donald G. Macpherson -- Chairman and Chief Executive Officer

Well, as we've said, our expectation is that we will continue to gain share at the rate we described. And our expectation is that the market growth will be between 1% and 4% as we described as well.

Christopher Glynn -- Oppenheimer & Company -- Analyst

Fair enough. Thanks.

Operator

Our next question comes from the line of Hamzah Mazari with Macquarie. Please proceed with your question.

Hamzah Mazari -- Macquarie Securities -- Analyst

Good morning. My first question is just on the medium customer side. I know you've touched on sort of the two-year stack and growth in Q2, but any comments as to what the makeup of new customers is versus sort of a year ago? Question really is, are new customers adding more to growth than you've seen last year or wherever past comparison you want to use?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Yeah. So -- no, we continue to see strong growth from existing customers and growth from new customers. We're probably going to be talking about that moving forward, but we haven't given a specific percent. But we're pretty happy with both the new customer acquisition and the existing customer growth.

Hamzah Mazari -- Macquarie Securities -- Analyst

Okay. And just my follow-up question is just around M&A. Has the thought process that changed at all, DG? I mean, most of your deals have been in Europe and Canada the last two (ph) years. I think the U.S. deal was in safety a number of years ago. It seems like the market is still very fragmented on the SM (ph) side. There's potentially some chunkier deals in areas where you don't play on the SM side as much. Just any thoughts as to how you're thinking about the portfolio? I know you highlighted some issues at Cromwell, but just any broad-based thoughts on portfolio and M&A?

Donald G. Macpherson -- Chairman and Chief Executive Officer

So, I would say that our focus is squarely on growing organically first. That is our primary focus. For all kinds of reasons, we have not had great success with M&A, and we feel like we're not afraid of M&A, but we are more focused on making sure we grow organically. We think that's best for shareholders and for team members and for customers, so that's our primary focus.

Hamzah Mazari -- Macquarie Securities -- Analyst

Okay, great. Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Steve Volkmann with Jefferies. Please proceed with your question.

Stephen Volkmann -- Jefferies -- Analyst

Hi. Good morning. Just a couple of quick cleanups, if I may. The timing of the sales meeting this year, does that benefit the gross margin in the second quarter a little bit?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Yeah, it will -- it will. So we'll be adjusting that in Q2 as well.

Stephen Volkmann -- Jefferies -- Analyst

Okay. And then, the shipping and logistics costs being lower, that seems like given where pricing looks and futures (ph), et cetera, that should be sustainable going forward, but it sounds like you're not really baking that in?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

It might be sustainable. At this point, we're sticking with our original guidance, and we certainly hope it continues. Can't disagree with your thought process there.

Stephen Volkmann -- Jefferies -- Analyst

Okay, great. And then the final one. It just seems like you maybe were off to a little bit of a slow start on share repurchases. Are you still thinking $450 million to $600 million?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Yeah, we are. I'm not sure it was a slow start. It was 458,000 shares, $135 million. So, that was a pretty sizable amount.

Stephen Volkmann -- Jefferies -- Analyst

Okay, fair enough. Thank you.

Operator

Our next question comes from the line of Chris Dankert with Longbow Research. Please proceed with your question.

Chris Dankert -- Longbow Research -- Analyst

Hi. Good morning. Thanks for taking my question. I guess, first off, thinking about the other business, I guess, do run rate investment cost peak in the first quarter here? Are there still kind of some additional initiatives that you guys are still keeping the pedal down and we'll see cost step up more as move into 2 and 3Q?

Donald G. Macpherson -- Chairman and Chief Executive Officer

Yeah. We will continue to make investments in Zoro through the -- most of this year. We would expect both of those investments to be made this year versus in future years.

Chris Dankert -- Longbow Research -- Analyst

But just on a run rate basis though first quarter versus second, fairly linear?

Donald G. Macpherson -- Chairman and Chief Executive Officer

Yeah. I mean, similar I would say. But at the whole Company level, not meaningfully different going forward.

Chris Dankert -- Longbow Research -- Analyst

Right. Thanks. And then, thinking about Canada, I mean, again, a lot of moving parts and a lot to parse through, but I mean is it fair to assume that we really won't see positive profitability till we get to the back half of the year here?

Donald G. Macpherson -- Chairman and Chief Executive Officer

Yeah, we would expect the back half of the year to show profitability. That's right.

Chris Dankert -- Longbow Research -- Analyst

Got it. Got it. Thanks so much.

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Justin Bergner with G.research. Please proceed with your question.

Justin Bergner -- G.research -- Analyst

Good morning, DG. Good morning, Tom.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Good morning.

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Good morning.

Justin Bergner -- G.research -- Analyst

My principal question is, the level of outgrowth in Q1 was, I guess, 200 basis points to 250 basis points in the U.S. based on the metrics you provided. Could you maybe comment on what limited the level of outgrowth this quarter such that you should be able to get back to the 300 basis point to 400 basis point range as the year progresses?

Donald G. Macpherson -- Chairman and Chief Executive Officer

So, I guess -- I would start by saying, if you look sort of at a 20-year history, generally we would have said 200 basis points to 250 basis points is pretty good. So, it wasn't a horrifically bad (inaudible) quarter. That said, we feel like we need to grow faster than that. We feel like 300 basis points to 400 basis points is where we can grow in U.S. There's a number of changes we've made and just we've made really throughout the business, marketing in particular. We talked about minor -- minor pricing adjustments, we talked about some of the work we're doing with our sales organization to accelerate growth. So, we are focused on making sure that we're taking the right actions to accelerate that to 300 basis points to 400 basis points.

Justin Bergner -- G.research -- Analyst

Great. Thank you. Just secondly, in terms of the corporate costs, if we end up annualizing near that $25 million per quarter run rate, we'll get to a annual corporate cost that's meaningfully below prior years. And I was just trying to understand what is the enabling driver or drivers there if that's the track we're on?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Yeah. I mean, it's just primarily productivity that -- or productivity initiative. No more color than that at this point.

Justin Bergner -- G.research -- Analyst

Okay. But there's not anything funny in terms of stock options or pension or anything that's non-productivity related that might explain part of the delta or expected delta.

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

I mean, there is one funny thing in terms of Fabory, loan forgiveness in the first quarter, that -- it's net neutral for the Company, but it is showing up in Q1.

Justin Bergner -- G.research -- Analyst

Okay, I'll leave it there. Thank you.

Operator

Our next question comes from the line of Patrick Baughman with JPMorgan. Please proceed with your question.

Patrick Baumann -- JPMorgan Chase & Co -- Analyst

Hi. Good morning, guys. Couple of questions. Just a point of clarification on U.S. segment daily sales growth, it was up 3.5% in the quarter, but then you had a slide upfront showing large up 5% and medium up 9%. So I'm just curious what's happening in other areas maybe that are making that headline a little bit lower.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Yeah. There's a couple of things happening there related to our specialty business and also our sourcing business. That's what's driving -- that's what's driving the reduction.

Patrick Baumann -- JPMorgan Chase & Co -- Analyst

You said sourcing business? What exactly do you mean by that?

Donald G. Macpherson -- Chairman and Chief Executive Officer

So, the way we look at midsize and large customer growth, it accounts for about 90% of the business. The other 10% is just some noise in there and didn't see growth for some of our specialty business areas. And so that's what's driving the difference.

Patrick Baumann -- JPMorgan Chase & Co -- Analyst

Okay. And then just on advertising growth, last year was pretty -- it was up almost 30%, which I guess the digital marketing initiatives you guys are undergoing. Just wanted to check in on how you guys are measuring the effectiveness of the spend and if you expect to continue to grow that bucket at that kind of a growth rate this year.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Yeah. So our advertising spend is really in three buckets, one, the catalog, one is basically mass media, and the other is digital. We track all of those in terms of return on investment, and all are very strong. The catalog, while we don't produce many books is a very strong return on investment. We see radio as providing very strong returns and continue to see that. And then with digital, we continue to see very strong returns, and that's fairly dynamic. We continue to shift in and out of specific channels. Overall, we see nice returns in the first quarter and we expect to see that moving forward.

Patrick Baumann -- JPMorgan Chase & Co -- Analyst

Got it. And then last one for me, just back to discussion on price/cost. You had said including contract implementations that price/cost was neutral in the first quarter, which I guess it means it was positive excluding those contract implementations. And then, obviously you've said that price will be adjusted to remain market competitive. So, is then the right inference that there was a benefit related to the timing of price versus cost increases from tariffs in the first quarter, some of which you're going to get back through the year or am I misreading that?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

No, that's correct.

Patrick Baumann -- JPMorgan Chase & Co -- Analyst

Okay. Thanks so much.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Thank you.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I'd like to turn the call back to DG Macpherson for closing remarks.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Thank you for joining us this morning. Appreciate all the questions. I would just reiterate what we said in the opening. We continue to be very confident. In the business in the U.S, we continue to be confident in our ability to gain share and to do so profitably. Canada, we recognize the challenges there, but we do expect to stabilize that business. And given the actions we've taken around cost, that can be a very profitable growth business for us. We continue to be excited about the online business and the growth and profitability there. And we continue to do a nice job of managing SG&A while continuing to invest heavily in the business, we're going to continue to invest in the business. So, overall, we feel like we're off to a decent start for the year and confident going forward. Thanks for your time.

Operator

This conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.

Duration: 47 minutes

Call participants:

Irene Holman -- Vice President-Investor Relations

Donald G. Macpherson -- Chairman and Chief Executive Officer

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

David Manthey -- Robert W. Baird & Co. -- Analyst

Nigel Coe -- Wolfe Research -- Analyst

Scott Graham -- BMO Capital Markets -- Analyst

Evelyn Chow -- Goldman Sachs -- Analyst

Ryan Merkel -- William Blair & Company -- Analyst

Deane Dray -- RBC Capital Markets -- Analyst

Unidentified Participant -- -- Analyst

Robert Barry -- Buckingham Research Group -- Analyst

Josh Pokrzwinksi -- Morgan Stanley -- Analyst

Christopher Glynn -- Oppenheimer & Company -- Analyst

Hamzah Mazari -- Macquarie Securities -- Analyst

Stephen Volkmann -- Jefferies -- Analyst

Chris Dankert -- Longbow Research -- Analyst

Justin Bergner -- G.research -- Analyst

Patrick Baumann -- JPMorgan Chase & Co -- Analyst

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