W.W. Grainger, Inc.

Hello, and welcome to the WW Granger first quarter 2022 earnings conference call and webcast. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Kyle Bland, VP Investor Relations. Please go ahead.

Good morning. Welcome to Grainger's first quarter 2022 earnings call. With me are DG McPherson, Chairman and CEO, and Dean Merriweather, Senior Vice President and CFO. As a reminder, some of our comments today may include forward-looking statements. 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 with their corresponding GAAP measures are find in the table at the end of this presentation and in our Q1 earnings release, both of which are available on our IR website. This morning's call will focus on our first quarter 2022 results, which are consistent on both a reported and adjusted basis for all periods presented. We will also share results related to Monotaro. Please remember that Monotaro is a public company and follows Japanese GAAP, which differs from US GAAP and is reported in our results one month in arrears. As a result, The numbers disclosed will differ somewhat from Monotaro's public statements. Now I'll turn it over to DG.

Thanks, Kyle. Good morning and thank you for joining us. Today I'll provide an overview of our first quarter performance and then pass it to D to walk through the financials in detail. I'll begin by quickly highlighting our strategic operating framework, the Grainger Edge. I am proud of our team members as we embrace the edge at every level of the organization and in everything we do day in and day out. This framework serves as the basis for our culture and defines how we work together to serve our customers and communities. I'm excited to share that earlier this month, we were recognized as one of Fortune 100's 100 Best Companies to Work For. This award is a tribute to team members across the organization. Turning to slide five, not unlike the past two years, the first quarter of 2022 threw us some challenges, including the ongoing impacts of the pandemic, heightened inflationary pressures, supply chain and labor challenges, and now the Russian war in Ukraine. I'd like to spend a few minutes on how we are managing through these challenges. First, we continue to manage through the highest inflationary period in our careers. On the cost side, we are leveraging our purchasing scale and working closely with our supplier partners to chart a shared path forward. Despite high inflation, our goal remains to be price competitive while targeting price cost neutrality. On the supply chain front, we continue to work with our supplier and transportation partners to ensure products are available and delivered to customers on a timely basis. U.S. customer service levels are starting to improve as carrier capacity increases. Overseas freight remains pressured with delays, port congestion, and container challenges, and when coupled with increasing fuel prices is pushing costs higher than historical trends. We expect these costs to remain elevated throughout the year. We remain focused on securing product for our customers as we navigate through the continued product shortages and delays. We expect the ongoing COVID related shutdowns in Shanghai and broader China will further challenge supply chains over the coming months. We have been increasing our inventory positions since the middle of last year to maintain service levels and continue to monitor developments to stay ahead of the game. In my visit to our customers in Q1, I continue to hear that we are performing well relative to the market on securing product. We also continue to stay focused on hiring, and maintaining competitive payroll and benefits to ensure we attract, engage, and retain high-performing teams. This is especially important for customer-facing and support roles within our distribution and contact centers. We continue to receive feedback that Grainger is a great place to work, and our team members feel valued as they work to support our customers each day. We continue to invest in our strategic initiatives like marketing, re-merchandising, keep stock, and technology. These efforts, coupled with our advantage service, have allowed Grainger to have strong outgrowth versus the broader MRO market. Switching gears to our financials, demand remained robust and we finished the quarter with sales growth of 18.2% or 17.9% on a daily constant currency basis. Our results were driven by strong performance in both segments. Hightouch Solutions North America had exceptional daily sales growth of 18.2%. In the U.S., we outgrew the broader MRO market by 550 basis points for the quarter, as our supply chain and inventory investments helped us meet our customers' needs. Total company gross profit margin finished the quarter at 37.9%, expanding 245 basis points over the prior year first quarter. The largest component of our expansion over the prior year was lapping the pandemic-related inventory adjustment that we took in the first quarter of 2021. Even when excluding that adjustment, however, we were still up nicely year over year. We delivered 14.6 percent operating margin, an increase of 305 basis points over the prior year, as the improved gross margin performance was further aided by top-line leverage and disciplined cost management. In the quarter, we delivered an adjusted ROIC of 41 percent and returned $163 million to shareholders through share repurchases and dividends. Yesterday, we announced an increase in our dividend, which marks our 51st year of consistent increases and continued commitment to our shareholders. As a result of our strong performance, we are raising our full year 2022 guidance estimates. I continue to be impressed with how our team has come together to deliver such great results. Earlier this year, we talked about our focus areas for 2022, executing on our key growth initiatives, driving operational excellence, and strengthening our culture. We've made strong progress in all three areas and continue to build a company for success. With that, I'll turn it over to Dee to take us through more detail on the quarter and our guidance.

Thanks, DG. I'd like to echo DG's sentiments. Our execution and teamwork in the first quarter drove very strong results. Turning to slide eight, we covered revenue and margins at the total company level, and I'll get into more detail in the segments in a minute. Before we do, I'd like to highlight a few other key points. Our total company SG&A as a percentage of sales was 23.3%. gaining solid leverage over the prior period first quarter. Given our investments in the DCs at Monotaro and our continued strategic initiatives and high-tech solutions, I am proud of the way the team can currently manage these investments as well as operating expenses to support strong top-line performance in the quarter. Finally, resulting EPS in the quarter was $7.07, up 58% versus the first quarter of 2021. Turning now to our high-tech solutions segment for the first quarter, we continue to see strong results with daily sales up 18.2% compared to the first quarter of 2021. We saw impressive growth across the board with double-digit revenue growth across all of our North American geographies and both large and mid-sized customers. In the U.S., we saw strong price realization from our recent pricing actions and delivered strong growth in every end market, with particular strength in commercial, transportation, and heavy manufacturing. In Canada, the economy has rallied back, and the business saw year-over-year sales growth in nearly every end market, with manufacturing especially strong this quarter. Canadian daily sales were up 10% or 11.8% in local days and local currencies. For the segment, GP finished the quarter at 40.4%, up 310 basis points versus the prior year. If we exclude the first quarter 2021 pandemic product inventory adjustment, we still achieve gross margin expansion of roughly 80 basis points. This expansion was largely driven by favorable product mix and also aided by the return of the in-person Granger show in February. While the shale provided a modest tailwind in the quarter, it is expected to net out as we move through the balance of the year. Given the timing of price and cost increases in the quarter, our price-cost spread was favorable. However, when netted against increased rate costs, it was largely neutral. I'll also note that our pandemic mix at the end of the quarter was back to near pre-pandemic levels at just above 20%. of sales mix, and we continue to see similar results through the first few weeks of April. While we have included our pandemic-related sales in the appendix for this period, given that we have returned to pre-pandemic mix levels, we do not expect to provide this information in subsequent quarters. As the operating margin line, we saw improvement of 395 basis points year-over-year as the strong Gross margin recovery was aided by 85 basis points of operational expense leverage. Overall, an extremely solid quarter for the high-touch solutions North American segment. Looking at market outgrowth on slide 10, we estimate that the U.S. MRO market grew between 12.5% and 13.5%, indicating that we achieved roughly 550 basis points of market outgrowth in the quarter. As I've gone out and spent time with customers and investors over the last few months, we often are asked about the drivers of our share game. We know our supply chain scale and our ability to deliver products to customers has been strong. We also know that by focusing on and investing in the right areas like re-merchandising our assortment, increasing our use of analytically driven marketing, and improving the effectiveness of our sales force, we can consistently deliver growth above the market. We continue to execute well, and our goal to achieve 300 to 400 basis points of annual market outgrowth remains intact. Moving to our endless assortment segment, sales increased 12.1% or 10.4% on a daily basis. Results were heavily impacted by foreign exchange, given the depreciation of the Japanese yen. In local currency and local days, Monotauro achieved 18.4% growth, whereas Zorro US daily sales were up over 19%, both very strong. Growth continues to be driven by new customer acquisition at both Zorro and Monotauro, and Monotauro's continued success with enterprise customers. GP expanded 10 basis points versus the first quarter of 2021, while operating margins declined 95 basis points as planned. This decline was primarily a result of our increased DC investments at Monotauro and was partially offset by Zorro's operating margin expansion, which improved 90 basis points over the first quarter of 2021 on strong GP improvement. Please note the slide covering channel-specific performance for Zorro and Monotauro is included in the appendix. In addition, we've also continued to see positive results in our key operating metrics. On slide 12, you can see registered users are up 20% over the prior period. You'll see the count of registered users for Xero has been restated for prior reporting. In 2021, Xero made the strategic pivot away from certain less productive channels. allowing them to focus on more profitable B2B customers who also have a higher likelihood to make repeat purchases. This all drives higher lifetime value of customers to Zorro. As a result, we've elected to remove these customers from this metric, which lowers the nominal user count for Zorro, but the growth rate remains relatively consistent to what we have shown in the past. We think this is a more accurate way to reflect this metric and we will use this new definition going forward. On the right, we show the continued growth of the Zorro SKU portfolio. We are targeting around 2 million SKU additions again in 2022 and are off to a good start as we continue to onboard more strategic third-party supplier partners. Now, looking forward to the rest of the year, We're off to a great start and results remain strong in April, with total company daily sales trending up around 20%. While we don't typically adjust our guidance expectations after a quarter and acknowledge the broad market uncertainty, our conversations with customers, results to date, and continued momentum give us confidence to make a change at this time. As a result, we are raising our 2022 full-year guidance. Our new outlook includes expected daily sales growth between 11% and 14%, and EPS between $25 and $27, representing over 30% earnings growth year-over-year at the midpoint. We've also updated our supplemental guidance in the appendix, which reflects a slight upward revision in the high-tech solutions operating margin and an increase in total company operating cash flow. With that, I'll turn it back to D.G., for some closing remarks.

Thank you, Dee. Before I open it up for questions, I would make just a few comments. First, we performed extremely well on the quarter. I'm proud of the team and the way we've executed, focused on serving customers well and navigated through some of the bigger challenges that we discussed at the beginning of the call. We continue to execute on our growth drivers, drive operational excellence, and strengthen our culture. We are well positioned to continue serving customers well and to have a very strong 2022. As we shared last quarter, I'm excited to provide some information on our upcoming Investor Day. We will be hosting it on Wednesday, September 21st at our Northeast Distribution Center in Bordentown, New Jersey. We will be focused on providing more details on our strategic initiatives and long-term outlook, as well as provide a tour of our DC where we will highlight some of our automation and ESG investments at work. More detailed information will be available in the coming weeks, and we certainly look forward to an exciting day.

With that, we will open up the line for questions. Thank you. We'll now be conducting a question and answer session. If you'd like to be placed into question queue, please press star 1 on your telephone keypad. We ask that you please ask one question, one follow-up, then return to the queue. Once again, that's star 1 to be placed into question queue. One moment, please, while we poll for questions. Our first question today is coming from Jake Levinson from Milius Research. Your line is now live.

Good morning, everybody.

Good morning. Good morning.

I just wanted to see if we could get a little bit more color on what's happening with our neighbors in the north. I know you folks used to break that out a little bit separately, but maybe you can just give us an update on how things are progressing in Canada. It seems like the end markets have finally turned in your favor, but are we kind of on the sustainable path to profitability there?

Yeah, yeah, that's a great question. Thanks for asking. So, you know, I think the business is on a very sustainable path to profitability. We have reset the way the business operates over the last three or four years. We're seeing signs of share gain returning into that business. The cost structure is in a good place, and we're seeing growth with some attractive customer segments, most notably manufacturing and health care. And that business just continues to get better and better from a profitability perspective, and it's steady, and it's going to continue to be a steady rise in profitability, but we feel pretty good about the path we're on.

Okay, that's helpful. And then just as a quick follow-up, looking at the safety side of the business, you mentioned that that's back to kind of pre-pandemic levels as a percent of sales. I guess the question is, what does the new normal look like for businesses for your customers in terms of buying those products? Obviously the mandates and re-changing our social norms around mask wearing and whatnot. So are your customers still buying masks and hand sanitizer and things like that at elevated rates, I guess you could say?

Yeah, I think you talked about it. We're pretty much back to pre-pandemic mix. I'd say there's slight elevation in some of those products. You know, I can't really predict what customer behavior is going to be around those products given the way that the virus proceeds. But what I will say is that we see most customers going back to some normalcy. I've been in a number of manufacturing plants the last couple of weeks, and in almost all cases, there isn't a lot of new PPE versus what was born in 2019 being used. So we don't expect it to be hugely elevated, mask and sanitizer sales going forward, and we're pretty much back to normal, still elevated, but not that much.

Thank you. Our next question today is coming from Ryan Merkel from William Blair. Your line is now live.

Hey, good morning, everyone. Thanks for taking the questions. First off, I was hoping you could unpack the comment you made about speaking with customers, and they expressed a lot of confidence about demand. In particular, I'm curious if you spoke with energy customers, if they're seeing a big uplift here.

I can give you my perspective, and D, if you've talked to customers that have a different perspective. I have not talked to all that many energy customers. I have talked to a lot of heavy manufacturing, light manufacturing, commercial customers, and You know, despite, you know, we talked a little bit about despite sort of the uncertainty of the world, everybody right now would say super busy, just hanging on. If I can get the supply chain parts into my operation, I have the demand. And we see that through most of the customers that we're talking to right now. So a lot of positivity. I haven't been, I'm trying to think, it's been a while since I've been in an energy plant, so I don't have that perspective. But generally, customers are pretty bullish on demand right now.

Go ahead. I was just going to concur. My time with customers is similar to DG's experience up to this point in the year.

Okay. All right. That's helpful. And then for my follow-up, you know, what really stood out to me was the profit margin in the high-touch business. And I'm curious, the guidance seems to imply that 1Q will be the high watermark. So, can you just unpack why that might be the case? Sure, DeeDee, do you want to take that one?

Yeah. So, you know, when we talked about guidance last year, I think, you know, a lot of the underlying assumptions really stick, even with some strong performance up to this point. You know, we, of course, had the lapse for the E&O adjustments. The first quarter is a time when we work with our suppliers on some of our largest price increases in line with our cost cycle that we work with them. I know the cost cycle has been a little unusual, but I will say the seasonality related to our price changes, we are assuming the same types of outcomes. So you are exactly right. We feel like Q1 will be a higher watermark as it relates to that, and we will moderate as we go through the year. Again, you know, some of the tenants are the same. We're still focusing on price-cost neutrality and remaining price competitive in this market.

Thank you. Our next question today is coming from Nigel Coe from Wolf Research. Your line is now live.

Thanks. Good morning. So I wanted to just return to Canada. You know, that business, you know, in days gone by, was tracking low double digits until the oil and gas double burst in 2014. But any reason why it can't get back to those kinds of levels? I mean, there's been a ton of changes in the business profile and the cost base. So just curious on that. And then on the midsize customer margins, they used to be running, I think, about 10 points above the average in that segment. Are they still in that kind of zone?

I think, Nigel, your question on Canada is revenue growth. Can we get back to sort of double-digit revenue growth? Is that your question?

No, no, no, margins, margins. Oh, margins, yeah, yeah.

You know, structurally, we don't think there's any reason why we can't get there. You know, given the path of the business, we're focused on sequential improvement, and we do feel like we can build to that, but it's going to take multiple years to get back to that 10%. They're on a good path, and I am very confident that we will continue to improve margins in Canada. But structurally, there's no reason why we can't get back to double-digit margins there. And then, Dee, do you want to take the second half of that?

Yeah, and a mid-sized customer, I think it's a good assumption now to use a high single-digit number.

Okay, that's great. Thanks, Dee. And then just April, any comments on how April's been tracking relative to – you know, the strength you saw in 1Q?

Very well. It's, you know, Dee mentioned that it's 20%. If anything, it's slightly better than what we saw for 1Q revenue in April. But generally, it's very, very good.

Thank you. Our next question is coming from David Manthe from Bearger Line. It's now live.

Thank you. Good morning. And congrats on the fortune designation. It's a great honor. Thank you. Could you please update us on high touch and some of your efforts there? I mean, you had really nice outgrowth, and I'm trying to understand the factors there. I'm sure it's a combination of these things, but, DG, if you could talk about customer receptivity and then any idiosyncratic things that are going on there in terms of better offering or changes in incentives, anything that you're doing inside Grainger to drive those better results.

Yeah, and we've talked about some of these things before. The primary initiatives for us are around continuing to improve our product assortment through merchandising efforts and making it easy for customers to find what they need. We continue to make great progress there. We see cause and effect in terms of driving share gain through that effort. Our marketing efforts, we're getting more capable in terms of marketing, spending money in the right places and getting really strong returns out of marketing, and that's a big piece of it. We see nice expansion of our keep stock offers, so becoming more integrated with our customers' inventory management practices and supporting their inventory management practices. Those are things that have been very consistent and are a bit evergreen for us at this point in the sense that we're always getting better at those, and those actually do drive significant share gain. I don't think there's really anything idiosyncratic. I think the core thing that we are working on I would add providing better insights to our customers to help them manage their business as they cost out, and I think we're getting better and better at that as well. But the only idiosyncratic thing would probably be supply chain related. I think through this time we've done a better job than most of managing, having product, of finding customers substitute products if we don't have products, and being able to serve them. And so we're probably getting some benefit. It's hard to quantify from just having inventory and being able to serve customers where others cannot.

Sounds good. And then just quickly, if you could zoom out on gross margin, kind of five-year-plus sort of basis, do you expect gross margin to continue to decline gradually over time, all else equal?

Yeah, go ahead, D.G., you can take off.

I was just going to add, D.G., you can continue on. You know, In the high-touch business, we've kind of noted specifically for this year that we're focusing on gross margin stability around 40%. And, D.J., were you going to talk about the outlook?

Yeah, yeah. So what I would say is we feel like we are price competitive at the gross margins we're at. We feel like within the high-touch, the 40% number is going to be a fairly stable number over time. Our company gross margins are likely to go down slightly just given the endless assortment growth continues to grow faster than the business, and they tend to operate at a lower gross margin and lower SG&A. But in terms of the segment performance, we actually expect pretty stable gross margins over the next several years.

Thank you. Next question today is coming from Josh Pokrowinski from Morgan Stanley. Your line is now live.

Hi. Good morning, folks. First question, I guess a clarification. Dee, you mentioned, I think, in some of your opening remarks about kind of a seasonal benefit in 1Q. It kind of tied into a sales event in February. I was just hoping to unpack that a little bit more and maybe add some numbers to it if you could.

Well, sure. Yeah, we returned to an in-person Grainger show in Orlando in February. That's what I meant in my prepared remarks related to a show. It was really great to be back in person. Our show was well attended. We heard great feedback from our customers and from our team members. From a Q1GP perspective, the show provides a modest tailwind for us year over year. And that's due to supplier funding, as you can imagine. And this favorable impact through the year will moderate versus prior years as we go through the year.

Okay. Got it.

That's clear.

Understood. And then a competitor of yours, you know, pretty recently talked about, you know, some supply chain stabilization, maybe not seeing as much Inbound inflation outside of freight-related items, what would the Granger take on that? Obviously, the freight environment has gotten more difficult, and China is a bit more of a wild card with lockdowns, but would that be your take as well, or do you see that differently?

We certainly have seen some improvement in particularly domestic freight in terms of service, and price increases have certainly moderated that. They were starting to moderate a little bit on ocean freight as well with the lockdown in China. Who knows how that's going to play out? But, yeah, we would say something similar where things were easing a little bit and continue to do that domestically. The overseas piece is probably the more complicated one right now.

Thank you. Our next question is coming from Chris Snyder from UBS. Your line is now live. Thank you.

I guess, for first, I kind of wanted to follow up on DG's prior commentary around the longer-term gross margin drivers. And certainly I understand that endless assortment outgrowth is a structural gross margin headwind at the consolidated level. But what gives the company confidence that it can hold business line, you know, gross margin steady, you know, beyond 22? You know, this is a pretty competitive business. So is it the midsize outgrowth? What gives you guys confidence on that?

Yeah, I think just working with our customers, understanding the value we provide, the value we create, seeing some midsize outgrowth, and having confidence as we continue to return to the more industrial product as we've seen. We just feel like our price is in a competitive place, and we can continue to support our customers and provide what they need. and sell on the value that we provide. And that's really what our business is based on, and we're going to continue to do that.

Thank you. And then I wanted to also follow up on the last question and commentary around potential maybe easing in some of the domestic freight costs or supply chain. And I understand that part of it, but have supply chains overall eased, or has procurement gotten more difficult since with the China shutdowns, even if some of the domestic freight market has opened up a little bit?

Yeah, so, you know, I would first comment that the China shutdown is going to take weeks and maybe longer for that to flow through in terms of understanding the impact. You know, I would say that ex-VAT, what we were seeing before was still significant supply chain challenges but more isolated to specific suppliers that were having trouble getting product to meet their manufacturing needs. And so it wasn't as widespread as transportation improved, and we do buy a lot domestically as well. And so for customers that have the materials that we haven't seen, labor had gotten a little bit better and transportation had gotten a little bit better. There's still plenty of pockets of challenges, though, and we still see it's still a challenged supply chain. from our supplier's perspective in many cases, but it is more isolated to specific suppliers rather than it was, you know, broad-based this time last year. You would have just said it was kind of chaos, and it is less chaos now, but there's still plenty of challenges.

Thank you. Our next question is coming from Hansa Mazzari from Jefferies. Your line is now live.

Good morning. Thanks for taking my question. This is Hans Hoffman filling in for Hans Mazzari. My first question is just on the cyclicality of the portfolio today. Can you just walk us through how to think about how your business performs in a recession and maybe any differences in the mix of the portfolio today versus past downturns? Oh, you're talking about if there's a recession, how have we performed in past recessions? Is that your question? Yeah, yeah. Is there any difference in the mix in the portfolio today versus past downturns? To answer the second part first, I don't think there's a significant change in the mix of the portfolio. We have more MLS assortment business, but that will probably perform similarly. The short answer is we generally perform well in downturns. We look at share gain during downturns, and it's usually been very good. Part of that's because we are steadfast in maintaining service to customers in downturns, and that allows us to serve customers better than many others can. And we generally still generate a whole bunch of cash during downturns and still perform well. Obviously, you know, everybody takes a hit. We take a financial hit. You can go back and look at 2008-9 as probably the most severe one we've had, and you can model what happened there. But, you know, one of the things that I would sort of say is we are, while we don't know when a recession will hit, we are certainly aware of the uncertainties in the world, and we are being very mindful of the cost of running the business, so we are prepared for anything that happens. But, you know, in general, we perform well, and we would expect to do that again. Great. Thank you. And then could you just walk us through what your market share is today with medium customers and then what the total addressable market there is? Yeah, so indeed, you may have the details. Roughly, if you go back over a kind of 10, 12-year period, we were at about $2 billion with mid-sized customers. We dropped below a billion. We're now, I think, a billion and a half or more, a billion and six maybe this year, something like that is the expectation. We're still to and change market share with mid-sized customers. We feel like we've got a long road ahead, and we continue to do a really nice job of reacquiring customers that left us and then growing with existing customers and building solid relationships. So we think we've got a long runway in terms of share gain with midsize customers.

Yeah, I don't have anything further to add. You hit that, DG.

Thank you. Our next question today is coming from Dean Dre from RBC Capital Markets. Your line is now live.

Thank you. Good morning, everyone. I apologize. I joined a bit late. I'm not sure this was covered. But DJ, I was hoping you could expand on what types of products are in short supply. Did you have any missed sales because you would blame it on the supply chain?

No, I wouldn't say we had many missed sales. I mentioned this a little bit before. More than ever, probably, we're relying on some of our product information investments to make sure we can get customers to substitute. But we wouldn't have any sort of things that wouldn't be in the news already. Obviously, if a product has a chip in it, that's been a challenge. There's certain commodity products that have been challenged. So I won't call out specific products, but I would say we've done a nice job of finding alternatives in most cases. And it's hard to argue that we're missing too many sales. I'm sure we are missing some sales, and they're just not occurring because nobody has those products.

That's helpful. And then just qualitatively, can you comment on your mix with regard to a typical reopening? Coming out of the pandemic, you've got a number of your customers opening up shop, back to work. And so that's when Grainger typically gets a nice lift as, you know, they haven't restocked their shelves, but now they have to. So you typically get a bigger lift during the reopening or restarting process. Is that still reading across in your North America businesses or is this kind of the steady MRO run rate?

First of all, we have not had many customers that closed shop. I mean, we've been with our customers throughout. There were a few in certain categories that shut down. So if you said cruise lines, which we have cruise line customers, obviously they shut down, and you'd see a little bit of that type of growth potentially there. But it's a very small portion, hospitals, governments, manufacturing plants, You know, retail organizations in terms of distribution centers have all been open the whole time. So, you know, one of the things that's been maybe surprising through the pandemic is just how consistent the growth has been. If you go back to 2019, we've seen substantial growth and we saw really growth, you know, only in the front end of the pandemic in 2022 that we really see a drop because most customers actually kept operating. And so I think it's just normal business. We don't see much restocking going on.

Thank you. Our next question today is coming from Chris Denkert from Loop Capital. Your line is now live.

Hey, thanks for taking the question. I guess, and forgive me if I've missed it, but can we get a little bit more detail on the Zorro strategic pivot? I mean, it sounds like, you know, moving more into productive channels. I mean, does this immediately change the TAM? Does it change the growth outlook for that business? Was it, you know, a margin-driven decision? Does any color on that strategy change would be great?

Yeah, and we've been making a strategic pivot with that business for the last several years, dramatically expanding the product line, building new data analytics capabilities, getting that business independent from a technology stack. So there's been a lot of investment that's happened. In terms of the questions specifically you're asking, we have done a whole bunch of analysis working with the team in Japan on customer profitability, and customer profitability not in terms of the first transaction but in terms of lifetime value. And we are skewing our efforts to attractive business customers. And so what you've seen is it's dropped some volume that we certainly could have in the short term because it's just not helpful in terms of creating a profitable long-term business. I think ultimately it actually will accelerate our growth rate as we get better at acquiring and getting attractive customers to the second, third order where they become more frequent buyers. But certainly we have made a little bit of a shift in getting out of some channels that were lower lifetime.

Yeah, that's really, really helpful. And I guess kind of with that as a backdrop, any kind of color you're able to provide in terms of kind of price versus volume inside of the Zorro business this quarter? Sure.

I think the price volume wasn't much different than what we saw in the whole business that we talked about before. High single-digit price and substantial volume growth is what we're seeing in that business at this point.

Thank you. Our next question is coming from Christopher Glynn from Oppenheimer. Your line is now live.

Thank you. Good morning. So I appreciate the comments that reopening isn't causing really episodic demand that you can really think of. But I think Dee maybe referred to some idiosyncratic benefit from competitors having relatively less supply chain where with all the new and getting product through. I think historically when you accrue volumes and customers, it's pretty sticky base for continued scaling. Just wanted to kind of revisit that. You know, there might be some reversion once everyone has sort of democratic access to process or to procurement. But, yeah, just I'll listen from there.

Yeah, you know, it's a great question. I think, you know, what I'm hearing from customers is most of the work that we've done has been highly valued to support their operations and to keep them up and running. And in many cases, we've actually added inventory management solutions to our keep stock solutions or further embedded in customers really, really want to continue to have long-term relationships. So, you know, you could argue there may be some pullback, but that's really not the behavior we're seeing, and it's not what we're hearing from our customers. Our customers are saying, if anything, we've learned a whole lot about, you know, who we want to partner with and why we want to partner with them through this time. And our ability to keep customers going is super valued, and I think it will continue to help us be sticky with those customers. Great.

Thanks. That's all from me. Thank you, Chris. Thank you. Our next question today is from Patrick Bowman from J.P. Morgan. Your line is now live.

Well, thanks. Good morning. Can you talk about the approach to pricing this year? Should we assume the 8% in the first quarter is a good level to work from now, or have you taken more actions that are providing another boost here in April and for the rest of the year?

Yeah, Dee, do you want to jump in? I cannot hear you, Dee. I can take it then. So what we basically have been looking at is, you know, we took price obviously through some of the back half of last year as well as everybody has. We think prices will moderate a bit, so we don't think the level we're at will be the full year number year over year because we think, you know, that the price increases will moderate. That doesn't mean prices will go down. They won't. But relative to some of the changes that we made last year, you'll start to see a bit slower, a lower – so we would expect them to moderate somewhat. Still a pretty healthy price, obviously, this year.

Got it. And then with all this – oh, sorry, Dee, go ahead.

Yeah, sorry. I don't know. There was a problem with my line. I apologize for that. Yeah, we – and, you know, high-touch U.S., I know specifically we usually talk a little bit about a pricing outlook, and so we're expecting price to be about 6 to 7 for the year.

And then with all the pricing and the positive price cost in the first quarter, just curious why you aren't able to increase the gross margin guide. Can you just talk about the puts and takes there and whether you may see some benefit if cost inflation moderates given that life of accounting dynamic you mentioned last quarter?

Yeah, so, you know, we've kind of usually talked about the lumpiness of price for us. and how it impacts gross margin through the year with a large portion of our high-touch U.S. business being contract-based. So in light of still seeing suppliers continue to come in with cost inflation requests and our ability to continue to work with them on that, When we look at the outlook, we believe that staying in line with our current gross margin is most feasible right now, knowing that we're going to have some lumpiness as we continue to appropriately pass through some inflation as it comes through off cycle. As the year progresses, as you know, the math works, you have less months to push some of that through.

Okay, understood. Thank you.

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to DG for any further closing comments.

Sure. Thanks, everybody, for joining us. It's a pleasure to have you on and hope you're all doing well. You know, I would just reiterate the fact that we're completely focused on what we can control, and that's making sure we advance our strategic initiatives to grow profitably, building the culture we think is really, really important. and making sure that we serve our customers well. And while there are many things going on, the market right now is very, very strong, and we feel good about the share gain performance we're getting. We feel good about what we're seeing in both models and, you know, really optimistic for the future. So thanks. I hope you all have a great rest of the week, and take care. Thank you.

That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.