W.W. Grainger reports solid Q3 results with 6.1% sales growth, focuses on North America after UK exit and raises margin expectations despite external challenges.

OPERATOR - (00:01:47)

Greetings and welcome to the W.W. Grainger third quarter 2025 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press Star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Kyle Bland, Vice President, Investor Relations. Please go ahead. Good morning. Welcome to Grainger's third quarter 2025 earnings call. With me are D.J. mcPherson, Chairman and CEO and Dean Meriwether, Senior Vice President and CFO. As a reminder, some of our comments today may include forward looking statements that are subject to various risks and uncertainties. Additional information regarding factors that could cause actual results to differ materially from is included in the company's most recent Form 8K and other periodic reports filed with the SEC. This morning's call will focus on our non GAAP adjusted results for the third quarter of 2025 which exclude the $196 million loss recognized from the pending sale of our UK based Cromwell business and the proposed closure of our Zorro UK business. Definitions and full reconciliations of our non GAAP financial measures with their corresponding GAAP measures are found in the tables at the end of this presentation and in our earnings release, both of which are available on our IR website. We will also share results related to Monotaro. Please remember that Monotaro is a public company and files Japanese GAAP which differs from US GAAP and is reported in our results one month in arrears. As a result, the numbers discussed will differ from Monotaro's public statements. With that, I'll turn it over to D.J.. Thanks Kyle Good morning everyone and thank you for joining today's call. As headlined in the release, our third quarter results were fueled by consistently strong execution from our team. Despite the continued external uncertainty, our customers remain focused on improving their operations through increased efficiency and productivity. They value the fundamentals of having inventory where and when they need it and a partner who understands their business and can bring the right solutions. As I spent time in the market with large customers this past month, these themes rang true. I was proud to see Grainger deliver the critical fundamentals that help our customers every day. I recently had great discussions with an aerospace customer and a municipality about how Grainger's deep rooted inventory management expertise can save them time and reduce costs. I saw that when we deliver a great service experience, customers take notice and it leads to more opportunities and deeper relationships. I also had the opportunity to speak with several experts focused on technology, tech and AI will continue to be an ongoing focus for Grainger, enabling us to provide great solutions for customers and drive productivity in our operations. The promise of these new transformation technologies has never been greater, but the key will be leveraging our proprietary data and know how to build solutions that connect to business processes and create a more seamless user experience. I'm excited about the work we're doing to bring more digital capabilities to both our customers and team members to make things better. With every interaction. Making things better and staying focused on what matters is core to how Grainger operates and we take that responsibility to heart in our communities as well. Last month at our annual bucket build in Lake forest, more than 500 Granger team members came out to pack over 4,000 disaster relief kits. This included filling five gallon buckets with essential cleaning supplies and hand tools that will help families and individuals begin the process of recovery after a natural disaster. Granger has a long standing commitment to emergency preparedness and response efforts and this is another reason I'm proud of how the Granger team lives. Our Principal Every day Now moving to our third quarter results, we delivered a solid performance that in total outpaced our August formal guide, particularly on the gross margin line. Total company reported sales for the quarter were nearly 4.7 billion, up 6.1% on a reported basis or 5.4% on a daily constant currency basis. Gross margins for the company were 38.6%, operating margins were 15.2% and diluted. EPS finished the quarter up 34 cents to $10.21. Operating cash flow came in at 597 million which allowed us to return a total of $399 million to Grainger shareholders through dividends and share repurchases. Our results continue to reflect tariff related LIFO inventory valuation headwinds consistent with what we discussed last quarter, but which came in lighter than expected in the period. As Dean will discuss, without this LIFO impact, our operating margin would have increased year over year in the period. Looking ahead, while we're continuing to see more costs in the market, these little headwinds will eventually dissipate as inflation cools and our gross margin will recover to our run rate expectation. As you likely saw, we recently announced that we've entered into an agreement to sell our UK based Cromwell business and plan to fully exit the UK market. Given the economic dynamics post Brexit, we had to alter our assumptions around the go forward potential in the region. With this planned divestiture, we are now focused entirely on growing our North America and Japanese businesses where we can deliver the greatest long term impact. Overall, while it has been an eventful few months, the business continues to perform well and in line with expectations. With this, we are narrowing our earnings outlook, which Dean will outline in a few minutes. It's important to note we factored in the October headwinds from last year's active hurricane season and an estimated impact from the government shutdown as we wrap up 2025. I'm confident that we'll continue to serve our customers well, deliver on our financial commitments and and drive solid results for all stakeholders. I will now turn it over to Dean to go through the details.

Dean Meriwether - Senior Vice President and CFO - (00:07:14)

Thank you DG Turning to Slide 7, you can see the high level third quarter results for the total company, including $4.7 billion in sales, up 5.4% on a daily constant currency basis. While gross margin finished ahead of our previously communicated expectations on a less than expected LIFO impact, we were still down 60 basis points year over year as segment mix headwinds and tariff related cost impacts within the High-Touch business weighed on results. This led to total company operating margins of 15.2% for the quarter, down 40 basis points compared to 2024, but 70 basis points ahead of our communicated expectations. Diluted EPS for The quarter was $10.21 of 34 cent or 3.4% higher than the prior year period. Moving to segment level results, the High-Touch Solutions segment delivered solid growth in the quarter in total sales were up 3.4% on both a reported and daily constant currency basis. Results were driven by volume growth and price inflation for the segment, with the latter improving as tariff costs continued to be passed. From an end market perspective, our indicators suggest that the MRO market remained muted as the heightened inflationary environment continued to weigh on demand. For Grainger. Specifically, we saw strong performance with contractor and healthcare customers and improving results with manufacturing customers, which helped to offset slower growth in other areas of the business. For the segment, gross profit margin finished the quarter at 41.1% down 50 basis points versus prior year, driven by similar themes to what we discussed last quarter. We saw negative but improving price cost spread as we progressed negotiations with suppliers through the quarter and passed incremental price in September. Further, we pulled through LIFO charges to reflect the impact of supplier cost increases, albeit less than expected as certain increases were pushed into latter periods. These two tariff related headwinds were only partially offset by mix and freight. I would note that if we excluded our LIFO headwind and wanted to compare across our peer set which report on fifo. Our implied FIFO gross margin rate would have increased year over year on SGA margin improved in the period as continued investments in our seller initiatives and marketing were more than offset by productivity and sales leverage. Taking all this together, operating margin for the Segment finished at 17.2% down 40 basis points versus the prior year quarter. Now focusing on the Endless Assortment Segment sales increased 18.2% on a reported basis or 14.6% on a daily constant currency basis, which normalizes for the FX tailwinds realized in the period. Zoro US was up 17.8% while Monotaro achieved 12.6% growth in local days. Local constant currency At a business level, Zorro continues its momentum, driving efficiencies with marketing spend and working to further enhance the customer experience, including improved search, better fulfillment and continued optimization of their assortment. Taken together, these actions are driving strong growth from its core B2B customers along with improving customer retention rates. At Monotaro, sales growth remains strong with continued growth from enterprise customers coupled with solid acquisition and repeat purchase rates with small and midsize businesses. On profitability, operating margins increased by 100 basis points to 9.8% with favorability across the segment. Monotaro margins remained strong at 13.2% up 80 basis points and Zoro margin improved to 5.8% up 150 basis points, with both businesses benefiting from gross margin flow through and healthy top line leverage. Overall, we had another strong quarter across Endless Assortment and we expect the team will carry this momentum forward as we wrap up the year. Before moving into guidance, I wanted to share a brief update on where we're at with tariffs in the third quarter. We remain engaged in active dialogue with our supplier partners and used our September price increases to help offset continued cost pressure. While our initial pricing actions back in May only applied to a small portion of our products, largely those where Grainger imports the product directly. The September increase was much broader and included initial pricing actions on supplier imported products where we had finalized negotiations. As we move into the fourth quarter, we're seeing inflationary pressure continuing to build, including impacts from the recent Section 232 expansion. As a result, we are taking some incremental pricing actions to better align price cost timing as the tariff landscape unfolds. These actions are only modest in nature, but are in addition to the price passed earlier in the year. On profitability expectations for the fourth quarter, we anticipate gross margins will improve sequentially with our normal seasonal recovery and improving price costs. The LIFO impact is expected to be roughly consistent quarter over quarter. Looking ahead, based upon what we are hearing from suppliers as part of our annual cost cycle, we expect further inflationary pressure into 2026. With this assuming no further material changes to the current tariff landscape, we now anticipate the inventory accounting dynamics from LIFO will persist over the next couple quarters until inflation cool. That being said, consistent with our long term earnings framework, we anticipate gross margin will stabilize around 39% for the total company subject to normal quarterly seasonality. While we will experience continued segment mix headwinds and some pressure within a subset of our private label assortment. These will be offset as price cost normalizes back to neutral and and the LIFO impact subsides on LIFO specifically, we thought it would be helpful to provide a view of how inventory accounting dynamics impact our gross margin over time, especially because of how this cycle is playing out relative to 2022. While LIFO expense is always a drag relative to implied FIFO margins, it's not typically a material impact in every period depending on what else is impacting our gross margin results. As you can see on slide 12, during periods of normal cost inflation, the LIFO headwind the difference between LIFO margin and the implied FIFO margin is roughly 20 to 30 basis points, reflecting the real time impact of higher costs flowing through our P and L. As we enter into a heightened inflationary cycle, like what we see in 2022 and like what we're seeing again today, this LIFO impact becomes more pronounced as the difference in cogs diverges between the two inventory methodologies. However, as inflation cools, the LIFO expense will normalize, LIFO and FIFO margins will converge and as this happens and we pass further price, our reported margin will recover. With this we expect our total company gross margins will stabilize around 39% consistent with our long term earnings framework. Now moving to the updated outlook for the remainder of 2025. As DG mentioned at the beginning of the call, we're narrowing Our full year 2025 adjusted EPS outlook which reflects slightly lower sales to account for the Cromwell divestiture FX updates and the impact of the government shutdown which we're assuming reaches a resolution by mid November. These top line headwinds are offset by higher margins resulting in an EPS midpoint consistent with the prior guide. In total, the updated guide includes daily organic constant currency sales growth of between 4.4 and 5.1% and a diluted adjusted EPS range of $39 to $39.75. If you squeeze to the annual guide to get an implied fourth quarter the revised revenue outlook implies a Q4 daily organic constant currency growth rate of 4% at the midpoint, which assumes more than 3 points of price contribution to revenue within the HITUT segment. October growth is off to a slow start up approximately 1% on a preliminary daily constant currency basis as we lapped a fairly significant hurricane related sales benefit in the first two weeks of the month and as we face current year headwinds from the government shutdown. However, if we just looked at the last two weeks of the month, which exclude the prior year hurricane impact, October total company sales are up in the 4 to 5% range on a daily constant currency basis, more in line with what we saw in the third quarter, but still reflecting the impact of the government shutdown which is weighing on public sector sales. Annual margin expectations have increased from our previous guide due to improved price costs and LIFO timing. If you were to squeeze the implied operating margins from the updated annual guide and focus on the fourth quarter, it shows a sequential step down in the fourth quarter to around 14.5% at the midpoint. While the puts and takes are different, this sequential movement is roughly in line with normal seasonality. Overall, despite the tariff related noise over the last couple quarters, we remain poised to deliver a solid year. Before I hand it back to dg, I thought it would be important to reiterate our long term earnings framework in light of the recent tariff uncertainty and as we look ahead. While we have made some Minor edits to CapEx to reflect the latest estimates around our global DC expansion, the core tenets of our framework remain solidly intact. We remain confident we can drive share gain in the us, grow the EA business in the teens, stabilize total company gross margins around 39% and grow SG and a slower than sales through process improvements and technology. Taken together, these actions will drive attractive returns and we remain well positioned to deliver great results for our shareholders for the years to come. With that, I'll turn it back to DG for some closing remarks.

D.J. mcPherson - (00:19:01)

Thanks Dean. As we head into the final months of the year, our team will continue to navigate the complex environment and deliver value for our customers, our communities and our shareholders. And as Dean mentioned, we continue to work through this inflationary environment and the challenges from the government shutdown. And while there is some short term noise, we remain confident in our ability to pass through cost increases and achieve the core tenets of our long term earnings framework. We'll continue to stay focused on driving strong execution, providing industry leading service and building innovative capabilities to deliver on what matters most to our stakeholders. And with that, we will open it up to Q and A. Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star2 to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is from David Manche with Baird. All right, thank you. That was a very clear presentation to business. Thanks for outlining all of that data. Question on the 2025 guidance and the Cromwell. So Cromwell's held for sale as of September 30th, so I assume you're taking any assumption out for that and just ballpark. Ish. Are we talking what, 75, 80 million? I'm guessing. And then from an operating income standpoint, those Cromwell operating losses are pretty immaterial. Is that all correct?

David Manche - Equity Analyst - (00:20:45)

Yeah. So two things I point yet, you know, we, we kind of adjusted for the Cromwell impact. And you know, if you go back to the press release that we issued around our proposal to exit the uk, in total, it incorporated both that impact, you know, as well as the impact that's being proposed for Zorro UK. So in total, it's about 40.

Dean Meriwether - Senior Vice President and CFO - (00:21:20)

That's $40 million in revenues for Cromwell and Zoro UK as held for sale in the fourth quarter.

David Manche - Equity Analyst - (00:21:27)

Correct. Okay. All right. And then on the pricing actions that you've taken thus far in the fourth quarter of 2025, should we assume that those are in endless assortment? I think you said your next opportunity to adjust contract pricing on High Touch customers would be January 1st. So is that another bite at the apple at the beginning of 2026?

Dean Meriwether - Senior Vice President and CFO - (00:21:57)

No. Obviously the actions we've taken were September 1, those have flowed into the fourth quarter, and that was a normal price cycle increase. And then in November 1st, now we're taking another one. And that will flow into contracts as well as non contract business. And that's all High Touch related. Zorro has had good price inflation this year based on some strategic changes they've made. Yep. Okay, thank you very much. Our next question is from Christopher Snyder with Morgan Stanley. Oh, sorry, I was on mute. So, you know, you guys said that, you know, I guess ex lifo, the gross margin would have been up year on year, which I guess implies a LIFO headwind of something at least 70 basis points. I guess my question is you guys are kind of saying you'll maintain a roughly 39% gross margin through these LIFO headwinds. So I guess as the LIFO headwinds go away, does that 39 go to something closer to 40? You know, just assuming that we're in a 70bps LIFO headwind backdrop. Thank you.

Christopher Snyder - Equity Analyst - (00:23:10)

Thanks for the question, Chris. So, you know, as we've noted during this period of time when we are comparing our results versus those who may be reporting on FIFO, we do have more of a negative impact directly related to the LIFO impact on gross margins. And so what we attempted to do here with our information is to recast an implied FIFO gross margin number for Grainger for more easy comparability. But as you note, as we go through the cycle and others eat through the less expensive FIFO layers, and you know we're already there with LIFO, we believe gross margins will become a little bit tougher for them. And we, as we continue to pass price, our gross margins will continue to elevate, as you noted. However, there are more things besides LIFO that impacts gross margin, product mix, you know, freight and other areas where we receive where we're gaining some favorability. We deem that some of those things may not be as favorable in the future as price becomes more favorable. And so that's why we stick to a longer range outlook of around 39 or around the area of 39. That doesn't mean it can't be a couple basis points better than that in the future. We just don't want to project out too much because all the information we have today around tariffs and other cost inflation is what we have to use to project from this point. Thank you, I appreciate that. That was helpful. I guess if we look at the Q4 guide, overall company up 4 so high touch I guess would be below that, maybe something more like three, which is effectively all price. So it seems like the guide is calling for no volume growth within hitouch. And I know the backdrop's been challenged for a while, but that business has continued to grow volumes, even if modestly, through the first three quarters of the year. So is that step down in Q4 to maybe zero just all because of these government contracts and the risk associated with that, or is there also maybe macro softening alongside that? Any color there would be helpful. Thank you.

Dean Meriwether - Senior Vice President and CFO - (00:25:51)

Yeah, in Q4 we have two challenges, one of which you called out, which is the impact to our business related to the government shutdown and the other one is related to the benefit that received in the prior year in October related to the hurricane. We range bound that last year of about 30 to 40 million dollars in the month of October. So that's also a challenge that we're cycling in Q4. The one thing I'd also point out is if you look at October by segment, which we don't typically talk about, but government has obviously impacted substantially, everything else looks normal effectively. So it is mostly it is entirely just the government impact that we're seeing from both the hurricane which affects state governments, three states that obviously in the southeast that were hurt hit hardest last year, and then the federal government given the shutdown. Thank you, I appreciate that. Our next question is from Jacob Levinson with Melius Research. Hi, good morning everyone. I realize there are some advantages on the tax front using LIFO inventories, but wanted to ask if there's been any discussion in terms of shifting the fifo. Just seems like the last couple of years we've seen a lot of companies that, that had LIFO accounting actually moving to fifo just given the maybe a stickier inflation backdrop. Yeah, yeah. So we obviously have talked about it, evaluated. I mean the thing you need to probably realize is if you make that change, you end up having a cash payment, not an earnings payment, but a cash payment effectively for the accumulated taxes you saved at whatever tax rate is today. So it's not an inconsequential number. So we need to weigh that versus the benefit of being on FIFO and having easy compares right now. We're not going to make that change. We might in the future. Okay, that makes sense. And then just on the government shutdown, I realize these are unfortunately becoming more regular occurrences. But in your experience is there normally some catch up in demand once the shutdown is over? Because I imagine a lot of these facilities are just mothballed right now. So once you ramp back up, maybe there's some pent up demand there. Yeah. So you know what I would say is the nature of the shutdown and this one in particular. Obviously some of the non military entities that we would serve are completely shut down. Typically you wouldn't see much of a catch up from those. But we also are seeing this impact given the lack of the number of people who are furloughed and purchasing people who are furloughed. We're seeing a little bit of slowdown in military and other areas as well. And so some of that may come back, but typically it wouldn't all come back. You'd see a little bit of it maybe come Back if there's catch up projects that they stop doing. But we would expect something between zero and something not huge to come back on that. Okay, perfect. Appreciate the color. Thank you. Our next question is from Ryan Merkel with William Blair. Hey everyone, thanks for the question. Just sticking with the government, did you guys size what the impact you expect in 4Q is from the government shutdown? Yeah, I mean, basically the way to think about that is every day a point or more impact on our total business. And so, you know, if it goes six weeks, it'll be half a point. If it goes the whole time, it'll be a point or more impact. That's what we've seen so far. You know, I would say that, you know, if it doesn't get resolved, it could become even bigger if it goes on a long time. But that's what we typically would see and expect to see now. Okay, got it. And then it sounds like you through another price increase in 4Q and that would be off cycle for you, which I think I thought you were trying to stick to the national account timing there. So is that sort of a change in how you're doing things or why the off cycle price increase? I think a lot of this is just probabilistic. So when tariffs first hit, we actually didn't know how they would play out and we didn't want to get out in front of it. So we've been actually taking price increases when we have cost increases as opposed to speculatively. And you know, there's been over 1,000 negotiations with our suppliers at this point. Lots and lots. That's not normal, for the record. And so what we saw was a number of cost increases come in after between the time we set the 911 prices and the time we would now. And so what we've done is we've raised price to compensate for that and we think it's the right thing to do. Our customers understand that.

Ryan Merkel - Equity Analyst - (00:30:45)

And I would just add, you know, a lot of that is price changes and corrections based upon what we're seeing in the marketplace. So I wouldn't assume that that change was as big as like, you know, the 5:1 change as an example. Got it. Okay, thank you. Thanks, Ryan. Our next question is from Stephen Volkman with Jeffries. Great, thank you and apologies for beating this dead horse dg. But the price increase in November, was there any aspect of that would be, I think your word was speculative that. Did you try to get ahead of any of this? No, it's not speculative. It's Just matching what we're seeing and what we're seeing in the market, sticking to our pricing tenants, which are basically price to market at this point. Okay, great. And then I think you also talked about in your private label business some headwinds, competitive kind of headwinds. How does that play out or what can you do to sort of address that going forward? Well, we don't think we're uniquely exposed or competitive disadvantaged in private brand. But what has happened with some of the larger tariffs is the difference between a private brand product in some cases and a national brand product can become very tight. And so then we have decisions to make as to how much price we take in those situations. And so we're still working through all of that. It's a subset of our private brand. It's not all of them, it's not a huge portion of them. But for some of those cases, we have to decide how we treat those strategically. Understood. Okay, thank you guys. Thanks. Our next question is from Christopher Glynn with Oppenheimer and Company. Thanks. Happy Friday. Happy Halloween. So, you know, I appreciate the comments.

Christopher Glynn - Equity Analyst - (00:32:46)

At the beginning on, you know, how you're looking at AI and adopting new technology. You've always been very tech forward and investing at scale. And so I'm curious what you're envisioning with that from both sides. You know, commercially layering into the outgrowth algorithm versus the cost to serve side and margin potential. Yeah, I think, you know, so what I would say is it's going to require all of the above to be successful long term. We think. And you know, we have been out in front in certain areas where with AI thinking about back end processing and customer service and those areas that are kind of obvious to attack, I don't, you know, everybody's going to be doing those things is my expectation. And so creating advantage is probably going to be more on the commercial side and leveraging our data, our product data, our customer data to create solutions that provide better experiences for customers. And so we are investing heavily there as well. We think both areas are going to be great, critical to our success. Great, thanks for that. And then last quarter you mentioned elevated bidding activity for new large business. Curious how that pipeline's playing out. And you know, should we think of that as incrementally constructive to the Outgrowth algorithm, perhaps for interim period? Yeah, we think we're doing well. I don't know. I don't know that it'd say it's constructive for the outgrowth at this point, but we think things are going well. On that front. And you probably know in our business, having big contracts and getting all the volume are two different things sometimes. And so you have to have the contracts and then you have to win at the local level. And we know that. And so that's really how we construct our business and our focus. Great, thank you. Thank you. Our next question is from Ken Newman with Keybanc Capital Markets. Good morning, guys. Morning.

Ken Newman - (00:34:47)

Maybe morning. Maybe first, just to clarify, sorry if I missed this in response to Dave's first question, but any help on just how to think about the operating profit or loss in the other segment? Not that Cromwell's divested. Is that segment going to be profitable in 4Q or just how do you think about that normalizing to next year?

Dean Meriwether - Senior Vice President and CFO - (00:35:09)

Okay, so the exiting the uk, it shows up in two areas. It shows up in other kind of where Cromwell was and that's the vast majority of it. And a little bit in EA because that was the Zorro UK business. So that will positively contribute, you know, once we close a deal from a profitability perspective. And it's like in the teens, from a operating, not in the teens, 20 or so basis points, improvement in operating margin.

Ken Newman - (00:35:51)

Okay, that's helpful. I appreciate that. And then for the follow up here, it looks like there was a pretty sizable increase and midsize customer growth in high touch us this quarter. Is that primarily a price versus volumes mix and then maybe just any color on how you think about how sustainable midsize customer growth can be going forward and its impact to mix?

Dean Meriwether - Senior Vice President and CFO - (00:36:16)

Yeah, so we believe, you know, we're doing really well with midsize customers. But the majority of the difference in the increase, I believe it's 7% in the noted slide is really due to some softer comps in the prior year. And I would just add that I think we have a lot of opportunity with midsize customers and we're learning and I think we'll continue to do better, but it's not immediate. So to Dee's point. Got it. Our next question is from Sabrina Abrams with Bank of America.

Sabrina Abrams - Equity Analyst - (00:37:01)

Hey, good morning everyone. So the gross margins in the quarter were I guess, a lot better than expected. And I know you've spoken to some stuff around LIFO expense timing, but it was a pretty big delta. Just want to understand if there were any benefits from burning down inventories quarter over quarter or anything about LIFO layers and maybe if you could give more color on exactly what happened with the LIFO timing. Did suppliers choose to eat increases? Thank you. Yeah, thanks for the question, Sabrina. So it's really around the fact that, you know, LIFO is really difficult to estimate because, you know, based upon your inventory purchase and the specific changes on the cost, you have to be able to estimate that by skew. And then whatever you sell, you have to go back in prior periods and pull those adjustments in and make a very good estimate for your prior year inventory at the same time. So we do the best we can at trying to estimate a pretty complicated quantification of LIFO impact. And so our team here was always continuing to negotiate with suppliers. And based upon where those negotiations landed, some of those cost increases are being pushed into prior periods. And so, you know, based upon that, that is some of the LIFO charge improvement. In addition to that, we have some benefit from price cost as well that impacts gross margin. And then also we also had benefits from favorable mix and freight. Okay, got it. Thank you. And maybe if you could talk a. Little bit about, you know, the market growth has been, and your daily sales growth has been very stable this year with the exception of, I guess what's happening in Q4. And you've already explained that. But barring that, just any early thoughts on how you're thinking about the growth in 2026? Are you thinking it will be similar to this year? Thank you.

Dean Meriwether - Senior Vice President and CFO - (00:39:21)

So we'll provide that information at the end of the year in January. We typically don't provide that. You know, we do expect to have significant price rollover, as you might guess. And so, and we still expect to continue to gain share at our target rate. So. But we will, we will have more, more, more news on what we think the market will do as we get to that point.

Sabrina Abrams - Equity Analyst - (00:39:44)

Thank you.

Neil Burke - Equity Analyst - (00:39:45)

Thanks. Our next question is from Neil Burke with ubs. Hey, thanks for the question. I wanted to ask about asking the price question another way. We hear about some price fatigue with respect to customers in the Industrial Channel. Can you talk about your conversations with your suppliers? I think you mentioned over a thousand. So is there a sense that they are not fully passing on costs? And so the inflation you see is a bit below, A bit below market? Yeah, I don't know if it's a bit below market. What I would say is that for manufacturer they have decisions to make about whether they pass percent or dollars. And I would say that a lot of them have passed somewhere in between that two in many cases. So, you know, just because the headline is 20% tariff increase, they may not pass 20% in all cases until we've seen really a mix of things and a wide range of Things from our suppliers on that front. Okay, thanks. And I know we'll get more on this in January but like any kind of initial thoughts on 2026, not so much on the top line. But you mentioned gross margins around 39%. So any kind of like puts and takes, when we think about how that drops through to operating profit, I mean I would just point to two things that, you know, probably set us up. Well, one is the LIFO thing we've been talking about that should improve as year goes on and the other is exiting the UK market. If we can exit the UK market that will help too. So I would only point to those two things at this point. We'll talk about others as we get to the end of the year. Great, thank you. Our next question is from Dean Turning with RBC Capital Markets. Thank you. Good morning everyone.

Dean Turning - Equity Analyst - (00:41:42)

Morning. I was hoping as we close the books on Cromwell DG you can share some of the lessons. This was not the first time Granger had tried to expand in Europe. There was also Fabry. So what doesn't work with the MRO model in Europe? That's kind of moot now I think. But then more importantly, don't you still have all kinds of opportunity to outgrow North America and you know, it's still highly fragmented so isn't that still the growth opportunity? So two questions here. Yeah, and the second one's really easy. So yeah, we do think the opportunities to grow in North America and, and in Japan with Montaro, we've got great growth opportunities there. I'd say Fabry and Cromwell are very different experiences. I think Cromwell is very good business. We bought it right before Brexit happened. We thought we had an opportunity to learn and build off that platform for ZORA UK and then potentially think about expansion and learn about the European market. That turned out to not be true. Obviously when Brexit happened and at some point it becomes clear that you've got a mid sized business that isn't really material to our portfolio and we want to make sure that our attention goes to things that really matter that can move the needle for us. And so that's why we made the decision. We do think Cromwell is a good business and will continue to be a good business going forward. Good to hear. And then just to clarify on the government shutdown, I appreciate how you sized it. Is there been any difference in behavior, demand, I mean between federal, state, local. I mean this is the focus is on the federal shutdown, but what's been the ripple effect across the rest of your government business? Very little, actually. I think, you know, the state, State business is down in October only because of the hurricane, basically. So if you look, removed the hurricane from the three states that had big hurricane events last year, state would be on a good path. Local hasn't really been impacted that much. So from a government shutdown perspective, it's really the military so far that's been hit and things like VA hospitals that are linked to federal that have had slowdown as well. Appreciate that. Thank you. Thank you. Our next question is from Nigel Koh with Wolf Research. Thanks. Good morning, Dee. I appreciate the attempted teaching on LIFO accounting. I'm an accountant by training and it fries my brain, so. But that's a really good effort. We've had so many whiteboard sessions in the last few months, it's ridiculous. I know, but the more you dig into it, the more confusing it becomes. But just on, I don't know if you quantified it, Dee, but We calculated our $52 million impact this quarter. Just the change in the LIFO reserve. I'm assuming that's the charge. And then I think the PR talks about still some impact in the first half of, by mid-2026, I think, is the wording, would you expect more moderate impacts in the first half of next year? Yeah, your math is right. And what I will say about next year is that we're right in the middle of the cost cycle for 2026, which is why it's so difficult for us to talk about 2026 outlook, because we're not done with that. But what we do know is more cost is coming into the year. And so therefore we're going to have additional LIFO impacts into the year. And so, you know, without having, you know, crisp numbers to lay out at this point, we know we're going to have a LIFO impact. We know we're going to have additional cycles of price to pass as a result into 2026. But as relates to actually sizing those incremental things that haven't been locked down right now, it's really hard to do. But we do think we get through the back half of next year, we'll be in a good position because we would have had multiple pricing cycles to catch up on any impacts and new costs that come through. Right, okay, thanks, Dee. And then obviously, good news on the price is starting to come through here. How do we think about price elasticity? And the spirit of the question is there is a sort of vague kind of aura of price fatigue out there with some companies. And I'm just curious how the customers are sort of responding to these price increases and how do you think about elasticity of demand, especially for the white label goods? Yeah, so you know, we are having very good conversations with our customers. They are seeing everybody come to them with what we're talking to them about generally. So we haven't really seen price fatigue and we've been very measured in how we've done this. You know, I guess there could be a point where that might be a challenge, but certainly for most of what we sell, it's a very small portion of our customers expense. And so we find that as long as our prices are competitive, we are usually in good shape. Okay, thanks dj. Our next question is from Tommy Mall with Stevens Inc. Good morning and thanks for taking my questions. I mean, I want to tighten up my understanding here on the UK exit two part question. The $40 million sales impact that was over what time frame and then the 20 basis points of operating margin impact. Just want to clarify, you meant to say or what you meant was assuming the exits go as planned, that would be the uplift to consolidated company margin. Yes. So yeah, the 40 million is just tied to Q4 and the 20 basis points impact is for total company on an annualized basis. Okay. And the 40 million D is for the entirety of Q4. Correct. So we're estimating that we will be able to close on the Cromwell deal by the end of November, early December. And that's the 40 million from that point. Yeah, effectively after that point in time, yes. Okay. And that's both. That's both Cromwell and what we expect to happen@Zora UK as well, combined. Perfect. Okay, we're clear now. Thank you. And then just on high touch and the exit rate on pricing for the fourth quarter, I think you said somewhere north of 3 points. And then also that there are continuing supplier conversations suggesting there's probably going to need to be more pushed. Let's call it 1/1 25. So as we just think about the rap here. Excuse me, first half 26. As we think about the rap, I mean, could we end up in a world where 2026 pricing on high touch is, I don't know, four points or better if we just put all these data points one after the other? Yeah, I mean we're estimating the rap will be, you know, close to three. So since we don't know the other numbers, it's highly likely that it's going to be north of 3 for next year.

Guy Hardwick - Equity Analyst - (00:49:37)

Yep. Okay, thank You. I appreciate the insight and I'll turn it back. Thanks. Our next question is from Guy Hardwick with Barclays Capital. Hi, good morning. Good morning. Most of my question's been answered but just a quick one for me looking at the sales growth by customer end market for High touch solutions. US warehousing's down mid teens which is sharply against the kind of trend of slightly up, slightly down the last few quarters. Can you explain that? Yeah, sure. That that's entirely around one customer where there was a shift is what I would say also like a lost contract or closure of facility, that sort of change. Just, just a, just a contract adjustment. Thank you. Our next question is from Patrick Bauman with J.P. morgan. Oh, hi. I had a couple quick ones here. Touch on the the volume trends at high Touch again. What do you estimate the MRO market volume did in the third quarter? And in context of that, can you touch on if you're still happy with the returns you're getting on your investments, your share gain Investments? Yeah. Yes. Roughly 2% on volume for the debt below 2% on volume for the core 2% market. No, you're talking about var volume Market.

Patrick Bauman - Equity Analyst - (00:51:16)

Market. Market. Oh, market would have been down 2%. That's correct. I'm sorry, I thought you were asking what our volume was. Our volume had been a one to two in the quarter and yes, the short answer is yes, we are seeing significant returns on our investments, getting more effective and more efficient in some of those investments. So yeah, we're pretty, we're pretty bullish on what we're seeing from what we're investing right now. Yeah. And I would just point you to, you know, our return on invested capital is still north of 40. It was lower than prior year. However, you know, the main impact from that is just us continuing to build assets and in this case build networking assets related to, you know, a lot of investments that we're making in D.C. capacity to ensure that we have great service and availability. Okay. And then my follow up is on the margin side again. So the LIFO charge I get is hard to size for 26. So we can make our own assumptions around how much of that 80 to 90 basis point drag to add back as a starting point. But you know the slide mentions price cost as being negative as well. Can you size that? I assume that's incremental to that 80 to 90 basis points. And then as you sit in front of the whiteboard and game theory, if the IPA tariffs are ruled illegal mechanically, how do you guys think about that in terms of the flow through to results. So I'll start and then DG can kind of, kind of focus. So as we look at follow, when we look at next year, we're still going to have LIFO impact. That's still going to exist. The difference will be our price will continue to build. And so we will see gross margin from a Granger perspective improve into next year as it relates to that. Now, the piece that we don't, and that's based upon all we know today, great. We're working on additional cost increases when we start the year. You know, generally we, based upon the cost negotiations, we push through cost increases in line with the negotiations that we have completed. And so the cycle kind of will start again. And those details we don't have to share. But usually LIFO weighs heavily on our business at the beginning of the year and then again we catch up from a price perspective through our cycle of increases. So LIFO will not be going away. It will normalize. What we're experiencing this year would normalize, but then we will be on a path where price will continue to build. And that's why we feel pretty confident that as we get to the second half of next year, just like we're ending this year, if you look at the midpoint of the guide that we're going to be at about 39%. Your second question is probably more theoretical at this point, which is if tariffs are illegal, what would happen? First of all, we have followed.

Chris Danker - (00:54:40)

Our. Own guidelines here that we only do things that actually are happening. And so we would have to actually see what the law change would look like and figure out what would happen. I'd say two things. One is we have worked closely with suppliers to tag what the tariff cost increases are. So we could, and we would know how to unwind those. If that was in fact required, we could do that. And certainly as that happened, we would then of course get a benefit because when we took the lower cost product in, then we have the reverse of what's happening with us in some way. But I don't know how big of a benefit that would be. So we'd have to come back to you and model all that if that in fact happened. Thanks. Our next question is from Chris Danker with Loop Capital Markets. Hey. Morning. Thanks for taking the questions. I guess focusing on analyst assortment here. Nice results. Maybe can you comment on how much of that's being driven by the more targeted selection, continue to provide some benefits. How much of that is kind of the customer acquisition flywheel, just larger Invoice sizes, maybe just any commentary on what we're seeing in terms of trends inside of ea? Yeah, so what I would say is that most of the improvement we've seen and I'll start I'll focus on Zorro because Zorro's been a pretty big shift in terms of performance has been improved fundamentals on getting more attractive customers and then getting them to buy frequently. Average order size hasn't really changed at all. It's all been frequency of orders. When you look at it, that's been the driver and that's been better customer acquisition. So acquiring customers with the right products that gives us higher probability of actually getting the repeat and it's also just doing better at marketing to those customers and creating a relationship through digital means. So really the fundamentals have improved a lot and we've seen repeat rates go way up. We've seen them do things as a business with pricing that have helped and we've seen service improve on the world. So all those things have contributed to improved performance. Got it. Thanks for the color there. And I guess as a follow up, I mean we're seeing better drop through now on the SGA leverage. Are there any additional investments similar to the Tokyo D.C. or anything else we should keep in mind into 2026, 2027 that would impact kind of that drop through rate or should we expect pretty good incremental margins in EA going forward? Other than Mito, I don't know of any other investment that is on the horizon. They would have a lot of capacity in both Osaka and Tokyo after Mito and that would be the expectation they would for a while. Got it. Well, thanks so much. Thank you. Thank you. There are no further questions at this time. I'd like to hand the floor back over to management for any closing comments. Great. So thanks for joining the call today. You know, one thing I'd highlight is that, you know, I think the underlying business trends are really good and that we're doing a lot of great things to improve the customer experience, to prepare to improve our cost structure, to continue work on building technology and building service capabilities through the right network changes on the distribution center network. So while we spent a lot of time talking about lifo, I hope you get the sense that that's not really what we're focused on as a business. We're focused on actually underlying performance and we feel like the underlying performance is pretty good. With that, I wish you all a safe and happy Halloween. And thanks for joining the call today. This concludes today's conference. You may disconnect your lines at this time. Thank you for your particip.