Greetings and welcome to the W.W. Grainger First Quarter 2019 Earnings Conference Call. [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..

Good morning. Welcome to Grainger's Q1 earnings call. With me are D.G. 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 D.G..

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 growth slow versus 2018. We estimate that the U.S. 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 a 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 our 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 towards 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 our 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..

Thanks D.G. 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 U.S.

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 D.G.

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 write-down, 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 D.G.

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 D.G. for closing remarks..

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..

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

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?.

Yes, 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..

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?.

Yes, 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..

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

Just wanted to clarify the comments on corporate expense. Again, I don't want to spend too much time on corporate expense, but, 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..

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

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?.

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 Cromwell 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..

Right.

And no comments on MonotaRO?.

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

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

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

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 lower. 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 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..

I think - to be clear, I think we're only [three] [ph] 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 market growth in the U.S. is a pretty big uncertainty.

Obviously if the market bounce back and was significantly higher than two, 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..

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 fair when we look at the U.S.

change?.

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

Last question for me. I was under the impression that the midsize customer thinking was mid-teens, not double digit.

Was I - am I wrong on that?.

Yes. 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..

So that 9 should convert into double digit the rest of the year is kind of what you're implying?.

Yes..

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

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?.

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 price to stay at 1.5 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..

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?.

Yes. 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..

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

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 price resetting there, so then price cost is going to turn to flat to maybe slightly down.

Is that correct?.

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

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

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

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 could you help us out there?.

Well, 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 gaining traction for sure, we've added a number of products from the U.S.

to the assortment, and that has gotten a nice pickup and we're starting to see some benefit 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's pretty exciting. We're seeing some sales force effectiveness work. We train all the sellers in the first quarter.

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..

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

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 complained about the weather. Your comment did not constitute an excuse, so appreciate that. So talk about the weather and 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?.

Yes. 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 highlight that..

Appreciate that. And I see that Tom provided more precision in volume and price this quarter in increments of 50 basis points.

Is that going to be a go-forward practice?.

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

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 spot rates were better. Maybe just some color there, and that's it for me..

Yes. 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..

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

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?.

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..

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?.

Yes. 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..

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

Yes. 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 today, we're already tracking at the high end of that. So that's certainly helping us in the SG&A area..

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?.

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

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

Just a follow-up on that last question on mid-sized 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 had kind of a lack of acceleration here through the balance of the year, could that start going the other direction again?.

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 that we've been in the last couple of years, and we would expect that to continue..

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, better managing inventory a little bit more tightly, and you're not purchasing as much or is that something that you feel like you've contemplated in guidance already?.

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'll 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..

Got it. It's helpful..

It was a small full forward last year..

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

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..

Yes. 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 they are competitive going forward..

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

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

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

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

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

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?.

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 customers..

And just my follow-up question is just around M&A. Has the thought process that changed at all, D.G.? I mean most of your deals have been in Europe, and Canada the last few years. I think a U.S. deal was in safety a number of years ago. It seems like the market is still very fragmented on the FM side.

There's potentially some chunkier deals in areas where you don't play on the FM 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?.

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 our shareholders and for team members and for our customers.

So that's our primary focus..

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

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?.

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

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

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..

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?.

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

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

I guess, first off, thinking about the other business, I guess, do run rate investment cost peak in the first quarter here or there's still kind of some additional initiatives that you guys are still keeping the pedal down and we'll see cost a bit more moving to 2Q and 3Q..

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

Which is just on a run rate basis though first quarter versus second, fairly linear?.

Yes. I mean, similar I would say. But at a whole company level, not meaningfully different going forward..

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?.

We would expect the back half of the year to show profitable business..

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

My principal question is, the level of outgrowth in Q1 was, I guess, 200 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 to 400 basis point range as the year progresses?.

So, I guess - I would start by saying, if you look sort of at a 20-year history, generally we would have said 200 to 250 basis points is pretty good. So, it wasn't a horrifically bad share gain quarter. That said, we feel like we need to grow faster than that. We feel like 300 to 400 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've talked about minor, minor pricing adjustments. We've 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 300 to 400 basis points..

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 that the track we're on?.

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

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

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..

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

Couple questions. Just a point of clarification on the 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..

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

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

So, the way we look at mid-sized and large customer growth, it accounts for about 90% of the business. The 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..

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 effectiveness of the spend and if you expect to continue to grow that bucket at that kind of a growth rate this year..

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..

And then last one for me. Just back to the discussion on price/cost. You had said including contract implementations that price/cost was neutral in the first quarter, which I guess it means that it's 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?.

No, that's correct..

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

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. In 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..

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