Greetings and welcome to the WW Grainger Third Quarter 2021 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 during the conference, please press star 0 on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to our host, Irene Holman, Vice President of Investor Relations. Thank you. You may begin.

Good morning. Welcome to Grainger's third quarter 2021 earnings call. With me are D.G. Macpherson, Chairman and CEO, and Dee Merriwether, Senior Vice President and CFO. As a reminder, some of our comments today may include forward-looking statements. Actual results may differ materially due to various risks and uncertainties, including those detailed in our SEC filings. Reconciliations of any non-GAAP financial measures with their corresponding GAAP measures are found in the tables at the end of this presentation and in our Q3 earnings release, both of which are available on our IR website. This morning's call will focus on adjusted results, which exclude restructuring and other items that are outlined in our earnings release. We will also share results related to MonotaRO. Please remember that MonotaRO is a public company and follows Japanese GAAP, which differs from U.S. GAAP, and is reported in our results one month in arrears. As a result, the numbers disclosed today will differ somewhat from MonotaRO's public statements. With that, I'll turn it over to D.G.

Thanks, Irene. Good morning, and thank you for joining us. The Grainger Edge is a framework that defines who we are, why we exist, and where we're going while establishing a set of operating principles. I'm proud of the ways that we use the principles to guide decisions and deliver results. I want to start this quarter with a big thank you. Things are very challenging on many fronts. Given the ongoing pandemic and labor and material shortages, nothing in the world seems to be working exactly the way it should. Our manufacturing partners, transportation partners, Grainger team members, and certainly our customers are all finding it harder than ever to keep the world working. I want to thank all of them for their tremendous efforts. I also want to offer a particular thank you to frontline workers who continue to go above and beyond. Grainger is proud to support the hospital staff, government agencies, teachers, and many others who continue to do great work in a very challenging environment. I might say that in spite of these challenges, we performed very well, but in reality, it's partly because of how we're wired that Grainger is doing so well. We've seen strong demand this quarter, especially in the U.S. We have product available in our network and have been able to ship it to customers quickly. Our service to customers has been exceptional given the circumstances. We're leveraging our scale, demonstrating our agility, and gaining share. Our goal is to always be in an advantaged position to help our customers solve their problems. As I've been out with customers this past quarter, time and again, I hear that Grainger is executing well. Customers tell me that they are pleased with our performance, and you can see this in our revenue growth. While the current supply chain environment is volatile and uncertain, we are confident in our current plans and our readiness to respond to any evolving dynamics. In the face of labor and material shortages throughout the supply chain, we are providing strong relative service and helping our customers avoid disruptions. We continue to actively leverage our network, even if sometimes we have to get the orders from less optimal locations at a higher cost. We are investing in inventory while actively monitoring the freight market in the West Coast ports. And as it relates to labor, we have made great progress, including staffing gaps and training team members, which has resulted in improvements, especially in our DC operations. Our customer research shows that this is driving customer satisfaction. Turning to our financial highlights, demand in the quarter was robust, resulting in strong revenue and gross margin performance, and well-managed SG&A. We achieved organic daily sales growth of 11.9% for the total company on a constant currency basis. When compared to Q3, 2019, the quarter was up 17.3% on a daily organic basis, driven primarily by core non-pandemic product sales, which is a positive indicator of our underlying run-rate performance. Our High-Touch Solutions, North America segment grew 11.6% on a daily constant-currency basis. In the U.S., we drove approximately 100 basis points of share outgrowth versus the prior year, and 475 basis points on a two-year average. We remain confident in our ability to grow 300 to 400 basis points faster than the market on an ongoing basis. Our service to customers, especially over the last two years, has contributed to meaningful share gains. Our endless assortment segment finished the quarter with 14.9% daily sales growth on a constant currency basis. I'd like to note two things that temporarily moderated growth in this segment. First, Zoro lapped a very strong third quarter in 2020. For context, we opened up pandemic product supply to Zoro customers in Q3 2020, that was previously reserved mostly for government and healthcare customers. In the third quarter of 2021, Zoro managed to drive 11.9% revenue growth. And when we compare that to Q3 2019, we're up 30.6%, which is really strong. Also, MonotaRO was impacted by several external factors, including a slow start to vaccinations and a generally slower Japanese economy. In local days and local currency, sales were up about 17.5% compared to Q3 2020. And MonotaRO continues to take share, especially as COVID restrictions lift, and we grow with our targeted enterprise customers. As we look at results versus Q3 2019, MonotaRO's sales are up over 37%. We feel that the comparison to 2019 for both businesses is more indicative of our underlying business strength. We still expect the segment to close the year with growth at about 20% above the prior year. We saw strong gross margin expansion across all segments, even above our expectations that we discussed last quarter. High-Touch Solutions North America was up 140 basis points over Q3 of the prior year, and Endless Assortment was up 115 basis points. Dee will cover the drivers for both segments. Last year we returned $327 million to shareholders through dividends and share repurchases in the third quarter, and we maintain a strong return on invested capital of 31.4%. Turning to our quarterly results for the company, I discussed most of what's on this slide, but I wanted to point out a few additional items. First, our SG&A was $812 million, right where we thought it would be. We continue to invest in marketing and labor primarily to increase variable compensation and great wage rates in the DCs. And like many companies, we're also starting to see increased healthcare costs as team members return to routine medical visits and undergo deferred elective procedures. And while overall spending is up versus the prior year, we're still gaining significant leverage compared to 2019. Our operating earnings were $438 million, up 17.4%, and our resulting EPS is $5.65 for the quarter, which is growth of 25%. Overall, this was a really strong quarter. With that, I'll turn it over to Dee to take us through more detail. Dee?

Thanks, D.G. Turning to our High-Touch Solutions segment, we continued to see a robust recovery with daily sales up 12% compared to the third quarter of 2020 and up 14.5% compared to the third quarter of 2019. In the U.S., we saw strong growth, especially in our core non-pandemic product categories. Both large and mid-sized customers saw significant growth at 10% and 19%, respectively. Canada continues to be slow as recurring shutdowns in many of the larger provinces had businesses closed or operating at minimal capacity. As vaccination rates improve and businesses reopen, we expect more typical purchasing behavior to resume, and sales to follow. Canadian daily sales were up 11.7% or 5.7% in local days and local currency compared to the third quarter of 2020. For the High-Touch Solutions segment, GP margins finished the quarter at 39.4%, up 140 basis points versus the prior year’s third quarter. Our focus and diligence on managing price-cost spread contributed to our GP improvement. In the quarter, we saw strong price realization to customers, both on-contract and wet pricing. Our realization was better than anticipated, and as a result, price-cost spread was above neutral. In addition, consistent with the second quarter, our U.S. pandemic product mix was about 22%, an improvement versus 28% in the third quarter of 2020. We are confident that our run rate GP remains strong and we will finish in line with the expectations we set forth for the fourth quarter. On slide 20, you will find a chart with details on the U.S. and Canadian businesses. This information has been provided to help bridge our prior reportable segments to our new High-Touch Solutions North America segment. I'd like to give you some advanced notice that we will continue to show daily sales and gross margin by business. However, as our operating expenses across the segment have become more intertwined, our operating margin by geography will no longer be provided in our 2022 reporting. On slide 9, taking a deeper dive into High-Touch Solutions for the U.S., the Delta variant and the renewed mask mandates in July reversed the declining trend we were seeing in the second quarter for pandemic products. As the virus surged, we saw pandemic product demand pick back up, especially for masks. However, I'd particularly note that our core non-pandemic sales growth was at or above 20% every month in the third quarter. We are encouraged to see this growth as a sign of more regular business and economic activities. When comparing core non-pandemic sales to Q3 2019, sales were up 12%, which is quite strong. In total, our U.S. High-Touch Solutions business is up 12% for the third quarter of 2021, and up 16% as compared to 2019. Looking at market outgrowth on slide 10, in the third quarter, as expected, we saw our share gain grow as we had more reasonable yet still inflated Q3 2020 comparisons. In the quarter, we estimated the U.S. market grew between 10.5% and 11.5%, resulting in our estimated outgrowth of approximately 100 basis points versus Q3 2020. To normalize for volatility, we're continuing to show the two-year average share gain, which was about 475 basis points over the market for the third quarter of 2021, a really exceptional result. Given the noise and fluctuations in the market number across industrials, the two-year average is a better estimate of our true market outgrowth. We remain focused on our key initiatives, which give us confidence in our ability to achieve our U.S. share gain goal of growing 300 to 400 basis points faster than the market. Now let's cover our U.S. GP rate. We saw a significant lift in the High-Touch U.S. GP performance in the quarter. Sequentially, we wanted to comment on two of the biggest factors that made up the difference between the second quarter and the third quarter. First, the biggest contributor, the inventory adjustments are behind us as anticipated. In addition, we're seeing greater price realization than expected. I'll note that while we sold some of the pandemic inventory that was previously written down, the impact on GP was immaterial. We're encouraged by these results, and are confident in our ability to achieve our expected 40.1% GP rate in Q4 based on continued pandemic mix improvements, our expected price realization in the fourth quarter, and our ability to navigate supply chain challenges. Moving to our endless assortment segment, daily sales increased 12.7% or 14.9% on a constant currency basis, driven by continued strength in our new customer acquisition at both Zoro and MonotaRO, as well as growth of larger enterprise customers at MonotaRO. GP expanded 115 basis points year-over-year, driven primarily by Zoro U.S. We took a number of pricing actions based on evolving market conditions and we de-emphasized lower-margin channels. In addition, we experienced improved rate efficiencies to Zoro primarily as a result of fewer B2C customers who typically place smaller orders that are more expensive to ship. Operating margin for the segment finished up 80 basis points over the prior year's third quarter, due primarily to improved gross profit margin. I'll go into more detail on the next slide as we provide further transparency on the results for both businesses. Moving to slide 13 in local currency and using Japan's local selling days, which occasionally differ from U.S. selling days, MonotaRO daily sales grew 17.5% compared to the third quarter of 2020. GP margin finished the quarter at 25.8%, 30 basis points below the prior-year third quarter, as we continue to grow with enterprise customers. As a result, operating margin decreased 65 basis points to 12%. Switching to Zoro U.S., daily sales grew 11.9% as compared to the strongest sales quarter of 2020. Zoro GP grew 375 basis points to 33.9% and achieved 325 basis points of operating margin expansion. In addition to the strong financial performance in this segment, we also continue to execute well on our key initiatives. First, when it comes to our registered users, we saw continued growth across both businesses, which is an important driver of top-line performance. Zoro continues to actively add SKUs to the portfolio. At the end of the third quarter of 2021, we had a total of 8 million SKUs available online, achieving our goal for the year a quarter early. Adding nearly 2 million SKUs in the last 9 months. We remain encouraged by our progress with SKU additions. Once again, I would like to provide some color commentary as it relates to the fourth quarter and the full year. For the fourth quarter, for revenue, we expect total company daily sales to be between 11.5% and 12.5%. We anticipate company gross margin will fall between 37.2% and 37.4%. As discussed before, we expect the U.S. GP rate to exit the year at or above pre-pandemic levels. For SG&A, we expect a similar level of spending in the fourth quarter as we saw in the third quarter between $810 million and $815 million, with increased variable compensation, wages, and healthcare expenses. And while it's unclear at this point, we may have some additional risk as it relates to vaccine mandate costs. Given the strong performance in the quarter, we remain confident in our guidance range. For the full year, we expect revenue to be at or above the midpoint, and all other metrics to be stronger than the low end of the range we discussed at the end of the second quarter, but likely still below the midpoint, given the pandemic inventory adjustments taken in the first half. With that, I'd like to turn it back to D.G. for some closing remarks.

Thank you, Dee. Before I open it up for questions, I have just a few points. First, I am immensely proud of the Grainger team and their commitment. It's been very challenging, but we continue to demonstrate the strength and resilience of our team and our supply chain. Second, it was a very good quarter across the board; the results were above our expectations. And finally, despite the current market and supply chain uncertainties, we are confident in our ability to deliver solid performance in the fourth quarter and into 2022. And with that, we'll open it up for questions.

Thank you. We will now begin our question-and-answer session. If you would like to ask a question, please press one. Please wait for a moment while we gather questions. Our first question comes from Chris Snyder with UBS. Please go ahead with your question.

Thank you. My first question is on North America High-Touch growth relative to Zoro. Is it fair to assume that the company prioritizes High-Touch volumes over endless assortment during periods of tight supply, just given the better margin and more important customers allied, stickier customers on the high-margin side?

Thanks for the question, and the answer to that question is no. In terms of inventory position, we've been able to serve both the High-Touch model and Zoro well throughout this period. What I would say is that if you're thinking about Zoro's growth, there are a couple of things that are impacting Zoro's growth rate in the quarter and they will get better as we move forward. One was last year we opened up in the third quarter, the safety products to Zoro, and as a result, customer acquisitions and revenue were extremely high, and a lot of the customer acquisitions were consumers as well as people just looking and scrambling to find product. The other thing is we've been very clear and focused on attractive business acquisitions. And as a result, we have shut off some channels for acquisition that weren't as profitable long-term. And that's going away moving forward as well. And so that's been a bit of a drag on Zoro, but it hasn't been because we haven't been shipping product from Zoro. We've been serving customers well across both models.

I appreciate that. And then second question, I just want to talk about the mid-sized opportunity. Prior to the 2017 price reset, if I remember correctly, the company had lost a lot of that mid-sized business prior to the reset, but it's coming back really strong, up almost 20% in Q3. Can you just help us frame this opportunity going forward? Is there any risk around Zoro cannibalization? And then what kind of gross margin tailwinds could this bring to the company?

Sure. That was a big part of the reason for resetting prices. We had gone through a long period of decline with mid-sized customers. And here we're really talking about mid-sized customers that have some sort of mechanical complexity. So, think about mid-sized manufacturers or companies that really value some of the technical product support and search capabilities of the Grainger model. Obviously, since the price reset, we've captured a lot of that back. We're still fairly significantly below our high point with mid-sized customers. We feel like we've got a long runway ahead of us. We're getting smarter all the time. We're not seeing much cannibalization with Zoro. Zoro tends to focus on smaller businesses and businesses that are maybe a little narrower in what their needs are, and so they tend to segment to different types of customers more. The Grainger midsize customer typically has fairly high mechanical complexity or complexity of some type. And so, we are really pleased with what we're seeing. I would say I think we went from $2 billion to less than $1 billion in that space over a 10-year period, and now we've covered some of that, we haven't covered all that, we think we can get back above $2 billion, so we think we've got a long runway ahead.

And D.G., I would just add as it relates to contribution to gross margin. In the quarter, it helped us about 10 basis points. And based upon the difference in the large growth rate versus the medium growth rate, if this around that amount, 10% versus 19%, 10% of gross margin, basis points improvement is reasonable.

Thank you. Our next question comes from Christopher Glynn with Oppenheimer. Please go ahead with your questions.

Yes. Thanks. Congratulations on a good quarter. From the approximately 20% outlook for Endless Assortment for the year, it does imply pretty decent sequential ramp into the fourth quarter. I'm just curious, you've mentioned the Japanese economy. I don't know if you're seeing a pivot there right now. And you also mentioned the channel emphasis shifts at Zoro. Does that imply they're lapping or something?

Yes. Both of those things are correct. So, in Japan, they got a really slow start to vaccinations and had fairly hard shutdowns over the summer, and they've rectified their problem. They now have pretty high vaccination rates, and we're starting to see more activity with larger manufacturing customers, in particular in Japan. So, we are seeing some improvement there and expect to see that continue. With Zoro, yes, we have effectively lapped some of the actions we took to focus more on profit and customer acquisitions, so both of those things should help us moving into the fourth quarter.

Great. And then the price realization obviously came in better than you expected, as you said. You have a lot of freight contracts that have been good. At some point, those come out, and you also at times in the past have had the ability to defer cost increases from suppliers at times. So, I'm wondering how those figure in, given that you've been really locked down tightly on the gross margin view here and how it transpired. Were you in a sweet spot there as you pivot into '22 with some of those things I mentioned coming into play?

Let me address the question. We typically aim to manage costs effectively. We're consistently collaborating with our suppliers in this environment to ensure that any cost increases we accept are justified and to challenge those that aren't. Our suppliers have been supportive in helping us navigate the right path for these increases. The same approach applies to transportation; we're keen on identifying reasonable cost increases and working alongside our suppliers and partners to achieve the best results. We have adjusted our pricing to reflect the market. Generally, during inflationary periods—though not necessarily this specific instance—we have historically managed to implement market price increases without experiencing as much cost rise or having those increases delayed. At times, this has given us a favorable position. Currently, in light of the speed of cost increases, our situation appears balanced, and we expect to maintain that balance. There have been several unexpected cost increases, but we've managed to adjust our pricing accordingly. I wouldn't say there’s a significant discrepancy or advantage at the moment; it's a rather chaotic time in the supply chain, and I believe we're handling it effectively.

Our next question comes from Ryan Merkel with William Blair. Please go ahead with your question.

Thanks. Good morning. D.G., you mentioned that your navigating supply chain costs will create challenges as well. Can you talk about some of the actions that you took?

I can't discuss all the specifics, but there are challenges at every point in the supply chain at the moment. The effort needed to manage this situation is significantly greater than what you would typically find. Earlier this year, anticipating upcoming challenges, we ordered a considerable amount of products to boost our inventory, and we have managed to increase it throughout the year, albeit not as much as we would have preferred. Our supplier management and product teams are collaborating closely to ensure we have suitable substitute products available to serve customers in case a specific supplier is unable to deliver. We are actively prioritizing products from Asia, and we have raised wages at our distribution centers and improved staffing levels, allowing us to operate more smoothly now compared to the challenges we faced back in May. Essentially, we are addressing the supply chain issues at every level, and our focus is on executing effectively, utilizing our agility and scale to ensure we meet our customers' needs, and we have performed well in that regard.

Got it. Makes sense. Okay, and my follow-up is on SG&A leverage. I know in '21 you had costs returning and of course, higher costs from the supply chain issues. My question is, how should we think about SG&A leverage in '22? Are you able to have productivity offset higher costs or do you expect costs to ramp further off of the 4Q baseline?

Our current priority is to ensure we continue to serve our customers effectively. Some of the fluctuations you mentioned result from the cost control measures we implemented last year. A good reference point is to examine our costs from 2019 and the SG&A leverage we’ve achieved since then, especially since we haven't provided specific guidance for 2022 yet. We aim to maintain this focus and continue improving our SG&A leverage as we move into 2022, much like our approach around 2019. However, we remain committed to achieving SG&A leverage over the long term.

Thanks. Our next question comes from Deane Dray with RBC Capital Markets. Please state your question.

Thank you. Good morning, everyone.

Morning.

Good morning.

Hey, good morning. I appreciate you gave price costs for the U.S. High-Touch business. What was price costs for the total company, if you can be specific or directionally? And do you have a target for 2021 just given the circumstances in terms of supply chain pressures, inflation, etc.?

Yes. Yeah. We don't measure EA on price, cost basis, so that's why you don't hear us talk about total company price costs. But the thing I will say is, all of the segments and all of the businesses are very focused on, one, maintaining price competitiveness, and two, in this inflationary period, being able to pass on cost to customers. So that is a consistent tenet for us, so that is what I can say. And the other thing I would say.

Got it.

Deane, to your question, clearly Zoro had very high price-cost leverage given the GP improvement. Like we said, some of that's just segment-specific, which customers they're acquiring and how they're thinking about acquiring it. But we do expect their most assortment to continue to have strong profitability and profitability improvement in Zoro.

Thank you for that. As a follow-up regarding pricing, there was a 3 percentage point increase in price and High-Touch this quarter. What are the expectations for the fourth quarter? Will those changes carry into 2022? Have there been any other pricing actions you've taken? Are there concerns about pushback or receptivity regarding pricing? Will we continue this into 2022?

We did take some pricing actions in September. And we saw some good results there, and also through the month of October thus far. So, we expect that momentum to carry us through Q4. And like always, D.G. mentioned our supply management team is continuing to work with our supply base on what increases look like for 2022. And we expect to continue. We do get more costs to pass that through early in Q1.

Thank you. Our next question comes from David Manthey with Baird. Please state your question.

Thank you. Good morning. As a percentage of sales gross margin and OpEx, I think will be very different in 2022 versus what they were in 2019. And the reason I mentioned that, Dee, you made a comment about leverage in 2022 being similar to 2019. Were you referring to contribution margins there? Or if you can just help clarify that statement.

Sure. So, I was trying to provide some context since we are not talking about 2022 at this point, just to help you understand that we're focused on gaining leverage and back in 2019, we had set out a path to say that we were looking to continue to focus on growing expenses less than sales. So that's the tenet that I was trying to articulate since we are not giving guidance on 2022 at this point.

Okay, understood. And then as it relates to your pricing mechanisms, I think you talked before about the open pricing on the website. You can adjust immediately, but could you talk about contract pricing and what I'm wondering is where are you being most effective in recapturing inflation these days? Is it just the low spot prices, or is it surcharges or renegotiating contracts? How are you being so effective at this point?

We are capturing price inflation in all areas. I would say with customers that primarily buy on web price and we've contract customers. Earlier in the year, we talked about the fact that it would be a little lumpy because of the timing as it relates to when we could pass on price with customers, but similar to some of the actions that D.G. articulated, that we are executing on as it relates to supply chain. That also goes for the commercial teams, as they are working with customers to pass on price. So, we're close to the end of the year now, and a lot of those discussions that both our sales team and then online, we've been able to pass on these costs pretty effectively. So that applies to contract customers, as well as web-based customers.

Thank you. Our next question comes from Adam Uhlman with Cleveland Research. Please state your question.

Hey, guys. Good morning. I guess I was wondering if you could share with us what you're seeing with your Keep Stock business, how sales have been unfolding there. And it would seem like you should be having better access in the customer side. So, I'm wondering if you could share any insights about new customer wins or any new initiatives recently or maybe what you have planned for next year.

Sure. The Keep Stock is a critical part of our business and has remained busy throughout the pandemic. We have access to the majority of our customer inventory locations and have continued to serve our customers effectively through Keep Stock. We have made several improvements to enhance our planning and inventory fulfillment for customers. We are experiencing significant growth in Keep Stock, especially with the resurgence of heavy manufacturing this year, which has positively impacted our Keep Stock business. While I won’t go into details about our investments, I can confirm that we are significantly investing in improved software capabilities to enhance our service and provide better analytical insights for our customers. This will remain a continuous focus for us in the Keep Stock area.

Okay, thanks for that information. Dee, you mentioned the costs associated with the vaccine mandate, and I understand there might be a requirement for vaccination tied to the G&A contract. Can you clarify what this might mean for Grainger and the potential costs for the business?

I'll take this one. This is a challenging situation in several ways. We are indeed a federal contractor and will comply with the G&A order, having plans in place for that. The OSHA ruling and the implications of the vaccine mandate costs are still uncertain. We are ready to take necessary actions and prepared for any developments. We hope that the implementation of the vaccine mandate doesn't negatively impact the supply chain. I've seen our transportation depots, our facilities, and our customers' operations, and a poorly considered vaccine mandate could lead to serious issues in an already strained supply chain. To be clear, we don't know how everything will turn out, but we are prepared and have taken steps to be ready for any outcome and are working to determine the best way forward based on how the vaccine rollout progresses.

Thank you. Our next question comes from Jacob Levenson with Melius Research. Please state your question.

Good morning, everybody.

Morning.

I wanted to point out that you have a very strong balance sheet right now, and DG and I are new to this. When you took over a couple of years ago, you made some adjustments and that included more aggressive buybacks. Could you help us understand your current perspective on the balance sheet and whether mergers and acquisitions could be a focus in the coming years?

This is Dee, I'll start off. We like our credit rating, of course, and we don't see any big changes related to our capital allocation strategy. We did provide guidance that from a share buyback, we thought we would be somewhere between the $600 to $700 million range for the year. And we think we're going to be at the high end for this year. And so no real, I would say changes to our philosophies that we've had in the past, that's working well for us.

Okay. That's helpful. Could you please clarify how that business is performing and update us on the progress of the turnarounds?

Somewhere between the $600 to $700 million range for the year. And we think we're going to be at the high end for this year. So no real changes to our philosophies that we've had in the past, that's working well for us. Jacob Levenson, Analyst, Okay. That's helpful. And then perhaps you can help us understand how that business is doing and how the turnarounds are going on the update there.

D.G., you want to start?

Cromwell isn't a large business for us, but it plays a crucial role in determining our growth potential in the U.K. The U.K. market has faced challenges, yet the team has done a commendable job in enhancing service and meeting customer needs during this period. Over the last few years, they have consistently reduced losses. We believe this business has the potential to contribute significantly to our profits in the future, although there is still work to be done. They have restructured their costs, are delivering excellent service to customers, and have reduced losses over the past few years. We anticipate they will achieve profitability after 2022.

The only thing I'd add there is that on the quarter, Cromwell was able to cut their losses year-over-year, and we expect them to come close to cutting them in half, which is what the focus has been year-over-year.

Our next question comes from Hamzah Mazari with Jefferies. Please state your question.

Good morning. Thank you. My question was just around Zoro U.S. Maybe just talk about the competitive dynamic in that market. I know it's smaller customers online-only, etc. But just maybe talk about who you're competing with there. And then I guess you have 8 million SKUs. Where could that SKU count go eventually?

Well, so on the second half of that question, we have 8 million SKUs today; we would expect to get to 10 million in the next couple of years at a minimum. And whether or not it goes to 15 or more is probably still open for debate, but we know we've got a long way to go to get the SKU count right. In terms of the competitive market, it's really very, very broad online. It's big Internet players. It's certain marketplaces. Customers sometimes buy through smaller local retailers as well. And so, there's a very broad competitive set when you look at small businesses and how they buy. Sometimes they buy through hardware stores. And it's pretty fragmented today; and there's a lot of different options for small businesses to buy MRO products. And so that market in particular is super fragmented. And so, we feel like we're growing and gaining share from a number of different sources, but it's not like there's one or two players that are dominating that space; it is very, very broad in terms of the competitive set.

Got it. And my follow-up question, I'll turn it over just on achieving pre-pandemic gross margins in the U.S. business exiting this year. I know you've talked about price realization; you talked about inventory adjustments, etc. But maybe just talk about the confidence level there and what could go wrong for you not to achieve that? I know we are already in the fourth quarter, so there's two months left or whatever, so any thoughts there would be helpful.

Go ahead, Dee.

Yeah. What I would say is, we're pretty confident, and that's why we continue to focus on showing you where we've come from and where we're going in the decks and continue to talk about it. But the two biggest factors that really give us confidence are the product mix. Where we are versus last year, we were at 28% on pandemic, and now we're at 22% and trending as we would expect. And then price, which we've talked quite a bit about here today. So, I noted earlier that we implemented some price increases in September, and the realization in September and October is looking good. We expect that to continue through the fourth quarter, and we expect it to cover costs that we have visibility to. And as it relates to anything else related to supply chain challenges, D.G. talked a lot about that. We are very focused on it, and we believe our scale puts us in a unique position to deal with some of those challenges today. We have good availability, and we're managing the cost process well, so I think we're pretty confident.

Thank you. Our next question comes from Chris Dankert with Luke Capital. Please go ahead with your question.

Good morning. Thank you for taking my question. I'm interested in the Endless Assortment business. There is a 20% growth projected over the medium term, which is impressive. However, I wonder what the main barrier to growth is in that business. Considering the potential for digital scalability, if the issue is just customer awareness and engagement, which understandably requires time, why couldn't growth be at 30% or even higher at this stage?

If you examine MonotaRO's long history, you'll start to see its limits. This business has grown significantly, from nothing to over $2 billion, and has experienced rapid growth for a long time. However, 20% growth has been a consistent figure for them. Achieving this growth involves having the right processes and systems to attract appealing small business customers. It also requires a dedicated effort to encourage repeat purchases and build a base of regular customers. Simply investing a lot of money doesn't necessarily resolve these challenges. It's crucial to be strategic in customer acquisition and understand what aspects are important to different segments to achieve desired growth. While the potential for scalability is evident, our experience suggests that the team's ability to develop essential capabilities and maintain high-quality growth tends to limit growth to around 20% in many instances.

That's very helpful, thank you. I see there's a significant investment in that business this year. Looking ahead, how should we consider SG&A growth for that business? Is the spending primarily on advertising analytics, or do we also need to invest in additional physical assets? How should we think about SG&A growth in Endless Assortment?

I would say I have different answers for MonotaRO and Zoro. For Zoro, it's mainly about their marketing data analytics systems. They have developed much of their own system infrastructure and continue to invest in it. The investments in MonotaRO are not significant physical assets; however, due to their growth and size, they will be making substantial investments in distribution centers over the next 3 to 5 years. Although we don't discuss it often, they have been very effective in building physical assets to serve their customers, and they have more investments planned in the coming years.

Our next question comes from Josh Pokrzywinski with Morgan Stanley. Please state your question.

Good morning, everyone. My first question is about the competitive advantage of having a superior supply chain compared to some of your smaller competitors. How do you ensure that the market share you've gained translates into a lasting advantage? I'm curious about your strategies for converting occasional customers or those attracted during the pandemic into more permanent ones. What has your approach been in this area?

It's a great question. The reality is that when we provide exceptional service to our customers, it leads to strong and lasting growth, which has always been the case in our business. When we can deliver better service than the overall market, we typically experience a long period of continued growth. Currently, our customers are discussing the sustainability of their supply chains with us and how we can leverage our capabilities to support their future growth. This advantage does not seem temporary; rather, companies are focused on ensuring they can operate effectively moving forward. We are actively engaged in conversations about how to assist customers in reducing processing costs and improving inventory management, which are core areas we usually address. I would say we anticipate some fluctuations—we mentioned this last year. While we knew that the boost from pandemic-related products and the exceptional market share growth wouldn't be repeatable, the 475-basis point annual share growth appears to be continuing and seems sustainable based on the volume we have captured.

Got it. That's helpful. And then I appreciate the color on the inventory repricing and above one-for-one or matching that in real-time, not a lot of temporary benefits. But maybe just looking at the other side of the equation with some bigger customers on contract. How are you keeping up with the price-cost equation there? Is it getting a little bit more kind of exotic with things like surcharges? And then what are you anchoring that sort of stuff to? Because inflation feels a little bit more unusual than just like pay steel is higher; everything is higher, and not every product category has the same pain points. So how are you managing with that, when customers that are maybe on a bit more long-term contracts or tend to be a little bit more inflexible on price?

Dee, would you like to address that?

Yes. I was about to jump in. Sorry. I'm not seeing a big difference between customers. I would say at this point, I think especially during this time our product availability is really what is at the forefront of some of our relationships, whether you are midsize, local, or large contracts. In addition to the things that D.G. just noted related to the way we serve customers in a multichannel way, right now, I think that availability is what's really making the big difference. Even for large contract customers, there is some inflexibility in some pricing, but we do have more flexibility right now than I would say we've had of late.

Thank you. Our next question comes from Nigel Coe with Wolfe Research. Please state your questions.

Thanks. Good morning, everyone. Wanted to ask a short-term question and then a more strategic question. But last quarter, you were pointing towards the low end of the margin range anyway. Now you're pointing towards the low to midpoint. So, I'm just curious. I think I know the answer, but I'd be curious D.G., Dee, what's changed from your perspective from July to now? And I'm specifically interested in whether pricing has been stronger, whether the retention on pricing has been stronger, that surprise is the upload.

You just said it there at the end, Q3 was better than what we expected. We had improved mix and improved price, and that favorability is flowing through the full-year EPS for us. And revenue, that volume coming through with that price was better than what we expected. And so just to reiterate the total company expectations, we noted that through to talk to you about where we expect to be on a four-year basis, revenue being stronger. So then we said that we’re going to be at the midpoint of the range there. And then for everything else, I reiterated that at least with these results, that we would be low end up to the midpoint. We've tried to pull in the improvement that we saw in Q3.

And the pricing part of that question is that being surprisingly good?

Yes, price realization is better than we would have expected at this point.

Thank you. And there are no further questions at this time. I'll turn the call back to D.G. Macpherson for closing remarks.

Great. Well, thanks everybody for joining us, we really appreciate it. Hopefully, you can tell we feel good about the quarter, but more importantly, I think we feel good about how we're growing, how we're gaining share, our ability to navigate the supply chain issues, and still continue to invest in core initiatives that we think are going to be important to our long-term success. So, we feel really good about the path forward as well. Wish all of you a safe Halloween, and look forward to talking to you soon. Thanks so much.

Thank you. This concludes today's conference; all parties may disconnect. Have a good day.