Greetings, ladies and gentlemen, and welcome to the W.W. Grainger Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference is being recorded. I will now turn the conference over to our host, Kyle Bland, Vice President of Investor Relations. Thank you. You may begin.

Good morning. Welcome to Grainger's Second Quarter 2022 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 as a result of various risks and uncertainties, including those detailed in our SEC filings. Reconciliations of any non-GAAP financial measures with their corresponding GAAP measures are found in the tables at the end of this presentation and in our Q2 earnings release, both of which are available on our IR website. This morning's call will focus on our second quarter 2022 results, which are consistent on both a reported and adjusted basis for the respective quarterly periods presented. We will also share results related to MonotaRO. Please remember that MonotaRO is a public company and follows Japanese GAAP, which differs from US GAAP, and is reported in our results one month in arrears. As a result, the numbers disclosed will differ somewhat from MonotaRO's public statements. Now, I'll turn it over to D.G.

Thanks, Kyle. Good morning and thank you for joining us. Today, I'll provide an overview of our second quarter performance and pass it to Dee to walk through the financials. Before I get to the quarter, I'd like to start with our Grainger Edge framework, which guides our strategy and behaviors across the company and with our customer and supplier partners. Over the last several years, this has been critical to our response to COVID and our efforts to gain share. Importantly, these principles that you see here are the basis of what we expect of each other. Team members have embraced these principles to build better customer solutions, focus on what matters, and move faster to deliver value. They are more than words on a page; they are how we work together to support our customers and team members. One example of the Grainger Edge helping guide our efforts is around ESG. Our principles of starting with the customer, investing in our success, and doing the right thing heavily influence our approach. At Grainger, we operate sustainably and with a long-term approach to critical issues. Our ESG approach, which we have reported on now for 11 years, is tightly integrated into the Grainger Edge and increasingly tied to our daily operations. In our recently published 2022 ESG report, we discussed how we are organizing our environmental, social, and governance practices, as well as our four near-term priorities, which is where we believe we could make the most impact. These near-term focus areas are: diversity, equity, and inclusion, making sure that Grainger is a place where each team member feels welcome and able to give their best work; energy and emissions, where we continue to make great progress on improving our carbon footprint, and we have significant plans moving forward; customer sustainability solutions; and finally, supplier diversity, which helps us identify and support great supplier partners to propel the business. Our team members have brought and will continue to bring these priorities into their work with our customers, helping them to achieve their ESG goals and creating even more value. As highlighted in the 2022 ESG report, we have recently worked with the state university to retrofit parking garage lighting, creating over $200,000 in annual energy savings, assisted a CPG company as they build out their supplier diversity program, and partnered with a nationwide hospital system in identifying a roofing vendor to install bio-based materials on roughly 500,000 square feet of rooftop, which will reduce greenhouse emissions by 39 million pounds over a 40-year period. These are just a few examples of ESG in action, and I am incredibly proud of how our teams are continuing to live our principles each day as they work with our customers, suppliers, and each other to further our efforts in this area. I hope you will take some time to review our full 2022 ESG report, which can be found on graingeresg.com. Turning now to our second quarter results. We had another strong quarter with sales growth of 19.6% or 22% on a daily constant currency basis. Our results were driven by strong performance in both segments. This included 1,000 basis points of market outgrowth in our US High-Touch business fueled by continued solid execution on our strategic initiatives and strong returns on our inventory and supply chain investments. Total company gross profit finished the quarter at 37.6%, expanding 255 basis points over the prior year second quarter. The largest driver of our expansion in the quarter was lapping the prior year pandemic-related inventory adjustment. Even when excluding that adjustment, however, we were still up around 60 basis points year-over-year, with both segments contributing to the favorable results. We delivered 13.9% operating margin, an increase of 350 basis points over the prior year second quarter. This is primarily a result of the improved gross margin performance as well as our ability to continue to drive SG&A leverage on the top line growth. In the quarter, we delivered adjusted ROIC of 40.5% and a significant increase over the 29.2% generated in the second quarter of last year. We also returned $219 million to shareholders through share repurchases and dividends. It was an excellent quarter all around. As a result of the strong performance and the continued momentum we are seeing through July, we are raising our full year 2022 guidance, which Steve will discuss in more detail. And with that, I'll pass it over to Dee.

Thanks, D.G. Turning to Slide 8. We covered revenue and margins at a total company level, but I'd like to highlight a few other key points. Our total company SG&A as a percent of sales was 23.7%, a 95 basis point improvement over the prior year second quarter as we drove leverage from our top line performance. We continue to invest in our strategic initiatives but remain committed to not adding unnecessary cost to the business. And our resulting EPS in the quarter was $7.19, up 68% versus the second quarter of 2021. Turning to our High-Touch Solutions segment for the second quarter. We continue to see strong results with daily sales up 22.2% compared to the second quarter of 2021. We saw broad-based double-digit growth across all geographies and over 20% growth in both midsized and large customers in the US. In the US, we continue to see strong double-digit volume growth and price realization of around 11%, all helping fuel 23.1% daily sales growth. Canadian daily sales were also strong, up 11.1% or 15.5% in local days in local currency. It's been a long journey, and we are proud of the traction the Canadian team has gained with their now fifth consecutive quarter of profitability. For the segment, GP margins finished the quarter at 39.7%, up 275 basis points versus the prior year, driven primarily by lapping of a $63 million pandemic product inventory adjustment in the prior year period. Excluding this inventory adjustment, we achieved gross margin expansion of over 25 basis points as favorable product mix and largely neutral price cost spread were partially offset by heightened freight costs. As we manage through this highly inflationary period, while there will be quarter-to-quarter fluctuations due to timing, our goal is to remain price competitive while achieving price/cost neutrality. Increased SG&A spend was driven primarily by higher variable compensation expense as well as continued investments in marketing, payroll, and benefits to support growth. Even with the increased investment, we delivered 150 basis points of SG&A leverage year-over-year, and when combined with strong growth margin recovery, Q2 operating margin of 15.6% was up 425 basis points versus the prior year period. Overall, the performance in our High-Touch Solutions business remains strong as our powerful value proposition continues to resonate with customers. Looking at market outgrowth on slide 10, and we estimate that the US MRO market, including both volume and price inflation, grew between 12.5% and 13.5%, indicating that we achieved roughly 1,000 basis points of market outgrowth in the quarter. While we know that our advantaged supply chain contributes to our success, we also continue to see strong growth with our strategic investments. We are excited about the returns that we are seeing on these investments, most notably with our remerchandising and our data-driven marketing programs. Our continued success gives us confidence in our ability to consistently achieve 300 to 400 basis points of annual market outgrowth on an ongoing basis and through the cycle. Moving to our Endless Assortment segment, reported and daily sales increased 11.4%, up 21.1% on a daily constant currency basis after normalizing for significant impact of the depreciating Japanese yen. In local currency and local days, MonotaRO achieved 21.9% growth and Zoro US daily sales were up 23.2%. The segment growth continues to be driven by new customer acquisition at both Zoro and MonotaRO and enterprise and repeat customer growth at MonotaRO, an impressive quarter of growth across the segment. Gross margin expanded 100 basis points versus the second quarter 2021 and was primarily driven by freight efficiencies as average order values increased at both Zoro and MonotaRO as both continue to focus on B2B customers. As planned, segment operating margin declined 25 basis points in the quarter, consistent with the first quarter. This decline was primarily a result of the new DC at MonotaRO coupled with continued investment in technology, marketing, and payroll costs to support growth at Zoro. Despite the increased investment, Zoro operating margins still improved 85 basis points over the second quarter of 2021 as strong GP improvement. As a reminder, the increased cost at MonotaRO will continue for the remainder of 2022 as they transition to their new Inagala DC. We anticipate that the business will return to more normal operating margins in 2023. In addition, we also continue to see positive results with our key Endless Assortment operating metrics. On slide 12, you can see total registered users across MonotaRO and Zoro combined are up 18% over the prior year period. On the right, we show the continued growth of Zoro's key portfolio. We are targeting about 2 million SKU additions in 2022 and will likely exceed that given our progress after the first six months. At the end of the second quarter, we have around 10.2 million active SKUs on the website. Now looking to the back half of the year. With another very strong quarter and with July total company daily sales of 19% or 21% in constant currency, we are raising our 2022 full year outlook. While we acknowledge that the broader market conditions remain uncertain, we have not seen a slowdown in demand in our business and continue to hear positive sentiment from our customers, further supporting our revised outlook. Our updated outlook for the full year 2022 includes expected daily sales growth between 14.5% and 16.5%, and EPS between $27.25 and $28.75, a 41% increase year-over-year at the midpoint. We've also updated our supplemental guidance in the appendix, which reflects improved segment operating margins and net ranges for all other metrics. While it is not typical for us to change our guidance this frequently, our objective is to provide our most up-to-date view with each earnings cycle. Given the strong revenue and profitability performance to date, we felt it was necessary to update our segment metric again this quarter. With that, I will turn it back to D.G. for some closing remarks.

Thank you, Dee. Before I open it up for questions, I would like to make just a few comments. While we may not know exactly what the rest of this and next year will bring from a market perspective, I'm confident in our team's ability to execute, drive market outgrowth and invest in the areas that matter most. The time that I spent with customers this past quarter has reinforced the pride I have in the Grainger team and our ongoing commitment to remain customer-focused. I hear consistently that we have delivered to keep our customers working. As a result of our team's efforts, we have deepened customer relationships becoming the trusted partner to many. We performed extremely well in the quarter, and I am confident that we will produce a strong finish to 2022 and remain well-positioned to serve our customers for the years to come. And with that, let's open the line up for questions.

Thank you. And ladies and gentlemen, at this time, we will be conducting our question-and-answer session. Our first question comes from Ryan Merkel with William Blair. Please state your question.

Thanks, good morning and very nice quarter.

Thank you, Ryan.

So I wanted to ask a question on the share gains, which have been really impressive. I guess it's a two-part question. So first, is the key driver of the share gains, the advantaged inventory that you have, or have the initiatives also maybe added a couple of hundred basis points above that 300 to 400 target?

Yes. It's a great question. Thanks for asking. Yes, the initiatives have added more than 300 to 400 basis points; we do on many of the initiatives we do A/B tests and we're able to track what the initiatives are bringing and they've been very, very effective in the last year or so. So we continue to see very strong gain from the initiatives. We are getting some tailwind from our inventory position as well. But the initiatives have been very strong in terms of their performance.

Okay. And I guess, the follow-up is, why don't you raise the share gain target if these initiatives are adding more than the 300 to 400, is it not sustainable, or you just not have enough evidence yet?

Yes. I believe that additional time will help us determine whether we are reaching a new standard for higher share gains. So far, we have committed to our share gain targets and will continue to update you on our expectations for the future.

Perfect. Thank you.

Thanks.

Our next question comes from Tommy Moll with Stephens. Please state your question.

Good morning. And thanks for taking my questions.

Good morning.

I was going to ask if you'd seen any slowdown in demand and Dee beat me to the punch. So I guess I'll ask it a different way. Is there any end market or customer anecdote that's not as positive as you could even hope for at this point? Is there anything at all that's changed? I just want to circle back on that, because your comment, you haven't yet seen a slowdown. It was pretty clear at the same time, investors are searching closely for any sign of anything that's changed and there have been at least a few macro indicators that have been met.

Yes. While we may not have expertise in every segment, I can share some observations. Much of this relates to what we've experienced during and after the pandemic. In reviewing our segment performance, it's evident that although slower growth markets remain robust, retail—which typically includes many distribution centers—has significantly slowed down after a strong couple of years. However, it continues to grow. Healthcare and government sectors are also still growing and have seen a recent uptick, though they are not performing as strongly as general manufacturing. Currently, the industrial sectors of the economy are outpacing the non-industrial sectors for us. That’s my observation, and it aligns with insights from others as well. The positive aspect is that we are witnessing growth across all segments, and our market share gains are contributing to this success.

Yes, that's great. Thank you. I have a question about your technology investment for high touch. D.G., you've previously mentioned some of the investments made in the website, product information systems, customer database, and more. Could you provide an update on those initiatives? What phase are we in for this investment cycle?

Yes.

If you could identify any of the fruit that's been borne out of these initiatives, which you've already touched on a little bit, but maybe you could give a few more examples.

Yes. I would like to highlight that we will discuss more details during Analyst Day. The initiatives we launched earlier have proven to be extremely valuable, particularly in areas like product information and publishing, which support our merchandising, website efforts, and print publications. The results have been very positive. We've also seen strong outcomes from our investments in customer information, particularly in enhancing seller coverage, improving marketing outreach, and ensuring we communicate effectively with the right customers. In September, we will elaborate on our technology transformation plans, but we are encouraged by the positive signs we've observed and the significant results we've achieved so far.

Thank you. And our next question comes from Deane Dray with RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone. I just wanted to clarify for Dee regarding the price cost neutrality. Is that based on the margin?

So that is on product cost. If you go back, we've discussed the difference between inflation related to products and that related to transportation. Our objective throughout any cycle is to maintain price cost neutrality concerning our product costs and to address a substantial portion of any additional freight costs moving forward. As you may know, we experienced a notable increase in fuel prices during the quarter, and we are actively seeking ways to manage those additional freight costs. When we refer to price/cost neutrality, we are not talking about overall gross margin; it pertains to a part of the gross margin.

Okay. That's helpful. Thanks for that. And this is more of a nuance, but you lowered the high end of the buyback guidance and this quarter, share count creep was up, and it costs you $0.03. I don't know that it's more of a nuance. But just why would you lower the buyback? And how do you feel about trying to contain share creep? Thanks.

Yeah. So thanks for the question. And we are generally always in the market from a repurchase perspective. We're not specifically looking to attempt to try to time the market with our repurchases. And we really try to balance that with our cash generation. And so it was nothing more than Q1 and Q2, we have some large cash payouts during those periods as it relates to our bonuses, some tax payments. So it's generally just timing for us.

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

Yes. Thank you. Good morning, everyone. The high-touch gross margin has seasonality, so I get the second half operating margin guidance relative to the first half. But in Endless Assortment, the op margin looked like it averaged about 8.3% in the first half. Your guidance for the second half implies lower than that. And I'm just wondering if you can outline what are the key factors that are pressuring second half profitability relative to the first half in Endless Assortment?

Well, I'll start D.G. Well, generally, we're continuing as it relates to MonotaRO to ramp up our investments there and fund those investments for carrying two DCs Anegawa and Amagasaki at the same time. So those ramp costs continue to have an impact on us. And similar to the High-Touch segment, the Zoro business is continuing to invest in marketing, payroll costs, as well as technology to drive their long-term revenue growth. So it is just investments during the period of time. And as we get to 2023, specifically for MonotaRO, we expect their operating margins to normalize back to historic levels. And so we'll see some settling out at that point.

Okay. Thank you for that. And then second, could you outline the impact of LIFO accounting on your results? We don't talk much about that, but can you talk about sort of gross margin impact in the current quarter, the recent past, the near future?

Sure. We typically discuss the impact of LIFO on an annual basis. It's important for us to keep up with standard cost increases, especially during this inflationary period. We are managing the rising cost inflation in our inventory and cost of goods sold associated with LIFO. We've been navigating this situation for almost a year now. For the quarter, the impact was minor, but we continue to adjust our standard costs and address the LIFO effect through pricing.

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

Hi. This is Hans Hoffman filling in for Hamza. On the endless assortment segment, specifically Zoro, where do you think profitability can go longer term from where we sit today and where SKU count can go? And then just what does the competitive set or competition look like for Zoro? Thanks.

Yes. I mean, so with Zoro, what we've talked about is we're going to pass 10 million items this year, unique SKUs. We expect profitability to get to the high single digits over the next several years. It's on a very good path to do that. And from a return on invested capital perspective, it's obviously very profitable given it doesn't have the inventory position. So profitability is getting better. It's going to continue to get better. We think we can get to probably 20 million SKUs at a minimum through Zoro over time, but that's sort of a long-term effort, probably a four or five-year effort to get there, we'd expect. And yes, and so competitive set wise, it's a lot of digital players that we see, and there's a lot of them out there, but we continue to perform well and I think we can gain share consistently through that model.

Got it. Thanks. And then could you just talk about how you're thinking about headcount additions going forward? What you're seeing in terms of labor inflation, turnover and labor availability?

Yes, it has certainly been a challenging labor market over the past year to year and a half. We believe we are well-positioned in staffing, especially in critical areas like our distribution centers, where we have made significant headcount increases. However, we need to manage this effectively over time. We are monitoring our turnover rates, which tend to be highest in the first year, as new employees often underestimate the challenges of the job. Once they get past that first year, they usually stay and become long-term team members. This trend continues, but it has been tough. We have hired extensively in recent years and are experiencing turnover within these groups. Our primary focus is ensuring we have adequate staffing levels to meet the volume we anticipate while avoiding unnecessary costs in other areas of the business. Therefore, we are being cautious about adding headcount outside of volume-dependent areas.

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

Hi, guys. Good morning. I got a couple of clarifications and then one question on assortments. Just on the market outgrowth definition. The 12% growth in the market this quarter, is that price and volumes, or is that just volumes? Just want to make sure we're comparing like-for-like?

Yeah. Price and volume, the 12%.

Okay. Great. That's what I thought. And then just on the price cost. So essentially, it's an invoice price. So basically, your invoice minus supplier invoice, that's how you define it?

Well, are you talking about price inflation?

So if I understand correctly, you're saying it's calculated by taking the product price and subtracting the product costs. Is that right? Is it similar to an invoice spread?

Yeah.

Yeah. Okay. Great. Just on the Endless Assortment, the growth in users is pretty consistent and pretty impressive quarter-by-quarter. Just wondering, what is the typical profile of the active users you're adding? How do you reach these users kind of acquisition cost? Any kind of help there would be helpful. And then just kind of how do you expect Zoro to perform in a recession. If these are sort of smaller users, do you expect it to be more volatile, more cyclical perhaps, or do you think that the underlying structural growth in that business can offset any pressures in a downturn?

Yeah. So what I would say is the typical customer that we acquire is a small business customer. We have actually gotten out of some of the lower-value marketplaces where we weren't getting business users as frequently as you want. So mostly business customers and relatively small business customers. We are then really focused on getting those customers to repeat. And we've seen really nice results through MonotaRO over the last year in terms of increasing repeat rates for existing customers. And so that's been a nice trend and a very positive trend. In terms of a downturn, we would expect the underlying growth to be able to sort of power through the downturn, we would be affected by the downturn, but we still think we'd have significant outgrowth from the Zoro model given the way the model works and what we've seen in other downturns in MonotaRO and other places.

Thank you. Our next question comes from Christopher Glynn with Oppenheimer. Please state your question.

Thank you. Great first half. And curious on the second half outlook, the HTS margin guide implies a little bit of a softer sort of tail off on the margin versus normal seasonality. I know last year was bent a little differently. So looking past that, but I think the tape is usually a little more than what's implied here. So curious if you could comment on that?

So this is, again, another year that's been difficult to forecast based upon what's going on in the marketplace. But as you know, seasonally, Q3 is a lower gross margin point for us in high-touch US. And we're planning and forecasting for that to be the case. And then we usually see a deceleration, seasonal deceleration with customers on the top line in Q4. And so we feel confident in how we have planned out and provided updated guidance for High-Touch. Nothing to read into that other than, we don't think the last couple of years are necessarily a great benchmark. And so we've gone back and looked at longer-term trends to actually forecast how we believe the High-Touch US business will perform for the remainder of this year, taking into account our jumping off point from H1.

Great. And just on this price level getting 10%, 11%, what scenarios within reason, would you see maybe price giving back and reversing a little bit, or are you pretty confident this is a new baseline?

What we're observing now is relatively stable, and it's difficult to anticipate a change. Historically, if we review previous cycles, there is only one instance where we might have seen a significant decline rather than just a decrease in price inflation, but only time will reveal the outcome.

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

Hey, good morning all.

Good morning.

Just a question on the inbound inflation that you're seeing, how that's progressed over the last couple of months. I think you're starting to see some of the PPI indicators plateau a little bit. Obviously, you guys are diverse across your purchases. So just wondering what that looks like in terms of what you're seeing today in the marketplace as you go out to make purchases and maybe how that's trended over the past quarter?

So, do you mean inbound transportation or amount product cost or all of it?

All-in, but I guess more product than transportation?

We have noticed a stabilization in purchase prices from our suppliers. Recently, we have received fewer requests for price increases compared to several months ago. However, we have not experienced any decreases at this time. The prices have stabilized, but they are still slightly going up, though the rate of increase is less than it was before.

Got it. Regarding availability, I think there was a time earlier in the pandemic when there was a significant difference between what Grainger could procure and what some of the smaller competitors could procure. How would you describe that difference today?

We don't have precise knowledge of what our competitors can achieve, so this is largely speculation. The availability market remains quite challenging, and the shutdown in China has not benefited the situation. There are still areas where supply faces difficulties. I believe we still hold some advantages. The improvements we've made to our product information management system have been vital over the past year and a half, allowing us to identify functional equivalents when a product is out of stock, enabling us to provide customer solutions. We do have certain strengths, but I want to emphasize that we are not completely out of the woods regarding the global supply chain in our industry. It will take some time before we emerge from this situation.

Our next question comes from Jacob Levinson with Melius Research. Please go ahead.

Good morning, everyone.

Good morning.

Good morning.

At the risk of beating a dead horse here on price. Certainly, the 11 points to go in the high touch business is quite a bit higher than we've seen at some of your peers. But I realize there are going to be some nuances. But if we peel back the onion, I guess the question is what's really changed the cycle that's allowing you to stay ahead of cost. Because certainly, DG, when you took over that, maybe that muscle memory wasn't there. So just curious what's happening under the hood, if you will.

I believe one thing to note is that the clarity of the signals in the market might not be as strong as one would hope, especially from an external perspective, since some competitors adjust their prices at different times. What has changed is that we are now competitively priced in the market, and we’re placing a greater emphasis on this aspect. The pricing adjustments we have made have aligned with market trends. Although the timing of our adjustments may vary, we are confident that we are competitively priced at this moment, which is our main principle regarding pricing.

Okay. That's helpful. And just changing gears a bit on Zoro, still seeing the growth accelerated over time, and that's a different tone, I guess, than what we're hearing from other e-commerce players more broadly. So, I guess, the question is, how much of this is that, you built a better mouse trap with the investments you've made over the years and the IT and the buying experience itself. Or how much of that is SKU additions or you're spending on advertising? Just trying to get a sense of what you feel like is really contributing to that success there.

Yes. I think few additions are a big part of it. I also think that the customers we're going after are business customers. And so, I think, most of what you would see as compares in the digital space would not be business focused, so we think business customers are probably doing better than consumers online right now. And so that's a big part of it too.

Thank you. And our next question comes from Chris Snyder from UBS. Please go ahead.

Thank you. I wanted to ask about customer inventory levels. One of the concerns that investors have on the distributors is that industrial companies are reporting outsized inventory levels. Obviously, a good chunk of that is price. But I would appreciate any color or views you have on MRO inventory at your customer base?

Yes, I'll take this question. I believe that the industrial manufacturers reporting higher inventory levels are primarily dealing with work-in-progress items. When visiting customers, I often notice that much of the product is not maintenance, repair, and operations items. I will address MRO items in a moment. Generally, products are left sitting around because manufacturers lack the necessary resources to complete production. They experience strong demand but struggle to fulfill it due to incomplete production capabilities. I've observed this trend at numerous customer sites over the past few months. This appears to be the main issue. Our customers do not maintain large stockpiles of MRO products; our approach is to ensure they only have what they need. Our inventory management solutions help prevent excess stock, and in discussions with customers, I see supply chain-driven work-in-process inventory challenges occurring at many manufacturers.

I appreciate that color. I guess, I wanted to follow-up for my second question on previous commentary around product availability across the industry, so at your competitors. I guess as industry-wide product availability gets better and starts to normalize. What do you think that means for your business? It sounds like some of the market outgrowth could compress back to the target range. Do you think that carries any risk of price cost, as I'd imagine maybe some of those smaller competitors will look to get back to their market share? Any thoughts on that would be helpful. Thank you.

Yes. I mean, of course, we haven't really gone through a period driven by a pandemic like this. So any answer here is speculative. I would say that more customer visits that I'm on, our ability to keep customers going has actually led to a lot stickier relationships led to us connecting more directly from a digital perspective, led to us managing our inventory pools, we see very strong growth with our key stock. And so things that we're doing on-site are really valued right now. So I'm not overly concerned that, that will be a detriment. Are we going to grow outgrowth of 1,000 basis points every quarter now or not. But we feel like we can gain share consistently and that we've built the right relationships and processes to do that.

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

Hey, good morning. Thanks for taking the questions. It looks like the operating cash flow guidance increases based principally on that better sales and profitability outlook here. But has anything changed as far as working capital requirements for expectations into the back half of the year here?

Well, I mean, as you can kind of see our working capital needs have kind of grown with trying to ensure we have the right inventory in stock to meet demand, and to support our customer sales. And so we see that trend continuing. I will say some of the AR growth is starting to stabilize here for us a little bit. And just inside, collections are strong, so we have no issues with collecting from our customers. But it's more a matter of ensuring that we have the right inventory on a go-forward basis. We still will have strong growth, as you know, in the back half that's implied by the guidance. So no big material changes. I would just say a little bit more stability as it relates to working capital needs.

Okay. Well, I guess inventory specific we had expected some of those purchases to taper a bit or flatten out a bit. Is that kind of still the case?

Based on what you just heard from D.G., our customers will continue to need MRO products as they operate. We are building inventory on some SKUs, while on others, we are still unable to increase inventory. We will keep working to restore inventory levels to where we believe they need to be in order to meet demand.

Got it. Got it. Okay. And then I guess switching gears to analyst assortment. Is the value per order there continue to trend higher? And I guess, how does that trend on value per order compare to what kind of the internal targets are for that metric?

We see nice increases in average order value for the Zoro business. And I think a lot of that has to do with whom we're targeting. We're targeting only business customers. And we found ways to avoid acquiring consumers, I would say, through that process that helps average order value. We expect that to continue to get a little bit better as we continue to refine our processes and continue to get more repeat business from these business customers. But we feel like we're on a trend. It's been a little bit better than we expected actually this year from an average order value. So, probably a little better than expected, but we're basically on the path we want to be.

Thank you. Our next question comes from Ken Newman with KeyBanc Capital Markets. Please go ahead.

Hi, good morning.

Hi, good morning.

I wanted to follow up on your earlier comments regarding retail and e-commerce sales. I believe those were up mid-single digits this quarter. Can you discuss what is included in the sales outlook for that segment? Additionally, could you provide more insight into how customer behavior has evolved throughout the quarter and into July?

So, we really aren't changing the outlook for our Endless Assortment segment?

No, no, I got it.

Okay.

So, you're referring to our retail segment within Grainger. Just to clarify, this includes many distribution centers, with some focused on e-commerce and others not. We collaborate extensively with large traditional retailers. We don't foresee this segment growing slower for the rest of the year compared to other segments. We typically don't provide specific growth guidance at the segment level, but we are certainly observing trends that align with what others are experiencing. Moreover, the changes we observed during the pandemic had a significant impact, as many channels saw rapid growth. Consequently, a lot of our growth was in retail, government, and healthcare, but that situation has shifted due to high comparison base. Therefore, while the activity remains strong, it's simply not growing as quickly as some other segments.

Understood. So, it’s a deceleration rather than a true year-over-year decline with that customer mix. Is that fair?

Correct.

And then for my follow-up, I know there's been a lot of questions on pricing this call. Just again, can you just help me what are the expectations for pricing momentum in the second half within High-Touch, I think we are closer to pricing peaking here within the second half or how we already approached that.

As we progress through Q3, I have noticed that it appears to be a low point for GM. We plan to continue passing on any inflation we might experience. While we have another chance to do that in the third quarter, it won't be as significant as the increases we've seen in the first quarter. From a full-year perspective, we anticipate ending prices in the range of 9% to 10%, which is slightly higher than where we are now. Our goal is to finish the year with prices that are cost-neutral, while remaining price competitive.

I would add to what Dee mentioned that the slowdown in inflation in the second half is not actually resetting or lowering prices. It’s mainly due to the comparisons from last year's inflation in the second half. That’s the key reason.

Thank you. And our next question comes from Patrick Baumann with JPMorgan. Please state your question.

Hi. The math on the guide suggests you expect SG&A to level off in the second half of the year versus what you just reported in the second quarter around $900 million. Maybe my math is off, but that's kind of what I was coming to? It looks like in prior years, those costs can increase second half versus the second quarter. So the question is, if my math is right, which might be wrong, you could just tell me it's wrong. If it's right, though, what causes those costs to be flat sequentially this year?

So I think it's just timing of our investments. And so earlier this year, like in most years, we have our variable comp payout, and this year based upon performance, we were able to accrue some of those expenses based upon how we were running in H1 and settled out in line with our guidance and our forecast. So we don't see a lot of incrementality in the second half from that perspective. And we're continuing to invest at a more steady rate. And again, as D.G. noted, we started some of those investments a little hotter last year in the second quarter. So we're comping some of that year-over-year from an SG&A perspective. But the numbers are right.

Okay. So my math is right. Got it. Helpful color. And then Dee, also in the past, you've been more specific on month-to-date trends, when you report the quarter. Is there any way to put a finer point on July when you say that there's no slowdown in demand – can I take that to mean that July sales are still running 20% plus at constant currency?

Yes. We noted that, yeah.

Yeah. It is in the script. I think you said, we're running close to 21% on a constant currency basis.

Thank you. Ladies and gentlemen, there are no further questions at this time. I'll hand the floor back over to D.G. Macpherson for closing remarks. Thank you.

All right. Well, thanks for joining us. It's a pleasure to have you on. I hope you all get to enjoy the rest of your summer. As a quick reminder, we are hosting our Investor Day on Wednesday, September 21. We hope you can join us in person, if possible, at our Northeast Distribution Center in New Jersey or virtually. We really look forward to spending time with you there. And again, thanks for the time, and take care.

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