Greetings, ladies and gentlemen, and welcome to the W.W. Grainger Third 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 third 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 Q3 earnings release, both of which are available on our IR website. This morning’s call will focus on our third 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 U.S. 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. Thank you for joining us today. I'm going to provide an overview of our third quarter performance and I'll pass it to Dee to walk through the financials. As I typically do, I'd like to start with our Grainger Edge framework, which guides our strategy and behaviors across the company and with our customers and supply partners. One of our Grainger Edge principles is to do the right thing. No word is that commitment more obvious than when we respond to natural disasters. Grainger's long history of being there for our customers before, during, and after a crisis strikes. Last month, Hurricane Ian destroyed parts of the U.S., most notably in Southwest Florida. Our team spent days, nights, and weekends on the front lines, working long hours to get essential products like generators, sandbags, and tarps to our customers. After the storm passed, our sales on-site service representatives and branch team members were on the ground making sure we serve our customers, and many of them did this while balancing their own personal recovery efforts. We know the road ahead will not be easy, but the Grainger team will continue to be there to support the community as they recover and rebuild. Before I get into the financial highlights from the quarter, I want to talk a little bit about what I've seen and heard during my market visits with customers. I recently visited an outdoor equipment manufacturer that experienced a surge in demand during the pandemic. As consumers had excess cash and a desire to spend more time outside during COVID, they saw a major uptick in revenue. They're now facing a dip in demand as consumers begin to pull back on spending. I've also visited some of our aerospace customers where it's clear that business activity has picked up, especially in 2022 as COVID impacts have diminished. The industry is now making investments in new airplanes and other equipment to meet ongoing changes in business and leisure travel demands. All told, we continue to experience a dynamic market, with some industries still on the upswing, some that are stabilized, and others that are trending down. And while our customers will face different levels of impact as we navigate through this inflationary period, we know that Grainger wins because of our ability to add tangible value to our customers' operations through inventory management, digital solutions, and product substitutes. This has been true in past economic cycles, and we expect to continue as more and more customers turn to us for solutions, thanks to our relevant product offering, know-how, and advantaged supply chain. Turning now to our results. We performed very well in the third quarter with sales growth of 16.9% or 20.3% on a daily constant currency basis. This normalizes for the impact of the significantly depreciating Japanese yen. Our results this quarter include strong growth in both segments as we continue to execute well against our strategic priorities. We outgrew the U.S. MRO market by 700 basis points in our U.S. High-Touch business and delivered over 23% sales growth in Endless Assortment on a daily constant currency basis. Total company gross profit margin finished the quarter at 38.5%, expanding 145 basis points over the prior year third quarter. Profitability was strong throughout the quarter, especially in the month of September as we benefited from a confluence of factors, including some timing benefits that provided a tailwind to gross margin. Steve will outline the details in a few minutes. Strong gross margin performance, coupled with solid SG&A leverage, helped us achieve a 15.3% operating margin, an increase of 230 basis points over the prior year third quarter. We delivered adjusted ROIC of nearly 42%, up over 1,000 basis points compared to the same period last year. We also generated $380 million in operating cash flow and returned $286 million to shareholders through share repurchases and dividends. Due to the strong results achieved in the quarter and continued strong trends in October, we are again raising our 2022 full-year guidance, starting with the customer and living our Grainger Edge principles is helping us deliver value to all of our stakeholders. With that, I will turn it over to Dee to discuss the details.

Thanks, D.G. As D.G. highlighted, it was another quarter of exceptional results, which are summarized at the total company level on Slide 7. We delivered strong growth and gross margin performance across both segments and also managed our SG&A well, driving 85 basis points of leverage in the quarter as we continue to stay disciplined while investing to support long-term sustainable growth. This growth in profitability resulted in diluted EPS for the quarter of $8.27, up 46.4% versus the third quarter of 2021. Turning now to our High-Touch Solutions segment for the third quarter. We continue to see strong results with daily sales up 19.4% compared to the third quarter of 2021. We saw broad-based double-digit growth across all geographies and over 20% growth with both midsized and large customers in the U.S. Daily sales growth in the U.S. of 20% was fueled by broad-based volume growth and strong price realization of over 12% in the quarter. Canadian daily sales were also strong, up 11.4% or 15.5% in local days and local currency. For this segment, GP margin finished the quarter at 40.6%, achieving 125 basis points of margin expansion. The increase is primarily due to product mix as well as favorable price/cost spread, realizing a timing benefit as we continue to work through cost discussions with our suppliers. Price/cost was also aided by some targeted customer and product actions as we work to ensure we are receiving the right economics for the value we provide to customers. These favorable contributors to gross margin were partially offset by heightened freight costs in the quarter. Our pricing team continues to do a really nice job managing through this highly inflationary environment. And while the timing will always be choppy from quarter to quarter, we remain focused on our core pricing tenets of achieving price/cost neutrality over time while ensuring our prices remain market competitive. Increased SG&A spend in this segment was driven primarily by higher headcount to support growth and compensation costs as well as continued investments in marketing. Even with the increased investment, we delivered 150 basis points of SG&A leverage year-over-year, and when combined with the continued gross margin expansion, Q3 operating margin of 17.3% was up 275 basis points versus the prior year. Overall, a very strong quarter for the High-Touch Solutions business. Looking at market outgrowth on Slide 9, we estimate that the U.S. MRO market, including volume and price inflation, grew between 12.5% and 13.5%, indicating that we achieved roughly 700 basis points of market outgrowth in the quarter. As you heard at Investor Day last month, we're having great success gaining share as we execute against our strategic growth engine. Given our recent performance and go-forward expectations, as announced at Investor Day, we are now targeting 400 to 500 basis points of annual outgrowth going forward, a 100 basis point increase from our previous outlook target. The strength of our initiatives, coupled with our supply chain advantage, gives us confidence in our ability to deliver against this commitment. Moving to our Endless Assortment segment. Reported and daily sales increased 8.6% or up 23.7% on a daily constant currency basis after normalizing for the significant impact of the depreciating Japanese yen, which is down over 23% versus last year. In local currency and local days, MonotaRO achieved 19.8% growth and Zoro U.S. was up 27.4%. Revenue growth continues to be driven by strong new customer acquisition and repeat business for this segment as well as enterprise customer growth at MonotaRO. Gross margin expanded 130 basis points versus the third quarter of 2021 as we continue to see freight efficiencies from increased average order value. We also benefited from favorable business unit mix as Zoro grew faster than MonotaRO in the quarter. Segment operating margin declined 95 basis points in the quarter as favorable gross margins were offset by continued investments to support growth in both businesses as well as DC start-up costs at MonotaRO for the new Inagawa DC. The new facility is ramping nicely. As we exit our legacy facility in the first quarter of 2023, we anticipate that the business will return to normal operating margins thereafter. On Slide 11, we continue to see positive results with our key Endless Assortment operating metrics. Total registered users are tracking nicely with Zoro and MonotaRO combined, up 17% over the prior year period. On the right, we show the continued growth of the Zoro SKU portfolio, now at over 10.3 million SKUs. You'll see a more modest increase between the second and third quarter as Zoro's offering of SKUs that could not meet our service level expectations. We continue to target around 2 million SKU additions in 2022 and have a robust pipeline to meet that goal as we finish the year. Turning to guidance. With another very strong quarter and with sales in October trending up over 16% on a daily reported basis or over 21% in constant currency, we are raising our 2022 full-year outlook. While we acknowledge that the broader market conditions remain uncertain and the risk of a potential recession has certainly increased, we have not seen any meaningful slowdown in our business and continue to outperform our normal seasonal trends. Our updated outlook for the full year 2022 includes: expected daily sales growth between 15.5% and 16.5% and EPS between $29.10 and $29.70, a 48% increase year-over-year at the midpoint. This implies Q4 daily sales, which normally slow due to seasonality, will grow roughly 9% to 13% as we face difficult comps over the fourth quarter 2021, especially in November and December. We also continue to see further FX headwinds from the depreciation of the Japanese yen. We've included updates to our supplemental guidance as well, which can be found in the appendix. While it is not our typical practice to change guidance each quarter, doing so provides our most up-to-date expectations in light of the current economic environment. With that, I'll turn it back to D.G. for some closing remarks.

Thank you, Dee. Before I open it up for questions, I would like to make just a few comments. While this quarter brought more market fluctuation and potential uncertainty broadly, both our market and our performance were strong. I remain confident in Grainger's ability to create tangible value, deliver a flawless experience, and gain share profitably over the long haul. We are grateful for our customers' continued confidence in Grainger. No matter what comes next, we will remain a trusted resource ready to help them navigate any cycle. I would also like to thank the Grainger team for all they've done and continue to do to support our customers. With our team's continued commitment to focusing on the things that matter, we are well poised to deliver a very strong finish to the year. And with that, we will open the line for questions.

Thank you. And at this time, we'll conduct our question-and-answer session. Our first question comes from Tommy Moll with Stephens. Please state your question.

Good morning and thanks for taking my questions.

Good morning.

Good morning.

Dee, I wanted to circle back to your comments on High-Touch profit in the third quarter. You called out price/cost as a tailwind in the period, and there were some timing impacts, I think, related to discussions with suppliers, but if you could elaborate on what you were referencing there around the timing and whether that implies that it may look different next quarter or at some point in the future, that'd be helpful. Thank you.

Thanks for the question, Tommy. So yes, we did perform well in the quarter, both top and bottom line, and specifically related to the gross margin expectations. We did experience significant product mix tailwinds as well as favorable price/cost spread. And I did note that, that was due to a couple of factors: price/cost being favorably aligned as we realize the timing benefit while we continue to work through cost negotiations with our suppliers. We do expect that benefit to normalize over the next couple of quarters. That really aided in some of the outperformance. In addition to that, from time to time and good hygiene, we continue to work with customers to make sure that we are receiving the value that we provide to them from an economic perspective. And so we also received some benefits in the quarter for that. We also expect that to continue.

That's helpful. Thank you, Dee. Shifting gears to capital allocation. If I'm looking at your guidance for this year correctly, I think, in terms of operating cash flow, there's no update to your prior guidance, but it looks like CapEx and share repurchases have been pulled in a little bit. So I'm curious for any commentary you can give there. And then also, as you think about CapEx for next year and some of the capacity expansion initiatives you talked about at Investor Day, if there's any early peak you can give us about priorities for 2023, that'd be helpful as well. Thank you.

Sure. Yes, that is correct. We did provide based upon the range we had out there for operating cash flow. We did make some tweaks in those numbers as well, as we have the opportunity to do so. As it relates to 2023, we'll talk a little bit more about what we expect CapEx to look like in February.

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

Thank you. Good morning. At the Investor Day, you discussed seller coverage and seller effectiveness as two of your strategic growth engines. I'm wondering if you can talk about the trajectory there. How many outside sellers do you have today versus what you had last year? And what is the plan for 2023?

Thank you, Dave. During Investor Day, we highlighted our enhanced customer information, which has helped us identify opportunities to bring in additional sellers. We've started adding a small number of sellers in a few pilot areas, and we anticipate having initial results early next year to guide our future actions. We're confident that we can consistently increase the number of sellers and enhance their effectiveness with the customer insights we've gathered. This is an exciting direction for us. However, we likely won't have comprehensive details on the overall impact until we receive results from the pilots in the second quarter of next year.

Okay. So TBD. And then as a follow-up, could you tell us specifically when the MonotaRO occupancy expenses that are duplicate today drop off and approximately what the magnitude of that overage is right now?

Sure. I was over there four weeks ago. I'll let Dee answer the sort of exact timing. But just to give you sort of a magnitude, they're operating two buildings in the Osaka area. The new one is an enormous six-story building that is coming up to speed and getting up to the line volumes to take over entirely, and they expect that to happen mostly by the end of the year. The other one has been running at the same time, so that's a duplicate cost. And Dee, I'll turn it over to you for the numbers.

Yes. So just to add on what D.G. says, we expect the duplicative costs to drop off after Q1 of 2023.

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

Hi, good morning folks.

Good morning.

I just wanted to focus in a little bit more on the outgrowth. I mean I think we've sort of transitioned here from a period of time with kind of more hyper-inflation and a little bit more scarcity supply chain-wise to what sounds like it's sort of an improving supply chain environment today just based on what some of your peers and broader industrial cohort have said. Any sort of change in the way customers or competitors are sort of interacting with the marketplace? Clearly, the background circumstances are changing. Just wondering if their needs or their priorities are changing as well.

There has been a significant increase in attention to supply assurance given recent events. The supply chain is improving; while it isn't fully restored, there is definite progress. Customers are still eager to learn how they can ensure they have what they need to complete their tasks. We have always supported this in various ways, such as maintaining inventory at branches, managing on-site inventory, or offering next-day delivery, which benefit our customers. We are continuing discussions with customers about how we can assist them during these challenging times, based on our ability to serve them. We believe much of the improvement we've seen in our supply chain will remain consistent going forward, based on the feedback we are receiving.

That's helpful. Dee, I have a follow-up question for you regarding the margin tailwinds and the discussions you're having with your suppliers about the economic value, which seems similar to a rebate. Am I understanding that correctly? Is this typically on an annual cycle where it stabilizes at the start of the new year, or what timeframe should we consider for that?

Yes, I wouldn't think about it so much as rebates, but we're constantly negotiating on price take timing with our supplier partners. Some of that timing has moved up, and some has slipped out. And that's why we continually talk about the lumpiness of GP because it's very difficult to time everything perfectly both from a price perspective and a cost actualization perspective. So, it's nothing more than that. It isn't. We really aren't focused on supplier rebates as a reason for this.

Got it, that’s helpful. And nice quarter. I'll leave it there.

Thank you.

Our next question comes from Jake Levinson with Melius Research. Please state your question.

Good morning, everyone.

Good morning.

D.G., if we did a postmortem, if you will, on the pandemic period over the last couple of years, do you have a sense of how many of these new customers that you picked up during COVID are still buying from you, or maybe just any color you have on kind of the retention rates?

Yes. Sure. So it's inherently a tricky thing to figure out. What I would say is that our customer file has increased substantially versus 2019. So a lot of the new customers have stuck around. Our customer file was at its peak in the heart of the pandemic in 2020, both for Grainger and for Zoro and MonotaRO. They all had sort of a similar pattern. There was a lot of consumers buying and just trying to find whatever they could find for safety reasons. That's all gone back to normal. And so we think that what we see now is all of the business customers that we were able to acquire during the pandemic, either for pandemic reasons or other reasons. We have had really healthy growth of the customer file, which is probably the biggest signal that matters the most.

Okay. That's helpful. Shifting to pricing, are your suppliers still implementing widespread increases, or is what we’re seeing in the P&L mostly a reflection of previous actions?

Yes. Dee, you may have additional insights on this. We continue to experience cost increases from several suppliers this year, although it's less severe than in the first half of the year. Most of the price increases you're observing are the result of previous actions. We do anticipate that some increases will continue as time goes on, but they won't be as severe.

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

Thank you. Good morning, everyone. I want to touch back on price realization. And D.G., can you give us a sense of how much of your price now is being driven by what you would call value-based pricing as opposed to standard markup?

Deane, what are you trying to understand? Please go ahead, Dee. You can take that one.

Yes. Deane, I want to clarify, I want to make sure I understand the question. So do you want to add a little bit more color? Is there a question...

It's more of a holistic question, but just give us a sense on pricing traditionally, historically with distributors was much more of a standard markup. And what you've seen is with the advent of more services being added and then understanding exactly the kind of value that Grainger is providing, you're actually able to gain more pricing and, under this umbrella, value-based pricing, and wanted to get a sense of where you are in that transition. Do you feel like you've done as much as you can? Are you halfway through? Just any color there would be helpful.

Sure. Well, I would say I think if you go back several years to the pricing strategy change to ensure that we could provide competitive pricing to all sizes of customers, we're through that cycle. Now, we're in more of a cycle, I would say, with higher sophistication relating to using our own internal information, product information, and coupling that with market information to get to the best price for customers. And if it's High-Touch business, as you kind of articulated, it is making sure we get to the best price based upon the value we provide to those customers. If it's like a midsized customer that has less services from us, price is relevant for them as well. So, I will say we are there. However, we always have opportunities with the broad assortment that we have, over 1.7 million SKUs, 2 million SKUs. Things are constantly changing. The market is changing. Costs are changing. And market price is changing. So, I will say our pricing sophistication continues to get better. From time to time, that leads to us being able to have some pricing levers in our benefit while we still remain competitive.

Okay, that's helpful. And then, look, supply chain has come up a number of times. How would you characterize it in terms of product availability, lead-time, and stockouts? And just also, if you could weave in if that's been the same for your private label offerings.

Yes, I would say that parts of the supply chain are mostly back to normal. The areas we manage, such as picking and shipping, are operating smoothly almost every night. A year ago, we faced labor and various other challenges, but those have largely been resolved in our supply chain. Outbound transportation is also performing well and is less of a concern now. However, some suppliers are still catching up from their previous challenges, leading to longer lead times in some cases. Our service levels for having products available and reaching customers are relatively high and are improving towards what we expect overall. We do see significant progress, although there is still a considerable distance to cover. The supply chain has experienced major disruptions, and we still have a long way to go with our suppliers and transportation companies. Regarding globally sourced products, it is becoming easier to secure shipping from Asia to the U.S., and costs are significantly decreasing from their peak, moving back towards earlier levels. Overall, we notice that the flow is improving compared to earlier in the year.

Thank you. Our next question comes from Ryan Merkel with William Blair. Please state your question.

Hey everyone. I had a follow-up on gross margin. Can you help quantify the price/cost timing benefit in 3Q and just speak to sustainability into 4Q?

Certainly. If we look at the U.S. market, gross margin increased by approximately 125 basis points. About half of this can be attributed to the price and cost benefit, which we anticipate will normalize as we move into 2023 or during the fourth quarter.

Got it. That’s helpful. And then I had a follow-up on price. Really, I'm trying to get at how much price is going to carry over into 2023 just based on what you've passed through so far. And when do you lap sort of the bigger price increases that you took in 2022?

Let me start with 2021. When you look at this quarter, especially November and December, we will be comparing to 2021, which marks our first significant period of price inflation. This is why we believe the last two months of this year will present tougher comparisons for us. We expect the price adjustment will be in the low to mid-single digits as we head into 2023.

Thank you. Our next question comes from Chris Snyder with UBS. Please state your question.

Thank you. So in the past, the company has spoken to an ability to hold North American High-Touch gross margins. So does the fact that 2022 is running a bit hotter than expected change that at all? Should we expect maybe some slight easing or normalization lower in 2023?

Yes.

Yes. Let's discuss the philosophy here, and Dee, feel free to add any thoughts. As Dee mentioned, there have been some minor factors that could change and potentially fade a bit. The overall approach hasn't altered. The past two years have been quite chaotic. We've experienced lower gross profits due to pandemic-related products and the challenges that came with them, which were necessary actions to support our customers. Now, we are seeing a return to normal gross profits along with some minor positive influences that may diminish. However, our strategy remains unchanged. We plan to outpace market growth in the High-Touch model by 400 to 500 basis points, maintaining consistent gross profits and achieving slight leverage in SG&A as we move forward. This approach is identical for the High-Touch DNS server models as well.

Thank you for the insight. Regarding the outgrowth in the U.S., the company has raised its target to 400 to 500 basis points, which is significantly higher than the pre-COVID run rate. However, I'm curious about the year-to-date outgrowth running around 700 basis points. As we consider the reduction from 700 to 400 or 500, what does that indicate? Is it merely a cautious approach? Could it be that 2022 is experiencing unusually high pricing compared to the market, or might some of the product availability gains the company achieved be diminishing? What accounts for this decrease? Thank you.

Yes, I mean it's a great question. So I think we mentioned this at Investor Day, but just to put maybe a finer point on it. When we look at what we get from a share gain perspective, we're looking at cause and effect for the actions that we take. This year is higher, obviously, than our target. And we've actually been able to determine that we think some of that might be availability-related just having product when others didn't. And some of that becomes sticky, as we've mentioned before. But when we look at the 400 to 500 basis points, that's looking at the actions and seller coverage, seller effectiveness, and keeping stock to drive share gain, and that's where that number comes from. So, we've had a little bit of benefit, I think, this year that's due just to having a better execution around the supply chain than maybe others have had.

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

Thanks. Good morning. So, D.G., building off the immediately prior question for Chris, I want to kind of bridge that to the medium customer discreetly. The large customer is obviously a bigger revenue base, but you have lower share there. You're doing 20% on 20%, and a lot of your capabilities do seem to be ramping as you've hit on some nice algorithms. And you have a long-term CAGR for the Endless Assortment. Should we start to think about medium customers along those lines? Can you hold the 20% with that lower share demographic?

What I would say is that we think we can grow midsize customers faster than large customers through the cycle. A lot of that has to do with the lower share we have, but also some of the actions we're taking are allowing us to acquire and penetrate midsized customers. Whether that's 20% or not, I won't comment on that. But if you recall, we were in the high $1.5 billion-$1.8 billion number 10 to 15 years ago, and we're going to break through $1.5 billion here in the next year or so, we think. So we're getting back to where we were, but there's still a long way to go. So, we do feel comfortable that there's going to be faster outgrowth of midsized customers than there are for large ones.

Okay. And then just to revisit the gross margin algorithm. You had the 37% target in 2025 that was based on a 30 basis point kind of tiny mix impact over the interim based on kind of a 37.3% this year. Should we just shift that algorithm thinking about the multiyear target?

Are you talking about the GP mix effect?

Yes. Using the minus 30 basis points as the driving force, and maybe you want to shift my thoughts relative to that.

Not necessarily. I think the only thing that's probably changed on a consolidated basis is the yen continues to depreciate, but that's going to impact on the topline. The GP rate should be the same algorithm that we've discussed.

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

Can you hear me?

Yes. We got you.

Sorry about that. So, you mentioned product mix as a favorable factor in the quarter year-over-year. Can you elaborate on that at all? I thought we'd move past kind of the pandemic versus non-pandemic stuff. So I'm just wondering what that might be now related to.

That is true, but don't forget that the pandemic stuff that was also safety equipment, which is a significant piece of our business, and we continue to sell more safety. But the other piece is that we're also selling a whole lot more technical products. Technical products are a significant product mix for us. Generally, those SKUs have a little bit better margin rate for us.

I'm sorry. What are some examples of that, technical product? What do you mean by that?

Material handling products, things that are more technical, help in manufacturing processes, pieces and parts as it relates to assembly lines and things like that are the more technical products. When we say safety product, I think a lot of people think about vests and gloves and things of that nature. So these are more products that are utilized or adjacent to manufacturing.

Do you view that piece of the expansion that you're seeing as more sustainable? Like is that a function of maybe some of your remerchandising efforts or anything else, or is that temporary?

Absolutely. You hit it on the head. Our remerchandising efforts are making sure that those products are much easier for our customers to find and are helping them solve their business problems.

Thank you. And my follow-up is on Zoro. Can you give a sense of how fast you think that market for Endless Assortment, that business model is growing in the U.S.? The Zoro growth in kind of the 27% range this quarter is obviously very strong. Just curious how you think that market itself is growing.

Yes, I mean we think that market is growing similar to what the whole market is growing, which would be sort of low double-digits, 10% to 13% in the quarter is kind of the market growth that we saw.

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

Thanks. Good morning, everyone. I'm estimating that heat manufacturing has increased in the high 20s, light manufacturing in the mid-20s, commercial up in the low 20s, and government up in the mid-teens. Regarding technical products and payable mix, I believe that's what it comes down to. However, I want to revisit this temporary gross margin benefit. Did you mention 25 basis points, Dee? Did I hear that correctly?

No. What were you talking about regarding the price or cost comparison?

Yes. That's just the temporary supplier negotiation benefit.

Yes. Well, I noted was the U.S. gross margin year-over-year was about 125 basis points and I said about half of that — roughly half of that, so call it, 50 basis points is what we're saying is the price/cost favorability that we believe will normalize heading into 2023.

Okay. So about $20 million. Got it. That makes a lot more sense. Thinking about your APAC supply chain, we're seeing significant shifts in currencies, particularly with the yuan. To the extent that you still source white-label products from China, considering the changes in the yuan and ocean freight rates, what kind of benefit do you experience, or does that benefit primarily go to your suppliers?

So what I would say is that as we think about next year, as we think about any year, we try to think about the total cost we're going to see and ensure we're pricing the market and get the best cost we can get. In many ways, those cost improvements will be embedded in price/cost because we will understand how those movements, and everybody else is going to have similar movements. The portion of product that comes from China is actually pretty similar across major competitors today. And so we don't think we are disadvantaged or advantaged necessarily on that. So we would expect that to sort of flow through in sort of normal ways from the competitive environment.

Thank you. And we have reached the end of the question-and-answer session. I will now turn the call over to D.G. Macpherson for closing remarks.

All right. Thanks for joining us today. We really appreciate you being on the call. As we said, we're certainly happy with the quarter, probably happier with sort of our longer-term ability to consistently gain share and do it in a profitable way and feel really good about the things we're doing as we face into an uncertain market. I hope all of you have a great weekend and a great rest of the year and look forward to talking to you in 2023. Thank you.

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