Good morning. Welcome to Grainger's First Quarter 2025 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 that are subject to various risks and uncertainties. Additional information regarding factors that could cause actual results to differ materially is included in the company's most recent Form 8-K and other periodic reports filed with the SEC. This morning's call will focus on results for the first quarter of 2025, which are consistent on both a reported and adjusted basis. Definitions and full reconciliations of our non-GAAP financial measures with their corresponding GAAP measures are found in the tables at the end of this presentation and in our earnings release, both of which are available on our IR website. We will also share results related to MonotaRO. Please remember that MonotaRO is a public company and follows Japanese GAAP, which differs from U.S. GAAP and is reported in our results one month in arrears. As a result, the numbers discussed will differ from MonotaRO's public statements. Now, I will turn it over to D.G.

Thanks, Kyle. Good morning, and we appreciate everyone joining the call. Despite the unpredictable environment, the first few months of 2025 have panned out much like we expected. The business continues to perform well as our team stays focused on serving our customers and delivering value to our stakeholders. While tariffs are certainly a topic of conversation, customers remain acutely focused on running their businesses safely and efficiently. I recently had the chance to visit a large corporate campus where we work alongside a facilities maintenance organization to support this customer. Our team shows up as a trusted partner, helping the customer solve the challenges they face on the ground each day, including ordering, organizing, and managing their MRO inventory. It was again apparent that local on-site execution is critical to creating value for our customers. This visit was a good reminder that no matter what the external environment is, it is important to stay focused on what we can control to ensure that we capitalize on a significant opportunity in the market. Although it's largely business as usual on the ground, the external environment remains highly fluid. We're working closely with our supplier partners to understand the full impact that announced tariffs will have on our business. Fortunately, the investments we've made in our product information and pricing capabilities, our scale, and the depth of our sourcing know-how position Grainger to effectively navigate the situation. As we move forward, we remain committed to ensuring transparency with our customers and adhering to our core pricing tenets, offering market-relevant pricing while targeting price-cost neutrality over time. Distributors generally benefit from modest inflationary environments and depending on the depth and duration of the tariff uncertainty, it may play out that way, but the situation remains highly unpredictable. In any case, we expect to play a key role in helping our customers navigate this current challenge, and I'm confident in the team's ability to remain agile in this dynamic environment. Moving to Q1 results, while the demand environment remains muted, we delivered another quarter of solid growth and profitability in line with the quarterly financial targets we communicated for the company in January. We continue to leverage technology, our product and customer information advantage, and analytical capabilities to drive differentiated value for our customers in both segments. Total company reported sales for the quarter were up 1.7% or 4.4% on a daily constant currency basis. Operating margins for the company remain healthy at 15.6%, and diluted EPS finished the quarter at $9.86. Operating cash flow came in at $646 million, which allowed us to return a total of $380 million to Grainger shareholders through dividends and share repurchases. Lastly, I want to mention that yesterday we announced a 10% increase to our quarterly dividend, marking the 54th consecutive year of expected dividend increases. This reflects our continued commitment to returning cash to shareholders through a balanced and return-focused approach. Overall, the quarter finished largely in line with expectations, and we remain on track to deliver our 2025 guidance. I will now turn it over to Dee.

Thank you, D.G. Turning to Slide 7, you can see the high-level first quarter results for the total company including $4.3 billion in sales, up 4.4% on a daily constant currency basis. Within the period, we saw gross margin improvement across both segments, which mostly offset SG&A deleverage and high touch. This led to total company operating margins of 15.6% for the quarter, down 20 basis points compared to 2024 but above our communicated first quarter expectations largely due to the timing of certain SG&A items. Diluted EPS for the quarter of $9.86 was up $0.24, or 2.5% higher compared to the prior year period. Moving to segment level results, the High-Touch solution segment got off to a slower start as weather, holiday timing, and some government softness across January and February impacted results to begin the year. In total, sales were down 0.2% on a reported basis or up 1.9% on a daily constant currency basis. Results were driven by continued volume growth and modest price contributions within the segment, and we deliver growth across all geographies and local currency. In the U.S. specifically, we saw strong performance with contractors and healthcare customers, which helped to offset slower growth in other areas including manufacturing. For the segment, gross profit margin finished the quarter at 42.4%, up 60 basis points versus the prior year. In the quarter, gross margin benefited from favorable product mix and supplier funding tailwind related to the annual Grainger sales meeting. Each of these items contributed roughly half of the year-over-year gross margin favorability. For the quarter, price-cost was roughly neutral. SG&A costs for the segment increased over the prior year period as we continue to invest in demand-generating activities and reflect the P&L impact of the annual Grainger sales meeting, which was an equal offset to the favorability we saw in gross margin. These costs, coupled with the softer top line and one fewer selling day in the current year, led to SG&A deleverage of 80 basis points for the quarter. If you normalize for one fewer selling day and the impact of the Grainger sales meeting, SG&A only slightly deleveraged year-over-year. Taking all of this together, operating margin remained healthy at 17.7%, down 20 basis points versus Q1 2024, but ahead of our expectations to start the year. Looking at market outgrowth on Slide 9, on a volume-only basis using the manufacturing subcomponent of industrial production as a proxy, implied growth for the U.S. MRO market volume was 1% to 1.5% in the quarter. With our High-Touch Solutions U.S. business driving 1.3% volume growth, this would suggest that mathematical market outgrowth on a volume basis was roughly flat in Q1, which was surprising to us even with our slower start in January and February. While tariffs have not had a meaningful impact on our business to date, they seem to be inflating the underlying IP benchmark, likely reflecting trade-related noise as manufacturers react abnormally given the unique environment. The IP benchmark has been a strong accessible indicator of our overall MRO industry performance over multiple cycles, but its ability to capture the dynamic and unprecedented nature of the current economic environment is uncertain. As we've been discussing over the last year, we run a separate internal model in parallel to help triangulate around MRO volume growth. This internal model pulls in several supply and demand factors, including MRO product shipments, import-export dynamics, and end-user activity to formulate a comprehensive view of the MRO landscape, including segments outside of manufacturing. This internal view suggests that the MRO market volume actually declined in the low single digits during the first quarter, implying we drove several hundred basis points of outgrowth. While the two different models have been highly correlated during normal business cycles, the divergence calls into question the relevance of our quarterly outgrowth disclosure given the uncertain environment. It is likely that this quarterly disconnect will persist so long as trade policy and tariffs continue to influence the manufacturer's production decisions. With this, moving forward, we're pivoting to an annual disclosure of our outgrowth metric. We believe this decision will create less quarter-to-quarter noise and allow us to stay focused on discussing the drivers of our growth while keeping an eye on our relative performance compared to the competition. We'll consider reintroducing the quarterly disclosure when the macro environment stabilizes, and in the meantime, look forward to sharing our annual progress on volume outgrowth at the end of the year. It's important to note that, despite the noise in the metric, we still delivered on our first quarter sales expectation, and this change in disclosure has no impact on the full-year High-Touch segment sales guidance we discussed back in January. Moreover, nothing is changing with our long-term earnings algorithm, including our annual volume outgrowth target, which remains at 400 to 500 basis points. Now, focusing on endless assortment, sales increased 10.3%, or 15.3% on a daily constant currency basis, which is just for the impact of the depreciated Japanese yen. Zoro U.S. was up 18.4%, while MonotaRO achieved 13.6% growth in local days, local currency. At a business level, Zoro continues its momentum, once again delivering strong growth underpinned by its core B2B customers and improving retention rates. At MonotaRO, sales growth remains strong with enterprise customers coupled with solid acquisition and repeat purchase rates with small and mid-sized businesses. On a reported basis, these results were partially offset by foreign exchange as the yen devaluation represented a headwind year-over-year. On profitability, operating margins for the segment increased by 80 basis points to 8.7%, with both businesses contributing to the favorability. MonotaRO margins remained strong at 12%, with continued distribution center efficiencies driving improved operating leverage. At Zoro, operating margins were up 240 basis points to 5.2%, aided by gross margin flow through and strong top line leverage. Gross margins outpaced expectations as we made some non-tariff-related pricing changes in the quarter, the benefit of which we expect to moderate slightly as the year continues. Overall, we're encouraged by the strong progress made in the quarter and expect to continue our momentum across this segment. Given the environment, I think it would be helpful to share an overview of how we see the current tariff landscape. On Slide 12, there are a few things to call out. First, it's early innings and things are constantly adjusting. Even with the original Chinese tariffs, which have been in effect for nearly 60 days, we're only recently completing negotiations with a subset of our supplier partners regarding tariff-related cost increases. So while we've seen a swift pace of tariff-related headlines, things are progressing more slowly on the ground. Second, understanding the full impact that the tariffs have on our business is not straightforward and needs to be quantified at a granular level. You can see our total U.S. COGS exposure on the left-hand side of the slide, with around 50% being domestically sourced and the remainder comprised of import products, including those from China. As others in the markets have discussed, this view of COGS is on a country of origin basis and does not further deconstruct individual product components by their respective country of origin. What we can do is take the announced tariff rates and apply that to our total COGS exposure to estimate the impact. You have to go through each product and evaluate its composition and cost structure. This includes answering questions like, what are the input components and where are they sourced, and how much of their cost is freight-related, etc. You need to do this by product to grasp what elements are subject to tariffs as you adhere to the government tariff schedule and engage in cost conversations with our supplier base. Given the investment we've made in product information, the tools we've built, and the product teardown work we've completed over the last several years, we feel we are well-equipped to navigate this challenge. As we gain clarity on costs, we'll work to pass along these increases to our customers similar to what we do for other cost increases we receive. With this earlier today, we took initial pricing actions primarily related to Section 232 and the first wave of announced tariffs on China, which did not include any increases related to the recent reciprocal escalations. These initial pricing actions only apply to a small portion of our products, largely those where Grainger is importing the product directly. On the vast majority of our products where we don't directly import, we are taking a measured approach and will wait to pass price until we have clarity on the amount and timing of cost increases. Our goal here will be to mitigate impacts to our business and achieve price-cost neutrality over time. Obviously, if the heightened reciprocal tariffs persist, we would need to consider source of supply and overall product economics to determine what course of action we would need to take. It goes without saying, but this remains a very fluid situation, and we're working side-by-side with our suppliers and customers alike. Importantly, as we look across our assortment today, we don't believe we're uniquely exposed to these tariffs compared to our competitive set. In any case, our team is focused on adhering to our two core pricing tenets to remain price competitive and achieve price-cost neutrality over time, and I have full confidence in our ability to remain agile while we execute on these objectives. As D.G. mentioned at the beginning of the call, after our solid start to the year, we're reaffirming our 2025 guidance. From a tariff perspective, we've included price-cost impacts we are seeing today and assume any go-forward incremental pricing actions passed on a price-cost neutral basis will be offset by lower demand. While the tariff inflation in a vacuum would provide a net tailwind to our business, it is unclear at this stage what the duration of the tariffs will be and what impact they will ultimately have on customer demand. With this, we assume these impacts will offset and are leaving our outlook unchanged, but we'll check and adjust as the year progresses. From a seasonal perspective, we expect the year-over-year sales growth will improve slightly in the second quarter, reflecting normal seasonality and including a modest tailwind from the first wave of tariff-related pricing actions that went into effect today. Preliminary April sales are up approximately 5.5% on a daily constant currency basis, which includes a 30 basis points headwind from the timing shift of the Good Friday holiday. All told, we expect the total company sales for the second quarter to be just north of $4.5 billion, or approximately 5% on a daily constant currency basis. From a profitability perspective, there are a number of moving pieces that we know will impact second quarter results. Moving sequentially from the first quarter, we know gross margins will structurally trend downwards, generally in line with normal seasonality. We've layered in the tariff-related price and cost impact that we know of today or can reasonably expect based upon conversations we've had to date with our supplier partners. On SG&A, we expect some leverage improvement sequentially as productivity and sales leverage partially offsets increased costs. We will continue to invest in demand generation, and as with every year, myriad increases went live to start the quarter. Further, as we've discussed, some expenses that were planned for the first quarter are shifting to the second, creating a sequential headwind. These items are in addition to the previously discussed noise that occurred in the first quarter from the Grainger sales meeting. This impact will flip sequentially in the second quarter and become a headwind to gross margin but an offsetting tailwind to SG&A. Taking all these moving pieces into account, we are targeting a second quarter operating margin to be at or near 15% for the total company. Again, this is obviously a highly fluid environment, but we believe our outlook covers a reasonable set of potential outcomes.

Thanks, Dee. Overall, I'm encouraged by how the team has managed through what is a very dynamic environment and how we continue to show up for our customers every day. Before I close, I want to take one more opportunity to acknowledge the strength of the Grainger culture. Just four months into the year, we've received several recognitions, including World's Most Admired Companies, Glassdoor's Best Places to Work, and for our first time ever, the World's Most Ethical Companies. Each of these achievements is special individually, but together, I believe they showcase why team members choose to grow their careers with Grainger. Congratulations to the team for earning these notable awards. And with that, I will open it up for Q&A.

Our first question comes from David Manthey with Baird. Please go ahead with your question.

Thank you. Hi, good morning. First off, let me ask about Zoro. It looked like a great quarter and terrific SG&A leverage there. Is the improvement that you're seeing there just based on stronger-than-expected sales this quarter, or are you starting to find an equilibrium between revenues and OpEx, so we continue to see a higher level of profitability there?

Yes, most of it is what we think is sustainable revenue growth. We're seeing nice repeat rates in the business, and that's gotten a lot better. We don't have to grow expenses with that revenue growth, given where we're at. We're in good shape to get leverage if we continue to drive that revenue growth.

That's great to hear. Second, you in the past said that you could achieve a 20% consolidated contribution margin at kind of a mid-single-digit rate of growth or higher. If we have this situation where volume and tariff-driven pricing net each other out, is it possible you could do that at a slightly lower rate because price is coming through at a higher contribution margin?

The short answer is yes, that is true. Obviously, if you don't have significant demand degradation with increased prices, then yes, we would have a lower rate of growth to get that through.

Thank you. Our next question comes from the line of Jacob Levenson with Melius Research. Please proceed with your question.

Good morning, everyone. D.G., I realize you folks have quite a broad product offering here, but can you maybe just speak to your ability to flex your sourcing, given the tariff headwinds and maybe how you're balancing that versus taking a price, especially given all the inflation we had over the past few years?

Yes. So the good news is we've done a lot of work to understand sources and alternative sources. We've already moved some things over the last few years to allow us to have a more resilient supply chain. The challenge is there are certain categories for which there are really no alternatives where everything comes from China, for instance. And so, that gets harder because that takes time, a lot of time in some cases, to actually move somewhere else. We're talking with our own suppliers on private brand and our brand suppliers, and we're hearing people talk about potentially moving things. But it's not immediate. You know, our hope is that we don't continue to completely shut down trade between China and the U.S. for a long period of time because obviously we wouldn't have everything we need to support our customers. We do have inventory on hand, and we're doing some creative things to make sure we have the right inventory to support our customers without taking extra costs on, and I think that's probably the trick right now. Our team is working very hard to make that happen.

Okay, that's helpful. Does that apply to your private label offering or perhaps in different ways? I assume the economics change significantly with the current tariffs.

They do. I mean, you know, I give you a hypothetical example that plays out a lot. It depends, of course, on whether or not the national brand and the private brand are only produced in the same location or whether there are alternatives. But in an example, if a private brand product is made in China and the national brand is made in Indonesia, let's say, if there are different tariffs, that can change the economics, and we could be in a position where the private brand doesn't really make any sense anymore in raising the price; they would actually just stop all volume. And so there are some cases like that; there are some cases that aren't like that, and you have to do it on a case-by-case basis.

Okay, that's great, thank you very much. Good luck, guys.

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

Good morning. Thanks for taking the question. I wanted to start off just high level on the macro. It sounds like you haven't seen any slowdown yet in the business just based on the guide you gave for daily sales. And then D.G., I don't know what any feedback that you found interesting when you're speaking with customers as it relates to the outlook and what people are concerned about?

We've experienced accelerated growth as the year has progressed, with April being our best month so far. There has not been any slowdown to date. However, it's important to note that the effects of tariffs will take time to influence our inventory, which typically flows through in a matter of months. We don't anticipate any immediate impact on demand from tariffs, though we might begin to see some effects this quarter, but we don't expect them to be significant. Any notable impacts will likely arise later, depending on how the situation evolves, and there is a lot of uncertainty surrounding this. Most customers seem to be incorporating modest tariffs into their planning. They aren’t expecting major trade issues and believe they can still obtain products. Currently, their focus is on managing operations and ensuring employee safety, rather than discussing tariffs specifically. There’s a sense that most believe a resolution will be found, but the outcome remains uncertain.

Okay, and then second question on tariffs. I just want to make sure I heard the message right. It sounds like I made first you put through a price increase but it was only for the direct imports that you're bringing in, and you're sort of waiting to see what the suppliers do, and you'll have an update on what that price increase might be next quarter?

Yes, next quarter. What I would say is mostly just our direct imports; there are a few suppliers that came with increases, and we put those through as well. But generally, it's on the whole; it's very modest for some specific products.

Our next question comes from the line of Christopher Snyder with Morgan Stanley, please proceed with your question.

Thank you. I'm following up on tariffs, which may not come as a surprise. Did you provide any information in the prepared remarks about how much price impact has resulted from what has been announced so far, including the early actions on 232 in China and the direct imports in May? Also, you did not change the gross margin guidance; is that based on the assumption that gross margin can be maintained during this period of higher cost inflation? Thank you.

Hey Chris. While we didn't specify an exact number in our prepared remarks, we did mention that we implemented price increases related to tariffs, particularly on imported products, and D.G. also mentioned some national brand suppliers. We estimate that the impact will be around 1% to 1.5%, which is relatively modest. Looking at our gross margin outlook for the year, we performed slightly better in the first quarter, having taken some known price adjustments. We aim to maintain price-cost neutrality over time. However, if these significant tariffs persist, we will need to reevaluate our pricing strategy. Our objective remains to achieve price-cost neutrality over the long run. Based on our analysis and guidance for the year, we still believe we can reach our targets. We expect to gain more insights in the second quarter as more negotiations finalize, and we'll assess price elasticity as well.

Thank you. I appreciate that. And then maybe just following up on some of your commentary earlier around the benchmark, maybe not being the right benchmark at this period of time. I guess why does the company think IP is the best way to benchmark volumes? Manufacturing is only, I think, about 30% of the mix. So I just wonder, could GDP be a better benchmark to go volumes against? I mean, I wonder if some of the dislocation we're seeing between IP and GDP could be causing some of that performance. Thank you.

Thank you for your question. There are a few points to clarify. First, we are maintaining our expectations for market growth this year in terms of volume. We are sticking to our revenue projections and believe that outgrowth, particularly regarding volume, is essential for our long-term success. Our targets remain unchanged. What we're observing right now is that historically, the IP manufacturing estimates have been somewhat accurate, though not perfect. Our internal model, which considers factors such as government spending and trade flows, provides a much more accurate picture, but it was previously deemed clear enough for everyone to grasp. This quarter, however, there’s been a noticeable divergence between those two metrics. As we analyze our performance compared to competitors, we're seeing more encouraging signs than what the initial benchmarks indicate. Given the current variability, our focus will remain on the annual figures. We recognize the internal model is more precise and while we can elaborate on it, it involves a level of complexity that may not be straightforward. Therefore, our objective has been to keep things simple in our communications.

Thank you. Our next question comes from the line of Tommy Moll with Stephens Inc. Please proceed with your question.

Good morning, and thank you for taking my questions. D.G., I wanted to circle back to your comments around the private label portfolio. If you think holistically there, is it relatively more tied to China? And if we do end up with persistently elevated tariffs there, how much risk to profit dollars, if any, is there to the extent you see customers, as you indicated in the example, shift away from private label to a national brand?

Yes. So I would say that certainly private brand is more China-centric than national brands, but not as much difference as you might think, actually. There's a lot of national brands that have the same China exposure in the same categories. So, the short answer is we think we can navigate around our private brands. Obviously, if this level of tariff were to persist, I think we'd get into supply challenges for big categories that are really important for our customers, and there may not be other sources. I think that's probably the biggest risk right now. If certain categories become un-cost competitive or non-cost competitive in China, I think we're going to have to look at other applications in some cases or just focus on the national brand. And I don't think it would be a huge deal overall. It would be a modest pressure, but not huge. But the issue here is going to be do we actually continue to trade effectively with China? If we do, I think we can navigate things. If we don't, there are going to be some categories that are really difficult to get our hands on.

Only other thing I would add is that we don't feel like we have a unique situation here. It's different for us than anyone else we're competing with. That's the only piece I would add here, Tom.

Yes, and the other thing on that is we've looked at where we have unique exposure, and it's almost nothing. It's very, very low. And so everybody's in the same boat here for sure.

Yeah. Thank you both. D.G., in recent periods, or I should say previous periods of market volatility, Grainger has been able to capture significant market share. And there's probably a whole host of reasons for that. But just as a simple example, I'm thinking about a few years ago when the supply chain was disrupted. You were able to exploit your scale and buying power to serve customers better than some of the smaller peers, for example. But if you think about the current environment, are there new lanes that you're identifying where you can lean in and once again exploit some of the scale and sophistication that you've built over your years as CEO? Thank you.

Yes, I think like I said before, we're in a good place in terms of understanding the options. I would say similar to when we went into COVID, our expectation was we're not trying to win any dip; we're trying to win through the cycle. And I think that allowed us to invest and gain share. We're talking about it similarly now. Are there ways for us to gain share coming through whatever happens here? I'd say with COVID and the supply shortages, it was pretty obvious what was going on. I'd say this is pretty uncertain still. We're probably going to let this play out for a few more months to understand really what the rules of the game are. But certainly, I do feel like we will be in a good position to drive some share gain through this process.

Thank you. Our next question comes from Ryan Cooke with Wolfe Research. Please proceed with your question.

Morning, and thank you for taking my question today. Maybe we could just touch on some of the moving pieces in your guide. I understand that you left the high-level framework unchanged, but I'm curious if there's been any push and pull between HTS and EA coming out of the quarter, and also if you could just help parse out price versus volume expectations. I think you had said earlier in Q&A that market volume outlook remains unchanged, but presumably you'd be looking at no longer be looking at minimal price for the year? So maybe if you could just touch on that.

Yes, so you're correct in the fact that there are a lot of moving pieces, which is one of the reasons when we looked at scenarios, the pieces were moving so much, whether it was gross margin, the revenue outlook, the price that we could actually feel certain about at this point in time, and then the leverage that we could probably drive for the rest of the year. We actually zoomed out and just said, okay, let's look at our seasonal trends. Let's base our outlook and guide, if we're going to look at it, on what we actually know and can understand, and that got us back to really holding the guide that we had laid out earlier in the year. There are some pieces, as you know, FX has moved a little bit differently, but we started off the year well, which helps us put a quarter of that in the bank. Gross margin was stable, and we're on our way to pass price and attempt to reach neutrality on the things that we actually knew. So that helps from a GP perspective. You call out that EA did really well, and it is growing faster than the high-touch business, which generally at those margin rates creates a headwind for us. But again, we were not necessarily incorporating potentially some of the upside that we may see from price over time, and so those things kind of canceled themselves out. So I guess the point I would like you to walk away with is we understand the dynamics of the business and what could happen. We have modeled several scenarios, including EA continuing to move fast and grow well in this market, but also I will point you back to some of our original assumptions related to the market. We knew that the administration was going to pass tariffs. We couldn't size them, but we did estimate that the market would most likely be down from a volume perspective or flat, and it looks like it is playing out that way. And so we've kept that assumption in mind as well. So again, we feel like we're at a good place. Any incremental price, we feel like we're going to be able to pass on as long as it's not too significant. But since we have been through several cycles of pretty high inflation, at some point that's going to start to impact demand, and we're thinking about that and being conservative as we think about the rest of the year.

That's very clear. Thank you, Dee. And FX was actually going to be my next question, so it sounds like there could be a little upside there given moves in the dollar, but okay. So I guess for my second question, we've covered a lot of ground on pricing and tariffs. Maybe if you could just touch on health of the customer groups and any notable trends that you'd highlight. I know government's a chunky exposure for you, so are we still seeing kind of no impact from DOGE or stimulus rollback there?

No. What I'd say is we're seeing all kinds of impacts at a sub-segment level. There were markets that were very, very strong in the quarter. Your specific comment on government, we think it was relatively weak to start the year. And we're not as exposed to DOGE given we're mostly military and state, but the little bit of business that we have, it would be exposed. Certainly, that was a little slower, so we did see that. But net-net, there's nothing. There's a lot of movements, but nothing dramatic to really describe at this point. I would say certain manufacturing segments were very, very strong. Aerospace is an example. It was very strong in the quarter. But other than that, not much to really talk about.

Okay. Appreciate the color. I'll turn it over.

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

Thank you. Good morning, everyone. Going to page 12 and the pie chart on the geographic mix, I would have thought China was much higher. And so has that changed meaningfully, let's say, in the last five years? And then also, how does that mix look differently versus your channel partners versus private label? Maybe I was thinking the private label is a much higher China source.

The private label source from China is indeed significant. It constitutes a notable portion of our end production location. It's essential to recognize that this reflects the final production cost of goods sold by region. We know there are some components sourced from China that are not included in our branded products, which means that figure may be higher than what we currently account for. While we have some understanding of this, we don't have complete visibility. At this stage, we observe that China's contribution has decreased slightly over the past few years—not dramatically, but there has been a reduction. We are seeing some categories shift to Vietnam, and there's been a slight increase from Mexico as well.

All right, good. That was really helpful. And D.G., I know you were dismissive last quarter that there might be any pre-positioning by customers ahead of tariffs. It doesn't appear that happened. But was interested if you all have done anything differently in terms of sourcing volumes ahead of tariffs. It doesn't look like it in your free cash flow. But just have you been tempted to try to get out in front of any of this? But some color there would be great.

Yes, not much. We placed pretty strong orders for Chinese New Year to make sure we got service right and got out in front of service on private brand products. And then we're doing some things for things that were on the water, for example, to hold them so that we don't take them at a depleted cost, but we still have them accessible when we need them for customers. So we are doing some things. But generally, we haven't done that much that would show up.

Great. And just last one is an observation. I appreciate all of your candor and the outgrowth, kind of the consternation between the two models. And as much as I would love to have real-time outgrowth updates from you all, getting an annual number, I think is fine. And it would be great if you could revisit those differences at year-end. But we appreciate it.

Great. Thank you. Appreciate it.

Thank you. Our next question comes from the line of Sabrina Abrams with Bank of America. Please proceed with your question.

Hey, good morning. Hey, thank you. Thanks for the question. I'm going to go back to the price and tariffs. So I guess, I think, Dee, you mentioned that it was 1% to 1.5% net impact in Q2. And I guess I'm just curious. So I understand, like, maybe it's not all, you haven't raised prices on everything at this point based on the tariffs. But just, like, if I think about the China COGS and the percentage of China imports to the U.S., I think I get to, with the 145% tariff, I think I get to a very robust price increase, like something in like the mid-teens level. And I guess just curious how to sort of bridge from the 1% to 1.5% to what's implied just by, like, China alone and like the mid-to-high teens. And I guess, like, yes, just thinking about, like, the different, I guess, like, getting from 1% to 1.5%, maybe it goes higher in the second half, and how to think about, like, the price increases on China. And, like, if, you know, the tariffs do stay in place, like, do we see pricing reach like 16%, 17%, 20% plus in your business? Thank you.

Yes. Just to remind everyone, the tariffs we implemented were primarily on our direct imports, which mainly consist of our own private brands. We did see a few increases on national brand products, but the majority of the impact came from our own products, which represent a smaller segment overall. Some of those items did see price increases in the mid-teens, but in relation to our entire catalog, this percentage is quite small. This is why we're currently projecting a 1% to 1.5% increase. This estimate does not include the impact of a 145% tariff, which would have significantly different implications. If our suppliers had to factor that in, it would lead to substantial changes. Currently, suppliers recognize that if they raise prices that much, it could severely affect sales. Therefore, we are navigating this situation carefully and figuring out how to manage it. So far, the price increases have been relatively minor.

Thank you. That makes sense. And then could you just provide a little more color on the price-cost dynamics through the year? I think there's a comment on the slide about being lumpy, but just want to understand expectations around price-cost in Q2 and sort of how that cadence trends through the year?

Yes, thanks for the question. And so, you know, just, I will say I continue what D.G. started with. At the highest level, you know, there's a lot of noise in the news about inflation. However, on the ground, things are moving a whole lot slower. And so the reason why we took the step to take the increases that we did is because those are more known. They've been negotiated. And, some of those standard costs in our system are being changed and thus the price is being changed. And so we did layer in this first pass of price inflation, and that will have an impact, a slight impact because it is modest on the second quarter. But there's a lot of puts and takes related to, I would say, price, gross margin, and profitability as we go from Q1 to Q2. As you know, from Q1 to Q2, structurally gross margin usually trends downward in the second quarter. We've layered on the tariff from that perspective. And then SG&A, there's also quite a bit of noise. We expect to gain some leverage as we move sequentially from Q1 to Q2. And in the prepared remarks, I noted that some of the favorability from Q1 SG&A flows into Q2. So that'll be a headwind. And then we have this noise with Grainger sales meeting that also impacts us both on gross margin and operating margins. So I wanted to point everyone to the fact that we expected for the second quarter operating margin to be about 15% because it is so noisy. It's kind of hard to follow all the noise and some of the things straight through. But as you think about the rest of the year, if tariffs remain modest as we continue to work through negotiations, we feel like we'll be able to manage that from a price-cost perspective. There may be some timing differences, but we will provide you that insight as we do on a quarter basis on how things are trending. And we feel like the overall guide still holds intact from an operating margin range, including operating cash flow and some of our other expenditures like CapEx share repurchase and the announced dividend that we just had.

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

Yes, thanks. Good morning and afternoon. So going back to the Zoro strength, I know it's in a different growth zip code from HTS, but the spread of growth is pretty unique historically. So I'm just curious. If we were in like a 3% to 4% HTS environment, would you be expecting Zoro to be putting up 25% to 30%? Is there a multiplier on end-market increments to the upside?

I generally focus on different end markets. Zoro's growth mainly comes from acquiring high-quality customers who are typically midsize and smaller, and encouraging them to make repeat purchases. Most of their growth is within their control and not directly tied to High-Touch, which targets larger industrial customers and offers additional services. Zoro is heavily marketing-focused, aiming to increase its market share among midsize and smaller companies.

Okay, great. Any other questions for the U.S., D.G.? Any interesting divergences geographically, regions within the U.S.?

No, not that we've seen. We haven't seen anything really all that interesting there.

Okay, thank you. My other questions have been asked.

Thank you. Our next question comes from the line of Katie Fleischer with KeyBank Capital Markets. Please proceed with your question.

Hey, thanks for squeezing me in. I just have one question here. Is there any way to quantify the amount of price increase requests that you have gotten from your suppliers and how long that will take to flow through to the P&L?

So we probably won't talk about the amount of increased requests. They've been all over the map, I will say that. So we've had some very high and some modest ones. Flowing through the P&L, though, I think is an interesting question. We typically have, let's say, three months' worth of inventory already. And so it does take a while for this to flow through. We have to place the orders, receive the orders for the cost to change. And so it will take some time. We will see a little bit of that in the second quarter, but I'd say more of it in the third quarter and beyond. We'll start to see that flow through.

Thank you. Our final question this morning comes from the line of Patrick Baumann with J.P. Morgan. Please proceed with your question.

Hi. Good morning. When comparing branded products to private label products, is there an average or guideline regarding the price discount of private label compared to branded products? What is the percentage difference in gross margin between the two? Additionally, have you considered the percentage of your private label products sourced from China that may become non-competitive if tariffs remain at the 145% rate?

Yes. So what I would say is that you have to do this on an individual product basis. In some cases, our private brands have a modest cost advantage. And if the tariffs are big, they will be underwater immediately. And in that case, though, the GP between the private brand and the national brand isn't actually that big of a difference. So that'll be an impact but not a huge one overall. There's some huge cost differences between private brand and national brand. In those cases, we may end up taking the increase, and GP may be smaller on those products in that case. So far, the cost increases that we, price increases we put through on those cost increases, we've been able to pass those through. And I think that'll make sense. Like I said before, if the 145% were to sustain, then that's where you're going to have some issues where we probably affect gross margin in the short term, potentially.

Okay. And then in looking at your comment on slide 12, again, back to that slide where you mentioned that total COGS isn't subject to the full tariff increase, resulting in net inflation being lower for Grainger. Can you help us understand how much of your COGS is product and input costs versus some of those other buckets like freight, supplier markup, other costs that maybe won't be subject to the tariffs?

We don't provide all those details, but I want to reiterate some points we've discussed before. Freight as a percentage of COGS typically falls in the mid to high single digits for us. This reflects the comprehensive analysis we've undertaken. Generally, you can assume that product costs have the most significant effect. However, as D.G. pointed out, it's essential to examine costs and product composition on a case-by-case basis to determine the exact tariff impact. I understand it's challenging for you to model this, and it can be equally tricky for us and our suppliers to find accurate figures. That's why our teams are approaching this carefully, and I appreciate that our supplier partners are collaborating with us. We're also working to communicate with our customers to share the insights we've gained.

Thank you.

So thanks for joining us today. We spent a lot of time talking about tariffs, and while we don't know where those are going to shake out, I just would reiterate that our business is focused on making sure we can serve our customers well, protecting service and working with our partners effectively to get to the right outcome here. We will be thoughtful. We will not react too quickly, and we'll get to the best answer. We feel like we've got a good position given our product information, our understanding of sources, and some of the things we've evaluated in the past help us have a good position heading into this. But this is all about making sure we can serve our customers effectively and protect service and do that in a financially proven way. So I want to thank everybody on our team and our suppliers for helping us with this. And thanks for joining us today, and take care. Have a great weekend.

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