Greetings, and welcome to the W.W. Grainger Third Quarter 2025 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce Kyle Bland, Vice President, Investor Relations. Please go ahead.

Good morning. Welcome to Grainger's Third 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 our non-GAAP adjusted results for the third quarter of 2025, which exclude the $196 million loss recognized from the pending sale of our U.K.-based Cromwell business and the proposed closure of our Zoro U.K. business. 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 was a public company and files Japanese GAAP, which differs from U.S. GAAP and is reported in our results one month in arrears. As a result, the number discussed will differ from MonotaRO's public statements. With that, I'll turn it over to D.G.

Thanks, Kyle. Good morning, everyone, and thank you for joining today's call. As headlined in the release, our third quarter results were fueled by consistently strong execution from our team. Despite the continued external uncertainty, our customers remained focused on improving their operations through increased efficiency and productivity. The value of the fundamentals of having inventory where and when they need it and a partner who understands their business and can bring the right solutions. As I spent time in the market with large customers this past month, these themes rang true. I was proud to see Grainger deliver the critical fundamentals that help our customers every day. I recently had great discussions with an aerospace customer and municipality about how Grainger's deep-rooted inventory management expertise can save them time and reduce costs. I saw that when we deliver a great service experience, customers take notice and it leads to more opportunities and deeper relationships. I also had the opportunity to speak with several experts focused on technology. Tech and AI will continue to be an ongoing focus for Grainger, enabling us to provide great solutions for customers and drive productivity in our operations. The promise of these new transformation technologies has never been greater, but the key will be leveraging our proprietary data and know-how to build solutions that connect to business processes and create a more seamless user experience. I'm excited about the work we're doing to bring more digital capabilities to both our customers and team members to make things better with every interaction. Making these improvements and staying focused on what matters is core to how Grainger operates, and we take that responsibility to heart in our communities as well. Last month, at our annual Bucket Build in Lake Forest, more than 500 Grainger team members came out to pack over 4,000 disaster relief kits. This included filling five-gallon buckets with essential cleaning supplies and hand tools that will help families and individuals begin the process of recovery after a natural disaster. Grainger has a long-standing commitment to emergency preparedness and response efforts. And this is another reason I'm proud of how the Grainger team lives our principles every day. Now moving to our third quarter results. We delivered a solid performance that in total outpaced our August formal guide, particularly on the gross margin line. Total company reported sales for the quarter were nearly $4.7 billion, up 6.1% on a reported basis or 5.4% on a daily constant currency basis. Gross margins for the company were 38.6%. Operating margins were 15.2%, and diluted EPS finished the quarter up $0.34 to $10.21. Operating cash flow came in at $597 million which allowed us to return a total of $399 million to Grainger shareholders through dividends and share repurchases. Our results continue to reflect tariff-related LIFO inventory valuation headwinds, consistent with what we discussed last quarter, which came in lighter than expected in the period. As Dee will discuss, without this LIFO impact, our operating margin would have increased year-over-year in the period. Looking ahead, while we're continuing to see more costs in the market, these LIFO headwinds will eventually dissipate as inflation cools and our gross margin will recover to our run rate expectation. As you likely saw, we recently announced that we've entered into an agreement to sell our U.K.-based Cromwell business and plan to fully exit the U.K. market. Given the economic dynamics post-Brexit, we had to alter our assumptions around the go-forward potential in the region. With this planned divestiture, we are now focused entirely on growing our North America and Japanese businesses where we can deliver the greatest long-term impact. Overall, while it has been an eventful few months, the business continues to perform well and in line with expectations. With this, we are narrowing our earnings outlook, which Dee will outline in a few minutes. It's important to note, we factored in the October headwind from last year's active hurricane season and an estimated impact from the government shutdown. As we wrap up 2025, I'm confident that we'll continue to serve our customers well, deliver on our financial commitments and drive solid results for all stakeholders. I will now turn it over to Dee to go through the details.

Thank you, D.G. Turning to Slide 7. You see the high-level third quarter results for the total company, including $4.7 billion in sales, up 5.4% on a daily constant currency basis. While gross margin finished ahead of our previously communicated expectations on a less-than-expected LIFO impact, we were still down 60 basis points year-over-year as segment mix headwinds and tariff-related cost impacts within the High-Touch business weighed on results. This led to total company operating margins of 15.2% for the quarter, down 40 basis points compared to 2024, but 70 basis points ahead of our communicated expectations. Diluted EPS for the quarter was $10.21, up $0.34 or 3.4% higher than the prior year period. Moving to segment level results. The High-Touch Solutions segment delivered solid growth quarter. In total, sales were up 3.4% on both a reported and daily constant currency basis. Results were driven by volume growth and price inflation for the segment, with the latter improving as tariff costs continue to be passed. From an end market perspective, our indicators suggest that the MRO market remained muted as the heightened inflationary environment continued to weigh on demand. For Grainger specifically, we saw strong performance with contractor and healthcare customers and improving results with manufacturing customers, which helped to offset slower growth in other areas of the business. For the segment, gross profit margin finished the quarter at 41.1% and down 50 basis points versus prior year, driven by similar factors to what we discussed last quarter. We saw negative but improving price/cost spread as we progressed negotiations with suppliers through the quarter and passed incremental price in September. Further, we pulled through LIFO to reflect the impact of supplier cost increases, albeit less than expected as certain increases were pushed into later periods. These two tariff-related headwinds were only partially offset by mix and freight. I would note that if we excluded our LIFO headwind and wanted to compare across our peer set, which report on FIFO, our implied FIFO gross margin rate would have increased year-over-year. On SG&A, margin improved in the period as continued investments in our seller initiatives and marketing were more than offset by productivity and sales leverage. Taking all this together, operating margin for the segment finished at 17.2%, down 40 basis points versus the prior year quarter. Now focusing on the Endless Assortment segment. Sales increased 18.2% on a reported basis or 14.6% on a daily constant currency basis, which normalizes for the FX tailwinds realized in the period. Zoro U.S. was up 17.8%, while MonotaRO achieved 12.6% growth in local days, local constant currency. At the business level, Zoro continues its momentum driving efficiencies with marketing spend and working to further enhance the customer experience, including improved search, better fulfillment, and continued optimization of their assortment. Taken together, these actions are driving strong growth from its core B2B customers, along with improving customer retention rates. At MonotaRO, sales growth remained strong with continued growth from enterprise customers, coupled with acquisition and repeat purchase rates with small and midsized businesses. On profitability, operating margins increased by 100 basis points to 9.8%, with favorability across the segment. MonotaRO margins remained strong at 13.2%, up 80 basis points, and Zoro margin improved to 5.8%, up 150 basis points, with both businesses benefiting from gross margin flow-through and healthy top-line leverage. Overall, we had another strong quarter across Endless Assortment, and we expect the team will carry this momentum forward as we wrap up the year. Before moving into guidance, I wanted to share a brief update on where we're at with tariffs. In the third quarter, we remain engaged in active dialogue with our supplier partners and use our September price increases to help offset continued cost pressure. While our initial pricing actions back in May only apply to a small portion of our products, largely those where Grainger imports the product directly, the September increase was much broader and included initial pricing actions on supplier imported products, where we had finalized negotiations. As we move into the fourth quarter, we're seeing inflationary pressure continuing to build, including impacts from the recent Section 232 expansion. As a result, we are taking some incremental pricing actions to better align price/cost timing as the tariff landscape unfolds. These actions are only modest in nature but are in addition to the price passed earlier in the year. On profitability expectations for the fourth quarter, we anticipate gross margins will improve sequentially with our normal seasonal recovery and improving price costs. The LIFO impact is expected to be roughly consistent quarter-over-quarter. Looking ahead, based upon what we're hearing from suppliers as part of our annual cost cycle, we expect further inflationary pressure into 2026. With this, assuming no further material changes to the current tariff landscape, we now anticipate the inventory accounting dynamics from LIFO will persist over the next couple of quarters until inflation cools. That being said, consistent with our long-term earnings framework, we anticipate gross margin will stabilize around 39% for the total company, subject to normal quarterly seasonality. While we will experience continued segment mix headwinds and some pressure within a subset of our private label assortment, these will be offset as price/cost normalizes back to neutral and the LIFO impact subsides. On LIFO specifically, we thought it would be helpful to provide a view of how inventory accounting dynamics impact our gross margin over time, especially because of how the cycle is playing out relative to 2022. While LIFO expense is always a drag relative to implied FIFO margins, it's not typically a material impact in every period depending on what else is impacting our gross margin results. As you can see on Slide 12, during periods of normal cost inflation, the LIFO headwind, the difference between LIFO margin and the implied FIFO margin is roughly 20 to 30 basis points, reflecting the real-time impact of higher costs flowing through our P&L. As we enter into a heightened inflationary cycle, like what we see in 2022, and like what we're seeing again today, this LIFO impact becomes more pronounced as the difference in COGS diverges between the two inventory methodologies. However, as inflation cools, the LIFO expense will normalize, LIFO and FIFO margins will converge. And as this happens and we pass further price, our reported margin will recover. With this, we expect our total company gross margins will stabilize around 39%, consistent with our long-term earnings framework. Now moving to the updated outlook for the remainder of 2025. As D.G. mentioned at the beginning of the call, we're narrowing our full year 2025 adjusted EPS outlook, which reflects slightly lower sales to account for the Cromwell divestiture updates and the impact of the government shutdown, which we're assuming reaches a resolution by mid-November. These top-line headwinds are offset by higher margins, resulting in an EPS midpoint consistent with the prior guide. In total, the updated guide includes daily organic constant currency sales growth of between 4.4% and 5.1% and a diluted adjusted EPS range of $39 to $39.75. If you squeeze to the annual guide to get an implied fourth quarter, the revised revenue outlook implies a Q4 daily organic constant currency growth rate of 4% at the midpoint, which assumes more than 3 points of price contribution to revenue within the High-Touch segment. October growth is off to a slow start of approximately 1% on a preliminary daily constant currency basis as we lapped a fairly significant hurricane-related benefit in the first two weeks of the month and as we face current year headwinds from the government shutdown. However, if we just looked at the last two weeks of the month, which excludes the prior year hurricane impact, October total company sales are up in the 4% to 5% range on a daily constant currency basis, more in line with what we saw in the third quarter, but still reflecting the impact of the government shutdown, which is weighing on public sector sales. Annual margin expectations have increased from our previous guide due to improved price/cost and LIFO timing. If you were to squeeze the implied operating margins from the updated annual guide and focus on the fourth quarter, it shows a sequential step down in the fourth quarter to around 14.5% at the midpoint. While the puts and takes are different, this sequential movement is roughly in line with normal seasonality. Overall, despite the tariff-related noise over the last couple of quarters, we remain poised to deliver a solid year. Before I hand it back to D.G., I thought it would be important to reiterate our long-term earnings framework in light of the recent tariff uncertainty and as we look ahead. While we have made some minor edits to CapEx to reflect the latest estimates around our global DC expansion, the core tenets of our framework remain solidly intact. We remain confident we can drive share gain in the U.S., while the EA business grows in the teens, stabilize total company gross margins around 39%, and grow SG&A slower than sales through process improvements and technology. Taken together, these actions will drive attractive returns, and we remain well-positioned to deliver great results for our shareholders for the years to come. With that, I'll turn it back to D.G. for some closing remarks.

Thanks, Dee. As we head into the final months of the year, our team will continue to navigate the complex environment and deliver value for our customers, our communities, and our shareholders. And as Dee mentioned, we continue to work through this inflationary environment and the challenges from the government shutdown. And while there is some short-term noise, we remain confident in our ability to pass through cost increases and achieve the core tenets of our long-term earnings framework. We'll continue to stay focused on driving strong execution, providing industry-leading service, and building innovative capabilities to deliver on what matters most to our stakeholders. And with that, we will open it up to Q&A.

Our first question is from David Manthey with Baird.

All right. That was a very clear presentation of the business. Thanks for outlining all of that data. Question on the 2025 guidance and the Cromwell. So Cromwell is held for sale as of September 30, so I assume you're taking any assumption out for that. And just ballpark, we are talking about $75 million, $80 million, I'm guessing. And then from an operating income standpoint, those Cromwell operating losses are pretty immaterial. Is that all correct?

Yes. So two things I'd point you at. We kind of adjusted for the Cromwell impact. And if you go back to the press release that we issued around our proposal to exit the U.K. in total and incorporated both that impact as well as the impact that's being proposed for Zoro U.K. So in total, it's about $40 million.

That's $40 million in revenues for Cromwell and Zoro U.K. as held for sale in the fourth quarter?

Correct.

Okay. All right. And then on the pricing actions that you've taken thus far in the fourth quarter 2025, should we assume that those are in Endless Assortment? I think you said your next opportunity to adjust contract pricing on High-Touch customers would be Jan 1. So is that another bite at the apple when we turn the page to 2026?

No. Obviously, the actions we've taken were September 1. Those have flowed into the fourth quarter, and that was a normal price cycle increase. And November 1, now we're taking another one, and that will flow into contracts as well as non-contract business, and that's all High-Touch related. Zoro has had good price inflation this year based on some strategic changes they've made.

Our next question is from Christopher Snyder with Morgan Stanley.

Sorry, I was on mute. So you guys said that, I guess, ex LIFO, the gross margin would have been up year-on-year, which I guess implies a LIFO headwind of something at least 70 basis points. I guess my question is, you guys are kind of saying you'll maintain a roughly 39% gross margin through these LIFO headwinds. So I guess as the LIFO headwinds go away, does that 39% go to something closer to 40% just assuming that we're in a 70-bps LIFO headwind backdrop?

Thanks for the question, Chris. So as we've noted during this period of time when we are comparing our results versus those who may be reporting on FIFO, we do have more of a negative impact directly related to the LIFO impact on gross margins. And so what we attempted to do here with our information is to recast and imply FIFO gross margin number for Grainger for easier comparability. But as you know, as we go through the cycle and others eat through the less expensive FIFO layers, and we're already there with LIFO, we believe gross margins will become a little bit tougher for them. And as we pass and continue to pass price, our gross margins will continue to elevate, as you noted. However, there are more things besides LIFO that impact gross margin. Product mix, freight, and other areas where we receive favorable movement. Some of those things may not be as favorable in the future as price becomes more favorable. And so that's why we stick to a longer-range outlook of around 39% or around the area of 39%. That doesn't mean it can't be a couple of basis points better than that in the future. We just don't want to project out too much because all the information we have today around tariffs and other cost inflation is what we need to use to project from this point.

I appreciate that. That was helpful. I guess, if we look at the Q4 guide, overall company up 4%. So High-Touch, I guess, would be below that, maybe something more like 3%, which is effectively all priced. So it seems like the guide is calling for no volume growth within High-Touch. I mean I know the backdrop has been challenged for a while, but that business has continued to grow volumes even if modestly through the first three quarters of the year. So is that step down in Q4 to maybe zero just all because of these government contracts and the risk associated with that? Or is there also maybe macro softening alongside that? Any color there would be helpful.

Yes. In Q4, we have two challenges, one of which you called out, which is the impact to our business related to the government shutdown. And the other one is related to the benefit received in the prior year in October related to the hurricane. We range bounded that last year of about $30 million, $40 million in the month of October. So that's also a challenge that we're cycling in Q4.

The one thing I'd also point out is if you look at October by segment, which we don't typically talk about, but government has obviously impacted substantially. Everything else looks normal effectively. So it is mostly just the government impact that we're seeing from both the hurricane, which affects state governments, in three states that were hit hardest last year, and then the federal government given the shutdown.

Our next question is from Jacob Levinson with Melius Research.

I realize there are some advantages on the tax front using LIFO inventories, but I wanted to ask if there's been any discussion in terms of shifting to FIFO. It just seems like the last couple of years, we've seen a lot of companies that had LIFO accounting actually moving to FIFO just given maybe a stickier inflation backdrop.

Yes, yes. So we obviously have talked about and evaluated it. I mean, the thing you need to realize is if you make that change, you end up having a cash payment, not an earnings payment, but a cash payment effectively for the accumulated taxes you saved at whatever tax rate is today. So it's not an inconsequential number. So we need to weigh that versus the benefit of being on FIFO and having easy comparisons. Right now, we're not going to make that change. We might in the future.

Okay. That makes sense. And then just on the government shutdown, I realize these are unfortunately becoming more regular occurrences. But in your experience, is there normally some catch-up in demand once the shutdown is over? Because I'd imagine a lot of these facilities are just mothballed right now. So once you ramp back up, maybe there's some pent-up demand there.

Yes. So what I would say is the nature of the shutdown and this one in particular, obviously, some of the non-military entities that we would serve are completely shut down. Typically, you wouldn't see much of a catch-up from those. But we also are seeing this impact given the lack of the number of people who are furloughed and purchasing people who are furloughed. We're seeing a little bit of slowdown in military and other areas as well. And so some of that may come back, but typically, it wouldn't all come back. You see a little bit of it maybe come back if there are catch-up projects they stop doing. But we would expect something between zero and something not huge to come back on that.

Our next question is from Ryan Merkel with William Blair.

Just sticking with the government. Did you guys size what the impact you expect in Q4 is from the government shutdown?

Yes. I mean, basically, the way to think about that is every day, a one-point or more impact on our total business. And so if it goes six weeks, it will be half a point. If it goes all the time, it will be one point or more impact. That's what we've seen so far. I would say that if it doesn't get resolved, it could become even bigger if it goes on a long time. But that's what we typically would see and expect to see now.

Okay. Got it. And then it sounds like you put through another price increase in Q4, and that would be off-cycle for you, which I thought you were trying to stick to the national account timing there. So is that sort of a change in how you're doing things? Or why the off-cycle price increase?

I think a lot of this is just probabilistic. So when tariffs first hit, we actually didn't know how they would play out, and we didn't want to get out in front of it. So we've been actually taking price increases when we have cost increases as opposed to speculatively. And there's been over 1,000 negotiations with our suppliers at this point. That's not normal for the record. And so what we saw was a number of cost increases come in between the time we set the September first prices and the time we would now. And so what we've done is we've raised the price to compensate for that, and we think it's the right thing to do, and our customers understand that.

And I would just add, a lot of that is price changes and corrections based upon what we're seeing in the marketplace. So I wouldn't assume that that change was as big as like the May first change, as an example.

Our next question is from Stephen Volkmann with Jefferies.

Great. I apologize for revisiting this, D.G., but regarding the price increase in November, was there any part of that that you considered speculative? Did you attempt to get ahead of any of this?

No, it's not speculative. It's just matching what we're seeing and what we're seeing in the market. We're sticking to our pricing tenets, which are basically priced to market at this point.

Okay. Great. And then I think you also talked about in your private label business, some headwinds, competitive kind of headwinds. How does that play out? Or what can you do to sort of address that going forward?

We don't think we're uniquely exposed or at a competitive disadvantage in the private brand. But what has happened with some of the larger tariffs is the difference between a private brand product, in some cases, and the national brand product can become very tight. And so then we have decisions to make as to how much price we take in those situations. And so we're still working through all of that. It's a subset of our private brand. It's not all of them, it's not a huge portion of them, but for some of those cases, we have to decide how we treat those strategically.

Our next question is from Christopher Glynn with Oppenheimer & Company.

So I appreciate the comments at the beginning on how you're looking at AI and adopting new technology. You've always been very tech-forward and investing at scale. And so I'm curious what you're envisioning with that from both sides, commercially layering into the outgrowth algorithm versus the cost of serve side and margin potential.

I believe that achieving long-term success will require a combination of various strategies. We have taken the lead in certain areas related to AI, such as back-end processing and customer service, which are quite evident targets for improvement. I expect that everyone will pursue similar initiatives. Therefore, our competitive advantage will hinge more on the commercial front and utilizing our data, products, and customer insights to develop solutions that enhance customer experiences. We are making significant investments in these areas, as both will be essential to our success.

Great. And then last quarter, you mentioned elevated bidding activity for your new large business. Curious how that pipeline is playing out? And should we think of that as incrementally constructive to the outgrowth algorithm perhaps for interim period?

Yes, we think we're doing well. I don't know that I'd say it's constructive for the outgrowth at this point, but we think things are going well on that front. And you probably know in our business, having big contracts and getting all of the volume are two different things sometimes. And so you have to have the contracts and then you have to win at the local level, and we know that. And so that's really how we construct our business and our focus.

Our next question is from Ken Newman with KeyBanc Capital Markets.

Maybe first, just to clarify, sorry if I missed this in response to Dave's first question, but any help on just how to think about the operating profit or loss in the other segment now that Cromwell is divested. Is that segment going to be profitable in Q4? Or just how do you think about that normalizing into next year?

The exit from the U.K. is reflected in two main areas. The largest portion is related to where Cromwell was located, and there is a smaller impact from the EA segment due to the Zoro U.K. business. This will have a positive effect on profitability once we finalize the deal, contributing around 20 basis points of improvement in operating margin.

Okay. That's helpful. I appreciate that. And then for the follow-up here, it looks like there was a pretty sizable increase in midsize customer growth in High-Touch U.S. this quarter. Is that primarily a price versus volumes mix? And then maybe just any color on how you think about how sustainable midsized customer growth can be going forward and its impact on mix?

Yes. So we believe we're doing really well with midsized customers, but the majority of the difference in the increase, I believe, is 7% in the noted slides is really due to some softer comps in the prior year.

And I would just add that I think we have a lot of opportunities with midsized customers, and we're learning, and I think we'll continue to do better, but it's not immediate to Dee's point.

Our next question is from Sabrina Abrams with Bank of America.

So the gross margins in the quarter were, I guess, a lot better than expected. And I know you've spoken to some stuff around LIFO expense timing, but it wasn't a pretty big delta. Just want to understand if there were any benefits from bringing down inventories quarter-over-quarter or anything about LIFO layers. And maybe if you give more color on exactly what happened with the LIFO timing? Did suppliers choose to eat increases?

Thank you for the question, Sabrina. The estimation of LIFO is quite challenging because it depends on the inventory purchases and specific cost changes, which must be assessed by SKU. When we sell products, we need to revisit previous periods to make necessary adjustments and accurately estimate the prior year's inventory simultaneously. We strive to effectively quantify the impact of LIFO. Our team consistently engages with suppliers, and the outcomes of those negotiations can lead to cost increases being allocated to prior periods. This plays a role in the improvement of the LIFO charge. Additionally, we also benefit from price and cost adjustments that affect gross margin, along with advantages from a favorable product mix and freight.

Okay. Understood. Could you discuss the market growth? Your daily sales growth has been quite stable this year, except for what's happening in Q4, which you've already addressed. Aside from that, do you have any early thoughts on your growth expectations for 2026? Are you anticipating it will be similar to this year's performance?

We will provide that information at the end of January. We usually don't disclose that information. However, we do anticipate a significant price rollover, as you might expect. We still plan to gain market share at our target rate. We will have more updates on our market outlook as we approach that time.

Our next question is from Neal Burk with UBS.

I wanted to ask about asking the price question another way. We hear about some price fatigue with respect to customers in the industrial channel. Can you talk about your conversations with your suppliers? I think you mentioned over 1,000 negotiations. So is there a sense that they're not fully passing on costs and so the inflation you see is a bit below market?

Yes. I don't know if it's a bit below market. What I would say is that for a manufacturer, they have decisions to make about whether they pass percent or dollars. And I would say that a lot of them have passed somewhere in between that two in many cases. So just because the headline is a 20% tariff increase, they may not pass 20% in all cases. And so we've seen really a mix of things and a wide range of things from our suppliers on that front.

Okay. And I know we'll get more on this one in January, but like any kind of initial thoughts on 2026, not so much on the top line, but you mentioned gross margins around 39%. So any kind of like puts and takes when we think about how that drops through to operating profit?

I mean I would just point to two things that probably set us up well, one is the LIFO thing we've been talking about that should improve as the year goes on and the other is exiting the U.K. market. If we can exit the U.K. market, that will help, too. So I would only point to those two things at this point. We'll talk about others as we get to the end of the year.

Our next question is from Deane Dray with RBC Capital Markets.

I was hoping as we close the books on Cromwell, D.G., you can share some of the lessons. This was not the first time Grainger had tried to expand in Europe. There was also Fabory. So what doesn't work with the MRO model in Europe that's kind of moot now, I think. But then more importantly, don't you still have all kinds of opportunity to outgrow North America, and it's still highly fragmented? So isn't that still the growth opportunity? So two questions here.

And the second one is really easy. So yes, we do think the opportunity is to grow in North America. And in Japan with MonotaRO, we've got great growth opportunities there. I'd say Fabory and Cromwell are very different experiences. I think Cromwell is a very good business. We bought it right before Brexit happened. We thought we had an opportunity to learn and build off that platform for Zoro U.K. and then potentially think about expansion and learn about the European market. That turned out to not be true, obviously, when Brexit happened. And at some point, it becomes clear that you've got a midsized business that isn't really material to our portfolio. We want to make sure that our attention goes to things that really matter, that can move the needle for us. And so that's why we made the decision. We do think Cromwell is a good business and will continue to be a good business going forward.

Good to hear. And just to clarify on the government shutdown, I appreciate how you sized it. Has there been any difference in behavior or demand between federal, state, and local levels? The focus is on the federal shutdown, but what's been the ripple effect across the rest of your government business?

Very little. I believe the state business is down in October primarily due to the hurricane. If you exclude the hurricane effects from the three states that experienced significant events last year, the state would be on a positive trajectory. The local business hasn't been significantly affected. In regard to the government shutdown, it's mainly the military that has been impacted, along with VA hospitals that are tied to federal funding, which have also seen a slowdown.

Our next question is from Nigel Coe with Wolfe Research.

I appreciate the effort to explain LIFO accounting. As an accountant by training, it can be quite challenging for me to grasp. However, it's a commendable attempt.

We've had so many whiteboard sessions in the last few months. It's ridiculous.

I understand. However, the more we explore it, the more perplexing it becomes. We estimated an impact of about $52 million this quarter due to the change in the LIFO reserve. I assume that's the charge. The press release mentions that there will still be some impact in the first half of or by mid-2026. Do you anticipate more moderate impacts in the first half of next year?

Your calculations are accurate. Regarding next year, we are currently in the middle of the cost cycle for 2026, which complicates our ability to provide a clear outlook for that year. However, we anticipate that additional costs will arise, resulting in further LIFO impacts as we move into the year. While we don't have precise numbers to share at this time, we recognize that we will face a LIFO impact and that there will be additional pricing adjustments needed for 2026. However, at this moment, it's challenging to quantify those incremental changes since they haven't been finalized. We believe that as we progress through the latter half of next year, we will be in a better position to address any impacts and new costs, as we will have had several pricing cycles to account for them.

Right. Okay. And then obviously, good news that the price is starting to come through here. How do we think about price elasticity? There's a sort of vague aura of price fatigue out there with some companies, and I'm curious how customers are responding to these price increases. How do you think about the elasticity of demand, especially for the white label goods?

Yes. So we are having very good conversations with our customers. They are seeing everybody come to them with what we're talking to them about generally. So we haven't really seen price fatigue, and we've been very measured in how we've done this. I guess there could be a point where that might be a challenge. But certainly, for most of what we sell, it's a very small portion of our customers' expenses. And so we find that as long as our prices are competitive, we are usually in good shape.

Next question is from Tommy Moll with Stephens Inc.

I want to tighten up my understanding here on the U.K. exit. Two-part question. The $40 million sales impact that was over what time frame? And then the 20 basis points operating margin impact, just want to clarify, you meant to say or what you meant was assuming the exits go as planned, that would be the uplift to consolidated company margin?

Yes. So yes, the $40 million is just tied to Q4. And the 20 basis points impact is for the total company on an annualized basis.

Okay. And the $40 million, Dee, is for the entirety of Q4, correct?

So we're estimating that we will be able to close on the Cromwell deal by the end of November, early December.

And that's the $40 million from that point, effectively.

Yes, that's both Cromwell and what we expect to happen at Zoro U.K. as well combined.

Perfect. We're clear now. Regarding High-Touch and the pricing exit rate, for the fourth quarter, I believe you mentioned it would be over three points. Additionally, discussions with suppliers indicate that more adjustments may be required, likely in the first half of 2025. So as we consider this, could we envision a scenario where the pricing for High-Touch in 2026 could be around four points or higher if we align all these data points accordingly?

Yes. I mean, we're estimating that the wrap will be close to three. So since we don't know the other numbers, it's highly likely that it's going to be north of three for next year.

Our next question is from Guy Hardwick with Barclays Capital.

Most of my questions have been answered, but just a quick one for me. Looking at the sales growth by customer end market for High-Touch Solutions U.S., warehousing is down mid-teens, which is sharply against the kind of trend or slightly up, slightly down each of the last few quarters. Can you explain that?

Yes, sure. That's entirely around one customer where there was a shift is what I would say.

Our next question is from Patrick Baumann with JPMorgan.

I had a couple of quick ones here. Touch on the volume trends at High-Touch again. What do you estimate the MRO market volume did in the third quarter? And in context of that, can you touch on if you're still happy with the returns you're getting on your investments, your share gain investments?

Yes, approximately 2% in volume for the quarter, still below 2%.

Market.

So market would have been down 2%.

That's correct.

I'm sorry, I thought you were asking what our volume was. Our volume would have been 1% to 2% in the quarter. And yes, the short answer is yes. We are seeing significant returns on our investments, getting more effective and more efficient in some of those investments. So yes, we're pretty bullish on what we're seeing from what we're investing right now.

And I would just point you to our return on invested capital is still north of 40%. It was lower than prior year. However, the main impact from that is just us continuing to build assets and in this case, build networking assets related to a lot of investments that we're making in DC capacity to ensure that we have great service and availability.

Okay. And then my follow-up is on the margin side again. So the LIFO charge I get is hard to size for '26, so we can make our assumptions around how much of that 80 to 90 basis point drag to add back as a starting point. But the slide mentions price/cost as being negative as well. Can you size that? I assume that's incremental to that 80 to 90 basis points. And then as you sit in front of the whiteboard and game theory if the IEEPA tariffs are ruled illegal, mechanically, how do you guys think about that in terms of the flow-through to results?

I will begin, and then D.G. can continue. As we look ahead to next year, we will still encounter the LIFO impact, which will remain a factor. However, we anticipate that our prices will continue to rise, leading to an improvement in our gross margin from Grainger's perspective as it relates to this. This outlook is based on all the information available to us today. We are addressing further cost increases and typically, at the start of the year, we implement cost increases in line with our completed negotiations. This cycle will begin anew, although we do not have specific details to share at this time. Historically, LIFO has a significant impact on our business at the beginning of the year, but we typically adjust for that through our price increases over time. While LIFO will not disappear entirely, it will stabilize. We expect what we are experiencing this year to normalize, and we will continue to see a rise in prices. That's why we are confident that by the second half of next year, similar to how we are concluding this year, we will be around a midpoint of approximately 39%.

Your second question is probably more theoretical at this point, which is if tariffs are illegal, what would happen? First of all, we have followed our own guidelines here that we only do things that actually are happening. And so we would have to actually see what the law change would look like and figure out what would happen. I'd say two things. One is we have worked closely with suppliers to tag what the tariff cost increases are, so we could and we would know how to unwind those if that was, in fact, required. We could do that. And certainly, as that happened, we would then, of course, get a benefit because when we took the lower-cost product in, then we have the reverse of what's happened in some way. But I don't know how big a benefit that would be. So we'd have to come back to you and model all that if that, in fact, happened.

Our next question is from Chris Dankert with Loop Capital Markets.

I guess focusing on Endless Assortment here. Nice results. Maybe can you comment on how much of that's being driven by the more targeted selection continue to provide some benefits? How much of that is kind of the customer acquisition flywheel, just larger invoice size? Maybe just any commentary on kind of what we're seeing in terms of trends inside EA.

Yes. I would say that most of the improvement we've seen, particularly with Zoro, has come from better fundamentals in attracting more appealing customers and encouraging them to make purchases more frequently. The average order size has remained relatively unchanged; the real driver has been the frequency of orders. This has resulted from better customer acquisition, targeting the right products that increase our chances of repeat purchases. We've also improved our marketing efforts and built stronger relationships with customers through digital channels. Overall, the fundamentals have significantly improved, leading to much higher repeat rates. Additionally, we've made pricing adjustments that have been beneficial, and our service quality has improved. All these factors have contributed to better performance.

Got it. And I guess as a follow-up, I mean, we're seeing better drop-through now on the SG&A leverage. Are there any additional investments similar to the Tokyo DC or anything else we should keep in mind into 2026, 2027 that would impact kind of that drop-through rate? Or should we expect pretty good incremental margins in EA going forward from here?

Other than Meadows, I don't know of any other investment that is on the horizon. They would have a lot of capacity in both Osaka and Tokyo after Meadows, and that be the expectations they would fit for a while.

There are no further questions at this time. I'd like to hand the floor back over to management for any closing comments.

Great. So thanks for joining the call today. One thing I'd highlight is that I think the underlying business trends are really good, and we're doing a lot of great things to improve the customer experience, to prepare to improve our cost structure, to continue work on building technology and building service capabilities through the right network changes on the distribution center network. So while we spent a lot of time talking about LIFO, I hope you get the sense that that's not really what we're focused on. As a business, we're focused on actually underlying performance, and we feel like the underlying performance is pretty good. With that, I wish you all a safe and happy Halloween. And thanks for joining the call today.

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