Greetings, and welcome to the W.W. Grainger Fourth Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to Laura Brown, Senior Vice President of Communications and Investor Relations. Thank you. Please go ahead.

Thank you. Good morning, everyone. Welcome to Grainger’s Q4 earnings call. With me are D. G. Macpherson, Chairman and CEO; and Ron Jadin, Senior Vice President and CFO. As a reminder, some of our comments today maybe forward-looking based on our current view of future events, actual results may differ materially as a result of various risks and uncertainties, including those detailed in our SEC filings. Reconciliations of any non-GAAP financial measures mentioned on today’s call with the corresponding GAAP measures are at the end of this slide presentation and in our Q4 press release, which is available on our Investor Relations web site. D.G. will be covering the performance for the quarter, as well as give an update on our 2018 guidance. After that, we’ll open for questions. D. G. to you.

Thanks, Laura. Good morning, and thank you for joining us today. We know it is a busy earnings day and we appreciate you being on the call. So, 2017 was an important year for Grainger. We took action to become more relevant to our customers and to compete more aggressively in the market. We also saw the market grow for the first time since 2014. In 2017, we announced a significant change to our pricing structure in the U.S. Pricing has been a barrier to our growth both with large and mid-size customers. This was a very complex change that required a lot of work, lot of collaboration, and great execution to pull off. I am extremely proud of our team members for executing the way that they have this year and the results show clearly in the fourth quarter 2017 numbers. We saw our performance accelerate through the back half of the year, which is very encouraging. We executed the pricing change, while continuing to focus on making sure we create value for our customers. In 2017, we also launched a new R&D website called Gamut, with a new way to think about product search. Given the positive early customer feedback we plan to combine the capabilities of Gamut with those of our industry-leading website Grainger.com to create the most powerful industrial website in the market. In Canada, we laid the foundation for a complete business model reset and that began in late 2017. We are improving our service to customers, do more consistent direct-to-customer shipping. We are improving Canada’s cost structure through branch reductions and the creation of North American centers of excellence, and we are improving our profitability to price increases and improve large customer solutions. We are now starting to see the benefits of that work,…

Thank you. [Operator Instructions] Our first question comes from the line of Ryan Merkel with William Blair. Please go ahead with your questions.

Hi thank you, good morning and congratulations on a nice quarter.

Good morning Ryan. Thank you.

So, first question, the 11% volume growth really stands out. You’ve been talking about 6% to 8%, so two-part question, first, do you view the upside as more a response to your price cuts versus the macro? And then secondly, are you just being conservative by not changing the sales guidance for 2018 at this early stage?

Right. So, thanks Ryan. I would answer those in succession. So, when we look at the 11% growth in the U.S. certainly part of that is an improving demand environment. It is a meaningful part, but not the majority. The majority is our own pricing and marketing actions driving that. So, certainly there is some demand tailwinds, which are great, but lot of this is just the changes we’ve made. The second part of that is, we're not going to change our projections this time. We are still four months in, five months in understanding what’s going on with the volume response and so we’re going to keep to our projections this time.

Fair enough, but would you also say that there’s no reason you see nothing out there that the 11% or something near that wouldn't be sustainable based on what you’re seeing today?

What I would say is that, the demand environment has been very consistent the last three months heading into this year. So, there is nothing to suggest things are changing.

Okay. And then, just second question on gross margin and the outlook there down 70 basis points, excluding the accounting, is there any upside from improved price cost? Are you starting to see some inflation from your suppliers?

Yes. We are starting to see some inflation from suppliers and we expect to have some price cost. We’ve already built that in to the projections. I think a lot of what happens with GP rate in the U.S. will be determined by the mix of growth that we get. If we continue to see the mid-size customers and the large non-contract customers grow faster than the average we may have some upside, but we just have to wait and see.

Very good. I’ll pass it on. Thank you.

Our next questions come from the line of Christopher Glynn with Oppenheimer. Please go ahead with your questions.

Yes, thanks. Good morning. Just wanted to ask another one on gross margin, you know with commodities and supplier inflation on an uptick here, in the context of your repricing strategies is pricing to inflation at odds with continuing to execute the volume response side of pricing?

No, not really. We will separate those two. So, the pricing actions we have taken, we really are tagging to the market and making sure we are market competitive, and then if market prices increase we will be able to realize that as well, if it is based on inflation. So, we view them as independent. We’re focused on being competitive, but certainly as inflation comes we would expect to realize that as well.

Okay. So, you’re not nervous about a squeeze there, even if it is short lived, it doesn't sound like. And then just a housekeeping item, does the 2018 tax rate guidance reflect the full impact of the bill or is there a more mature run rate that we would pencil in for 2019?

Yes, we are calling this provisional at this point. This is the best to our knowledge at this point, and we think we’ve captured the key elements in the rate.

Thanks.

Our next questions come from the line of Adam Uhlman with Cleveland Research. Please go ahead with your questions.

Hi, good morning. I was hoping if you could give us some more color on the acceleration and sales growth with the medium-sized customers that you saw? Could you share any data on the active customer count, the re-engagement that you had with customers that had fallen off, has there been any change in the average order sizes, maybe just a little bit more detail so we can better understand the moving pieces there?

Yes. So, I won’t provide too much detail on that. I will say that, if you recall, we have a fairly small portion of mid-size customers as customers today. The price change has had more impact with the existing mid-size customers early days, but we are starting to acquire new customers, but I would say our customer acquisition is still pretty nascent. So, it’s really been mostly around existing customers buying more and then what we would call lapse customers, people who knew Grainger rebuying, but we are starting to acquire some new customers as well.

Okay, thanks. And then D. G. could you comment on what you’re seeing so far in your January sales, there has been some difficult weather and government shutdown impacts, maybe how we should be thinking about in the quarter, the cadence as we move through the year?

Yes, I mean it’s too early to comment much about January. We don't feel like the government shutdown is going to have much impact if it gets funded going forward. Obviously, if there is another shutdown that would change things. And the weather events are normal for this time of the year, I think certainly we’ve had days when there has been some impact, but overall, we don’t expect any of that to have a huge impact at this point.

Thanks.

Our next questions come from the line of David Manthey with Baird. Please go ahead with your questions.

Hi good morning. D. G. your plan seems to be coming together better than most believe that it would, when you look at the current quarter outperformance what do you feel were the biggest contributors to that outperformance relative to your expectations going in?

I would say that almost all of the outperformance came in two places. One is the U.S. and the other is Canada. So that contributed about $0.60 of the outperformance. Obviously, given the U.S. size most of it was there. I would say, a little of that outperformance would be the market strengthening and the rest would really be around price and marketing and some of our sales activities with large local customers that are really getting traction. So that’s where we could see most of the outperformance right now. And then Canada was - the rest of that and that was getting some traction on the price increase, which was a really important.

And just to be clear, did you say that the price increase was in the second half of the quarter or…?

Yes, it was.

Okay, and then a follow-up question. Was there something about the operating outperformance that you saw that $0.50 or so in the fourth quarter that leaves you to believe it was unsustainable into 2018? The reason I ask is that, given that all that outperformance was concentrated into one quarter, it just seems like the guidance might have stepped up by more than the $0.50 assuming that outperformance would have been spread out more evenly in 2018 than it was in 2017. So, is there anything about it or are you just being cautious here as you look out to 2018 and everything that’s going on?

I think short-term we would expect, like I mentioned the demand environment continues to be strong. Lot of uncertainty of course to what happens throughout the year and so we built in the outperformance from the U.S. into the guidance, but we didn’t assume that all of that continues throughout the entirety.

Okay, thanks to D. G. Good luck.

Thank you.

Thank you. Our next question comes from the line of Robert McCarthy with Stifel. Please go ahead with your questions.

Good morning everyone. How are you today?

Great.

Good. So, I think - two questions or two sub questions, how are you want to typify, I think the first question is building of some, what David asked about, I mean clearly perhaps your conservatism could be due to the fact that the back half of 2018 will provide a very interesting compare environment, because you will be anniversarying the price comps and the volume response, so is that really where the base is of your caution with respect to right raise in the guidance further, is really the rubber hits the road in the back half of 2018, and will have a better sense than because then you will start to anniversary some of these actions?

Well I think, as I mentioned before, if you look at mid-size customers for example, most mid-size customers have not yet engaged with us, so I think there is probably a longer run way than just through the end of July to grow with mid-size customers and you would expect to continue to grow there. I think if we’re being cautious, it’s just, we don't have enough time history here to know exactly how this is going to play out. So, we are - we have got our targets and we are holding to our target, and that’s what we’re going to do.

And then on the 2019 targets, I mean, any thoughts about how you're cadence and how that’s looking there, is there any source of potential upside from those targets or do you at least think those targets remain very firm?

We’re still very comfortable with those targets. We don't change long-term guidance at the quarter and we will continue to talk about that certainly in November when we [indiscernible].

The final question obviously given the stock move and the fundamental performance improvement the CFO job is looking increasingly attractive or is there any updates as to when we will see a new CFO put in place?

I would say the process has moved along very, very well and we are deep into that process at this point. We will let you know.

Best wishes.

Thank you. Our next question comes from the line of Hamzah Mazari with Macquarie. Please go ahead with your questions.

Good morning. Thank you. The first question is just around the portfolio and the question really is, does repatriation or tax reform longer term make you take a fresh look at the portfolio, whether it’s the MonotaRO business or any other pieces of the business, just in terms of whether they belong or don't belong or whether the tax rules sort of change your view on monetization longer term?

So, I think the first thing I would like to say - Hamzah thanks for the question - is that we have gone through a lot of work over the last three years to get our portfolio to be where we think it needs to be, and so the business that we have that remain we think can be very successful. It’s still early in the tax reform cycle to understand whether there will be significant implications throughout the portfolio, but right now we think the portfolio we have is the right one. We think we have competitive advantage in the places where we think we can grow the businesses and grow them profitably and that’s where we’re focused on.

Got it. And just a follow-up question, if you could just remind investors on your government business and how that did and clearly the shutdown was only three days, but since it’s topical and we saw some impact in 2013 in your business, I know federal is a smaller piece, but just any view on how that government business did and what we should be thinking about?

Yes, so I think our government business is very strong. When you think about the government, if you're talking about the government shutdown, typically certain parts of the government sales and so as the military continues to buy and it continues to buy, they are a big part of our federal government. It has some impact, but for us if there is a shutdown that’s short lived, it won't have tremendous impact. If it is long-lived, of course, all bets are off. But it's a fairly small - the part that was affected by the most recent shutdown was a pretty small portion of our portfolio.

Great. Thank you very much.

Our next questions come from the line of Deane Dray with RBC. Please go ahead with your questions.

Thank you. Good morning everyone. I was hoping to get some more color on the capital allocation decisions that you’re making here with regard to the benefits of tax reform. So, to start with the spending on digital, with this in a plan before tax reform and maybe just give some color as to where and how this money will be spent?

Sure, thanks. So, for us as a company, the most important thing for us is to be successful and drive success over the long term. We took a look at the tax bill and took a look at where we might accelerate investment to ensure that we are successful. There is a host of things around digital. We’ve certainly developed a lot of capabilities. This is really moving things forward in the cycle, and so accelerating things that we probably would have done over a longer time horizon and we feel like now is the time to do that, and there will be no regrets for making these investments and they are important to creating competitive advantage longer term. And so, we decided to pull this forward.

Is there any way you give us some examples of what type of spending in the lines of digital?

So, we're not going to talk about specifics today, but we have a plan. We are likely to talk about that more around the EPG timeframe.

Got it. And just last question is, can you provide any specifics on what the adjustments where to - or the add backs where to adjusted gross margin?

What do you refer…

I know you exclude restructuring, is there anything else?

Go ahead Ron.

Most of it is op expense. The ones that affect the cost of goods sold or GP would be the ones that have do with inventory primarily. So, as we go to close a branch we will increase reserve because some of the inventory that we would have sold over time now, we have to accelerate that process. So, we end up taking a hit to cost of goods sold as we increase that provision. That’s predominantly what it would be. So, most of it is in expense out of that 112 million we talked about, we could do the math on that, but it’s - I think it’s 10 million, 15 million that would COGS.

Got it. Thank you.

Our next question comes from the line of Matt Duncan with Stephens. Please go ahead with your question.

Hi good morning guys congrats on a great quarter.

Thank you.

So, first question I have got, D. G. I was hoping maybe you could give us just a little bit more granularity on the external ratio and volume you saw with U.S. large customers, you did mention that the spot buy volume and the non-contracted large customer volume both grew faster than the average, could you put some numbers on that by chance and sort of help us gauge what the acceleration was from the third quarter to the fourth quarter in those two categories?

I think the important point there, Matt is that, those two pieces of volume had been shrinking for several years. And now they’re actually contributing to the growth and so both were - they were slightly better than the average, but that really jumped sequentially from what we have been seeing with both large local and spot buy. So, we saw, I think spot buy grow roughly 10, and large local grow roughly close to 10, little less than 10. So those were the numbers we saw.

Okay that’s very helpful, thank you. And then another one on gross margin, sorry to keep beating you over the ahead with this, but just on the supplier price increases that you are seeing, what are those sort of on average and then historically one thing that I’ve thought you guys have always done well over time is use inflation to help get a little bit of gross margin? Although this seems like a strange conversation to have right now, is there any chance that you might benefit a little bit as you sort of time how you increase your pricing around inflation or is that just not the way we need to be thinking about it, given the dynamics in your business right now?

No, I think it is the way to think about it. I think net, net of the repricing, we do believe that we will be able to benefit from inflation. To your question about what we’re seeing from suppliers it’s all over the map depending on what type of supplier they are, but, you know low single-digit inflation is kind of what we are seeing at this point on average. And so, we would expect to benefit some from that.

Okay, thanks D. G.

Thank you. And our next question comes from the line of Sam Darkatsh with MRC. Please go ahead with your question.

From Raymond James hopefully. So, hi D. G., good morning. So, two questions if I could, your original guidance for pricing in North America, I’m sorry in the U.S. was down 6% for both 3Q and 4Q and they ended up being down 5 in both quarters, was that due to a change in the pricing strategy or FX or was that you being conservative, or what was the reason for the delta between your actual pricing in U.S. and what you originally guided for?

It’s pretty much all customer mix or type of buy mix. So, when spot buy and large local and mid-size grow as fast as they have then that is the benefit.

Got you. And then second question, I mean you still have 250 million in debt pay down anticipated for 2018, I’m trying to understand why that is preferable over share repurchase, given the fact that your debt-to-EBITDA is still away about a turn or so, why is that an attractive use or use of cash?

Hi, Sam it’s Ron. You know, I have to apologize that’s a short-term debt and other, and by the end of next year it is really other. Our short-term debt at the end of this year is less than $50 million. I think it’s about $40 million, and by the end of next year it’s, a similar very small number. So really that 250 million, probably 200 million of it is cash, it’s excess cash. So that could be applied to many things. In November, I mentioned that that number was about 100. So that number is growing in part because of improved performance and tax change. So, we’re reinvesting 40 million of that in CapEx as D. G. said and 80 million in share repurchase and there is more of that we could do with the excess cash that’s still there assuming we deliver on that plan.

Thank you, gentlemen appreciate it.

Our next question comes from the line of Robert Barry with Susquehanna. Please go ahead with your questions.

Hi guys good morning, and I’ll add my congrats on the quarter. I just wanted to follow-up on the comments about benefiting from inflation, do you think you actually be pricing ahead of seeing it or is that a comment more due to like timing of inventory turns or something like that?

So, historically we’ve seen benefits from our ability to manage COGS better than inflation that we have seen, and so I think that’s probably the source of the benefit that we typically have had historically.

That you think will occur again?

Well, in fact I just want to add, D. G. mentioned before low single digit inflation, on the items we are seeing inflation, but our plan for this year is still negative half a percent deflation given all the actions we take and continue to take to reduce cost with other suppliers where we're not seeing inflation.

I think the principle we always have as we price the market and then we get the best COGS and service we can. And so, if the market is increasing price and we’re able to manage COGS better that’s the benefit that we have seen historically that people refer to.

Got it. And then you said the strong performance on the topline was mostly on your actions, the price cuts, the marketing, but anything you would call out in terms of end-markets did get notably better and may be in that commentator you could speak specifically about resellers just because it’s especially strong? Thank you.

I think the strength is across the board, and I think you are always looking at sort of what’s happened in the past, I think heavy manufacturing was strong. You know resellers were strong, it’s still a pretty small portion of our overall mix though. So, I wouldn't really point to anything that unusual was in the end-markets.

Okay, thank you.

Our next question comes from the line of Justin Bergner with Gabelli. Please go ahead with your question.

Good morning D. G. and congratulations on the good quarter as well. First question just relates to understanding sort of the break-out between - among the $0.50 that sort of better than expected earnings that Grainger delivered in the fourth quarter, I’m just trying to sort of decompose that a bit, I mean it seems like about half of that is coming from the better sales growth, maybe some from mix, some from Canada, are those sort of the right buckets in the right general proportions and are there other drivers in that $0.50 be it versus your own expectations that you guys should be thinking about?

The bulk of that comes from the U.S. it is volume and expense leverage, so strong drop through rates on the volume and it’s Canada. The Canada GP improvement. Those are the primary levers.

And then was mix also beneficial, given the medium customers are accelerating?

Mix is beneficial on the gross profit line for sure. Yes.

Okay. Another question I had is, as you think about the acceleration or large customers and medium customers and higher share wallet from your pricing changes, do you have a sense as to who your increasingly taking share from, is it sort of mom and pops and regionals or is it larger national players that you think are the share donors?

I think, historically and I think it’s probably no different today. We’re still on a very, very fragmented market, and so when we’re gaining share typically it’s from a very fragmented set, whether it’s mom and pops or mid-size distributors or others. Mid-size customers, I think it’s even probably more diverse in the sense that there is, they use retail sometimes and so if we’re able to get that business than we might be taking it from other sources, but it’s very fragmented.

Okay great, and then just finally quick clarification question, so between the P&L investments in digital and increased CapEx which seems mainly digital related as well, you’re spending sort of an additional $50 million to $60 million on digital on 2018 versus where you are expect it to be before?

No, just the 40 that we're talking about.

Okay. So, the P&L impact of the increased investment is non-digital or…?

So, the 40 is capital, probably more like 15 of expense and the depreciation on the 40 is - gets you to the 20 million impacts.

Thank you. Our next questions come from the line of John Inch with Deutsche Bank. Please go ahead with your questions.

Thank you. Morning everyone. Hi D. G. and Ron, the gross margins were better in the fourth quarter and I was wondering if there was perhaps some more favorable benefit from say the rebates, and the reason I ask that is, the question is because it is the fourth quarter does it cause for some sort of a true-up for the year? So, if you’re getting more rebates, do you have to actually recognize disproportionately more gross margin benefit because you have to average it over the course of the year, if that makes sense?

No, it’s a great question and certainly with the additional volume we would be getting additional rebates, but that volume is brought into inventory, so those rebates are capitalized. We would see those rebates shortly in the P&L next year.

Okay. So, there is no - in other words the gross margin improvement in the fourth quarter was all volume metric, there wasn't any other, some sort of accrual accounting impact that would not repeat?

No.

Okay. Pricing was better or sort of down five versus down six, why was that again, was it just mix, I mean you’ve answered a couple of questions saying it’s mix, but was there some other phenomenon in the way the quarter played out?

Just customer mix, and volume mix.

Okay. One more question from me, it looks like the trajectory or transportation cost UPS, freight and the like that seems to be sort of having significantly higher in the short term. How do you, just describe Grainger, like how do you actually pass through those costs to customers. I know that you sort of build UPS on top, but - maybe if you could just explain sort of what’s going to be the impact of these costs and how you manage them?

I think we’re actually doing quite a good job of managing our transportation cost and I won't go into details of where we expect those to go now. In general, to your question, it just depends on the customer. For many customer, we actually take the burden of transportation cost and it’s included in their contract. Some do pay freight. We feel that’s the best environment because we feel we could manage those costs, as well or better than anyone and that’s what we’re focused on there.

Just one last thing, government, I mean you basically said D. G. the government is pretty strong or was pretty strong, MSC called out weak government in December, it sounds like you did not [indiscernible] what their excuse was, but it sounds like you [indiscernible].

I think some of that question goes to what we saw over November and December. For us the demand environment has been very, very consistent. 2016 was a little unusual on the sense that November I think was bad for everybody and December was good for everybody, so the compares can make you think that December wasn't as good well in fact, relative to our forecast and expectations, December was every bit of strong, if not stronger than November. And so, we didn’t see anything from shutdown that caused any problems for us.

Thank you. Our next questions come from the line of indiscernible with Patrick Baumann with JPMorgan. Please go ahead with your questions.

Hi guys, good morning. Quick question on the segment margins for the U.S. Exiting the year to you guys were at 15%, I don't think you have changed the 2018 guide for U.S. segment margin, I think it’s still 14.7% I guess at the midpoint. It’s just another question trying to get at the conservatism or the guidance and why you’re just following through the 4Q [ph] be through 2018 ops guide? So, just looking historically, the first quarter margin typically improves versus the fourth quarter. In the U.S. segment, can you remind me why that is and is there any reason this year would be different from previous years?

No. I mean. So, I'm just trying to understand your question. So, you are asking a historical or were the first quarter margins typically higher? [indiscernible]

What is that?

That’s related to price increase cycles typically. So, often we take - we have taken price increases early in the year, and so that has typically been the pattern that we have seen. This year, we - the patent will be similar since we are taking to price increases drops offset, which is price reset that we are going through.

Got it, got it. Makes sense. And also, where is the digital investment, is that in other businesses, will that show up there?

No that is in the U.S. We’re putting in the U.S.

Okay, got it. And then, last question for me, just the volume pickup for mid-size and large spot noncontract that you saw through the quarter, I mean versus what you said at the mid-November investor meeting, it seems like, I guess you had it grown 6% for large, and 15 to 20 I think for mid-size and it was 8 for large and 26 for mid-size, was that just being conservative at the November meeting, was that just you guys being conservative or what was the growth, the pickup really back half weighted in the quarter, so it just surprised you there?

It’s been better than our expectations and in November we had very short time horizon of working at that data. So, I think we’re starting to get a better sense for what’s going on now.

Okay, got it. Thanks a lot.

Our next question comes from the line of Andrew Buscaglia with Credit Suisse. Please go ahead with your questions.

Hi guys, congrats on your quarter.

Hi, thank you.

Just wanted to dig into Canada a little bit more, I mean definitely better than expected, what end markets are really driving that and I think you mentioned things are still strong just generally on a monthly basis, but it pulled back in December, is that just like comp and remind us what the comp, why that was strong last year at this time?

Yes. So, I think for the second part question you’re asking, I think you’re asking overall. Last year there seem to be, people are talking about budget flush and such things. It seems like customers last year spent a lot of money at the end of the year, and I don't know that we know exactly why that happens, but it made November - November was not strong, December was very strong. So, from us that compare is the only reason December looks like it’s slightly slower at this point. In terms of Canada, I think the turnaround effort we’re talking about probably is independent of end market segments. It’s more - making sure that we have the right service model, the right pricing, the right cost structure. So, the improvement wasn’t because we saw great things in any specific end user segment, it was because we focused on providing good service at the lowest cost and improving our pricing.

Okay. Got it. So, more Grainger specific. And then one other question I had was, part of your strategy I think with Gamut was learning more about the market, and then I think your plan was to roll that into Grainger.com, can you tell us where you stand with that, is that going to be part of the additional investments you plan to make?

So, we are developing more detailed plans as we speak. We will provide more updates later in the year, probably, as I mentioned before, probably the EPG timeframe.

Alright, thanks guys.

Thank you.

Our next questions come from the line of Joe Ritchie with Goldman Sachs. Please proceed with your questions.

Good morning guys. This is Evelyn Chow on for Joe. I like to touch first on Canada. I understand the prudence in maintaining the guide right now for 2018, but just curious to understand, you had great price increases, your expense leverage in 4Q was very impressive, what more do you kind of need to see out of this business, either from the market or your own strategic actions to making confident that this could turn profitable in 2018?

I mean, I think we’ve got a plan that basically lays out what we expect to get by quarter and we’re on that plan, and we have a set of initiatives that we are executing with high intensity and if we continue to execute as we started to execute I think we’re going to be in good shape. So, we are watching things very closely if you might suggest and we’re going to make sure that we execute this well, but there is no structural reason why the Canadian business cannot be very profitable and get back to growth once we get through the reset.

That makes sense. And then maybe just, almost a conceptual question, I think a lot of sceptics that figures look at the benefits from tax reform not just for your business, but across distributors in general, kind of points an idea that what if these tax benefits can get competed away? I guess I would infer from your increased digital investments that you believe these are benefits that are here to stay. I’d just be curious to understand your response to that kind of pushback both for the industry and for your business in particular?

I think over the very long term, I think we don’t know what benefits will be sticking. Right now, certainly it’s a benefit to us and we’re going to continue to invest in things that make us successful that help us compete differentiate us from our competitors, create value for our customers and that’s really our focus, so I won’t comment or speculate on what happens with the benefit of tax over the long term.

Thanks guys.

Our next questions come from the line of Chris Belfiore with UBS. Please go ahead with your questions.

Good morning. So, I understand that Grainger is historically been able to pass inflations through at a higher rate, but the competitive environment has changed, so do you have a sense of the acceptance of a higher price with the U.S. government, customers given that they may have other options and then all the pricing actions you guys wanted to share?

Yes. So, as I mentioned, we tend to think of managing price as a market competitiveness effort. So, we will look very closely at what happens with market prices. Historically, we had seen inflation pass through two customers. We don’t really see any reason or anything different in the market price structure now than we did two years ago. Most of the changes, all of the changes we made have been because of our own structure, not really because market prices have been increasing or decreasing. And so, I don’t think the dynamics actually changed all that much. We don’t have any evidence that it has changed all that much and so I don’t know why we would think that it’s an inflationary environment and we manage COGS where we wouldn’t get to benefit.

Okay. And then just going up to Canada, with regard to the volume price relationship there was there any demand weakness or was it just a function of lower volumes on the higher pricing?

Well, I think the lower volume is only partially because of the pricing. Lower volume is also because we removed a bunch of branches. So, we will go from 170 branches to 35 or something like that over the course of two years and that is taking away some unprofitable volume, but certainly taking away a little bit of volume.

Thanks.

Thank you.

Our next questions come from the line of Ryan Cieslak with Northcoast. Please go ahead with your questions.

Hi, good morning guys, congrats on the quarter. My first question, D. G. you mentioned that, with regard to the mid-size customers the new customer acquisition still is early innings and maybe somewhat slow, but at this point what most of the pricing actions having been taken, what do you need to do or what you think is the trigger to really start to see some new customers come through to the model?

Yes, just to be clear we are seeing some new customers come through, but it’s a smaller portion initially there, existing our lapse customers. So, we have a lot of experience with acquiring new customers in some of the online businesses, it just takes time. You just keep acquiring, acquiring, acquiring, and so we are not going to - the reality is the customers are not Grainger customers, you have to get to them through, usually through digital solutions and if you - if they find that the prices are competitive when they get the service that we provide they often come back and so we’re really focused on acquiring new attracted business customers and I think that'll just continue to build over time.

Okay and then for my follow-up question, going back to the question and the comments about passing along inflation for you guys in some of the supplier inflation that you have already seen, have you already started to pass that along and been successful, just want to be clear there, and if not when does that actually or do you start to do that, is that something you're going to wait a quarter or two to do, or is that something you guys are already starting to implement and progress through here in the first quarter? Thanks.

We’ve already started it very recently, but we’re able to change price multiple times during the year. We’ve already started that process. So, we will start to see some of that benefit in the first quarter.

Okay. Best of luck guys.

Our next questions come from the line of Chris Dankert with Longbow Research. Please proceed with your questions.

Good morning guys thanks for fitting me in here. Just thinking about the digital strategy, obviously that’s doing quite well, but are you willing to comment on success of kind of your endless selection strategy versus more approaching Gamut and Grainger.com is there any kind of difference in trends that we should be thinking about?

I think - we will talk a lot about this in May. I think the differences might include some subtleties. I would say that the endless sort of model tends to be attracted to smaller customers, less complex customers, and the solutions that we provide on Grainger.com Gamut tend to be more attractive for, certainly more industrial customers and bigger customers or more complex customers. So, we see acquisition and growth rates that are different across the customer base, across those two solutions typically.

Got you. I will wait until the EPG I guess. And then thinking about Cromwell, getting digital getting online that was a big focus when that was brought on board, I guess any comment on how that progress is going?

Yes, so we’ve replumbed the website for Cromwell core business and started Zoro U.K. Zoro U.K is certainly early days, but starting to get some traction. Too early to tell how fast that’s going to grow, but we'll certainly start to see some growth in U.K. The market seems to be there for that offer, so we're pretty excited about what we're seeing early.

Got it. Thank you so much guys.

Thank you.

Thank you. That concludes our question-and-answer session. I’d like to turn the floor back to D. G. Macpherson for closing comments.

Alright. I will close very quickly here. Thank you for your time and attendance today. As I mentioned, overall, we’re very pleased with our progress. I think we’ve done a lot of heavy lifting this year to get not only pricing right, but to get our portfolio to be as clean as possible and we are really focused now on creating value for customers in U.S. turning around Canada, continuing to accelerate growth with the online model, and given all the changes, given our team members efforts this year, we feel like we’re much better position than we were certainly a year ago. So, we’re pretty optimistic about where we're heading and really [indiscernible] execution. So that’s where we're going to focus on. So, thanks for your time and thanks for following us.

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