Greeting and welcome to the W.W. Grainger fourth quarter and full-year 2016 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 would now like to turn the conference over to Ms. Laura Brown, Senior Vice President, Communications and Investor Relations. Thank you Ms. Brown, you may now begin.

Good morning, everyone. This is Laura Brown, Senior Vice President of Communications and Investor Relations. Thank you for joining us this morning. With me is DG Macpherson, Grainger's CEO and Ron Jadin, Grainger's CFO. Earlier this morning, we reported our results for the 2016 fourth quarter and full-year. Included in today's press release were several large adjustments. We would like to take this opportunity to discuss these adjustments in further detail and that's the reason we decided to host a live call this quarter. 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. These documents are available on our Investor Relations website together with reconciliations of any non-GAAP financial measures mentioned on today's call with the corresponding GAAP measures. DG will begin by making some opening comments regarding the performance of the business as well as provide additional cover on a couple of the adjustments. He will then turn the call over to Ron to discuss the remaining adjustments. After closing remarks, we'll open the call for question. DG, to you.

Thank you, Laura. Good morning everyone and thank you for joining us. Even though our underlying operations performed is expected, given the number and the size of several fourth quarter adjustments, I thought the need to discuss them more in open detail. As Laura mentioned, Ron will cover several of the accounting adjustments as well but before we do that, I would like to share my thoughts on the performance of the business for the quarter. The fourth quarter was operationally in line with the expectations we shared in November at our Analyst Day, both from a sales and an earnings perspective. Our US business performed slightly better than expected given stronger sales performance in December in solid expense management. Our business in Canada was still underperforming is making progress and also met our expectations for the quarter with better than expected sales performance in the month of December. Both the US and Canada exceeded our sales expectation in the month of December, which we partially attribute to the favorable timing of the year and holidays and some customer year-end spending. Our single channel online business is primarily Zoro in the US and MonotaRO in Japan, continued to perform quite well, growing revenue and earning strongly in the quarter. So far, in January we're seeing some softness which we believe is related to extend the vacations that occurred in early January due to the timing of the New Year's holiday. In addition, January has a touch count both in the US and Canada. And in Canada, especially why that's some prebind that occurred prior to the new system implementation of February 1st last year. Now, this past year, we made strong progress towards positioning the business for better growth and performance in the future. Several examples include further realignment of…

Thank, DG. As we shared in this morning's release, we recognize the $36 million or $0.38 per share charge related to an accounting adjustment for unclaimed property. For Grainger, unclaimed property is debt is defined primarily as aged customer debits and credits. Prior to 2013, the unclaimed property was recognized as income and no liability was established. The adjustment made in the fourth quarter reflects our best estimate of any unclaimed property prior to 2013. This issue was identified internally and the estimate has been validated by external third parties. In 2013, we implemented a new process and began establishing liability for unclaimed property. In addition, we recorded $9 million or a $0.10 per share charge to increase the reserve for contract dispute. We've been working with the General Services Administration or GSA, auditors to resolve these issues from an ongoing audit. These issues related to tax rate and miscellaneous billing errors, this dispute relates to sales under a multi-award contract beginning in 1999. The GSA continues to be a great customer. We have done more than $2 billion in business with them since the beginning of the contract in 1999. In addition, there were several small discrete tax items recorded in the quarter, the true up estimated tax is versus taxes paid, primarily for US federal and state tax provisions. Combined these at a negative $0.06 EPS impact, partially offsetting $0.21 in EPS favorability recorded in earlier quarters from the settlement of tax returns for the years 2009 to 2012. Now, I'll turn it back to DG for closing comments.

Thanks, Ron. Well, I'm certainly not pleased with the need to make these adjustments in 2016. The underlying business generally met our expectations. As a result, we reiterated our sales in EPS guidance for 2017. As I mentioned earlier, we made significant changes to the business over the last year and I am excited about the future prospects for growth and profitability for the business. We are focused on our core businesses in North America, the online model in the UK. We generated $1 billion in cash flow at 2017. We expect to see free cash flow continue to grow as we will not need to spend as much in the coming years on capital expenditures as we have in the recent past. So, with that, I'd like to open the call for questions.

Thank you. [Operator Instructions] Our first question is from Ryan Merkel of William Blair. Please go ahead.

Hey, good morning guys, and congrats on being the quarter.

Thank you.

So, first question from me is why are you reducing gross margins for the year and then secondly related, you also mentioned that Apex is tracking a little bit lower and you're changing that. So, what's underlying those two things?

Yeah, go ahead, Ron.

Yeah, go ahead, Ron.

Sure. Ryan, it's really early to make a call on guidance for the year based on where we ended the fourth quarter really being right on our guidance. As we thought about it, our favorability in expenses we thought we should reflect slightly but we didn’t want to change the overall, so it's just kind of at really at the front, just a minor tweak for recognize a little bit of favorability and a little bit of risk on either expense or GP. But I wouldn’t read really probably we shouldn’t have changed anything in line side, it was such a small change and we really don’t know any more about the year, now then when we set it November.

Okay, so nothing really that dramatic change with the gross margin?

No. We don’t intend any real signaling there.

Okay, got it, okay.

I mean, 10 basis points is pretty small.

Got it, okay. And then secondly, on pricing. Our suppliers starting to talk about price increases and then you delay the price increase in Canada but remind us when you plan to push that through.

Sure, Ryan. So, we are constantly in communication with our suppliers on price increases from our supplier community. We had some pressure in some categories but overall the pressure's been relatively modest and we don’t expect to have significant price increases throughout this year. So, we're expecting it to be relatively stable on that front. In terms of Canada, as we went through the transition with the system last year, given some of the service challenges we did not pass through a price increase that otherwise we would have been passing through last year. We have started that process now and through the first half of the year, we will be increasing prices in Canada to reflect the market.

Perfect. And just one last follow-up. I'm a little surprised to hear you say you're not expecting suppliers to raise prices. Just given what we've seen with the commodities, so is there something else that is that demand's not strong enough or you're just not having the negotiations right now that tell you or give you enough confidence that you would see suppliers rating price.

Right. So, given what we see and there is always a lag for us. So, in terms of the commodities increasing, it takes a while for that to flow through the supplier base. At some point of commodity stay at elevator levels for a longer period of time, we typically will see some supplier cost increases and we will then pass those through. But it hasn’t been long enough yet to really force that to happen.

Right. So, given what we see and there is always a lag for us. So, in terms of the commodities increasing, it takes a while for that to flow through the supplier base. At some point of commodity stay at elevator levels for a longer period of time, we typically will see some supplier cost increases and we will then pass those through. But it hasn’t been long enough yet to really force that to happen.

Got it. Okay, thank you so much.

Thank you.

Thank you.

Thank you. The next question is from David Manthey of Robert W. Baird. Please go ahead.

Thanks. Hi guys, good morning. First off, could you talk a little bit more about the unclaimed property continue to, not sure I fully understand that. Could you give us more details on what the impact was historically because of how it was being handled and what it means going forward as well?

I'll turn that over to Ron.

Sure. So, the $36 million reserve covers, I think we highlighted in there but $2 million or $3 million for potential interest cost, that sort of things, but roughly the $33 million or so related to that is over a five year period. So, it's about $6 million or so a year. And these are amounts owed to probably nearly 170,000 to 200,000 customers in amounts that are typically less than $200 a piece, somewhere adjustments on freight and tax. There is a variety of different debits and credits that can be issued by Grainger to a customer. And in those years, prior to 2013, after they aged significantly and were not applied, were taken to income by the company. And we should have put a liability on the books for that prior to 2013, actually in 2013 and we didn’t do till now.

Okay. So, it's not that it increased anything, it just didn’t decrease whether its sales or cost as it should, is that what you're saying?

I'm not sure I understand our question there.

Well, if it were something that you had owed to a customer but you didn’t take through the P&L, the sales or your profitability was inflated historically now you're just recognizing that, so bringing that down, is that how I should think about it?

Yeah. We recognize it to the P&L up through 2012. So, we took those --

And not?

And not since then, no.

Not since then, right.

So, everything's, we are really just reflecting now the same process we've been going through since 2013, we're reflecting that back into prior years.

Okay. And then second on pricing, if you can talk a little about the Red Pass Plus sort of the uptake there? How are you driving awareness and then as it relates to the pricing dynamic here, whether or not you are getting price increases or the cost side of your equation is changing. Are you still targeting a minus 1% price in 2017?

Yes. We have no change to our expectation at this point for pricing for the year. Red Pass Plus for those unfamiliar, it's a program for typically for mid-sized customers. Most of that activation has happened historically the last nine months through inside sales and it's been a program we've used to get reasonable prices for those customers. That had continued to accelerate that program. We're also offering it now online for the first time. And we're also seeing some sign ups online. So, we would expect that to continue to be a key part of getting reasonable prices for all of our mid-sized customers both online and through our inside sales organization and we're seeing really good results when we get customers to sign under that program thus far.

Thank you. The next question is from Robert McCarthy of Stifel. Please go ahead.

Good morning, everyone. I guess the first question is, is this going to be a conference call that you're going to have every quarter, is this just because of the nature of the charges and what's going on. Is this a one off?

So, we will continue to evaluate our investor outreach and we will continue to talk about it. At this point this is a one off because if that changes we will certainly let you know.

Alright, not to be cynical but obviously CEO's in the past when they get into the seat, obviously if taken rather large sizable charges going forward, now obviously this is a long standing issue, so I understand that. But do you think that you could have done more in terms of perhaps calling out some more restructuring on your branch base footprint or do you think it that just do more of that consistent with your kind of message that you are sort of viewing that organically as you go forward?

Let me try to understand the question. So, on the branch organization, is that what you are asking?

The branch history, perhaps this could have been an opportunity while you had all these items to perhaps do some more maybe one time issues in association with branch consolidation or restructuring.

Yeah, sure. So, we now have a little 252 branches in the US. I'll focus in the US for this discussion. We've gone from 420 to 250. We've actually seen stability and even some growth in branches with those existing buildings and the volume that goes through them is quite profitable. So, we will always evaluate the branch and the branch footprint but right now we like what we are seeing out of the branches that remain open. And so, we right now wouldn't make sense for us to take any additional restructuring given what we're seeing in terms of volume into those branches.

Okay. And then this question is a bit of a stretch but I guess that’s what I'm known for. In terms of the oil and gas and energy exposure in Canada, I think that broadly could be anywhere from 15% to 20% of the overall company. Could you talk about kind of what you are seeing both explicit energy exposure, the knock-on impact the Canadian effect and what you -- could we see the prospect for a recovery kind of going into '18 or '19 or what are you looking for to get a better sense of maybe we could start to see a return to positive growth across the sizable kind of end market perspective of your company.

Yes. So, oil and gas for Canada I think as you are familiar with, the direct exposure is high, the indirect is probably 30% plus I would say in terms of resources and just Alberta and what you see, what we have seen is the knock-on effects for oil and gas on construction companies in Alberta. So, it's the big portion of the revenue in Canada. It's much less in the US, in US it's less than 5%. So, that said, we are watching very closely. You can look at oil recounts, obviously they've gone up recently, we're also talking with lot of our large customers about project business. Certainly things are stabilized with that customer base. They are not taking capacity out, this time last year they were taking 10s of 1000s of people out of the operation. Right now that's not happened. We don't see great activity yet but certainly I would expect it could to your time line '18, '19, we certainly could see a turnaround there. That's very possible if oil stays between 50 and 100.

Okay. Could you touch briefly on your US exposure excluding Canada with respect to oil and gas direct and indirect and what you are seeing there?

US, for oil and gas.

Oh, for oil and gas. Question into direct is, US of oil and gas direct is 2 arguably oil and gas has a fairly significant impact on heavy manufacturing so I don't know that we fully know but I would say organizations that produce large machinery, given oil and gas have been very affected by that and so we have seen that heavy manufacturing getting hit in the US as a result probably less than 10% of our total US business and that probably is stabilizing now as well.

Thank you. The next question is from Ryan Cieslak of Keybanc Capital Markets. Please go ahead.

Hi, good morning guys.

Good morning.

Good morning.

The first question is on just the gross margin guidance for the first quarter. It downed 80 to 130 basis points or so. That implies sequentially maybe the trends from the fourth to the first blow in you but normal trend we've seen on a sequential basis. Is there anything going into the first quarter that might be impacting the gross margin or something that maybe was unusual in the fourth quarter that's rolling off.

Probably just Canada, the timing of the recovery and margins in Canada like DG said it's going to the pricing actions are going to be over the first six months and so that's going to ramp up over a longer period of time than you'd expect to see in the US from a pricing perspective.

Okay and then the pricing then on in Canada, you mentioned that the price increase coming through, is that something that just gradually rolls through in the first half of the year or is there a specific date you guys would be implementing that, that price increase?

We've already started the process. It hits a relatively small portion of the volume initially because you have to go through customer level negotiations to get a broader increase and so that's the process we have to follow through the first six months.

Okay. And then my follow-up question and I will jump back in the queue when you look at the end market breakout in the month of December, real nice take up in commercial and government and then you also highlighted heavy manufacturing as positive. Was there anything in particular within those end markets that you really saw in the month that gives you greater confidence? Is that sustainable or is that just a combination of maybe some easier comps and some other things? Thanks.

Yeah, I'm going to take. So, in December everything was up and part of that's a holiday timing, part of that was some year-end buying. From an end market perspective we are seeing certainly manufacturing stabilize even through the entire fourth quarter and then government has been strong and consistent strong performer and we feel like we're well-positioned to continue to grow the government business.

Thank you. The next question is from Deane Dray of RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone.

Good morning.

Good morning.

Hi. I was hoping to follow-up on that last point on the strengthening the government business in the fourth quarter and it's the term that you say was project business and I was associate Grainger with more MRO type business stuff that wears out or has to be replaced and less about project. So, maybe if you just clarify when you talk about the government projects what type of business is that?

Yeah. So, that it would be more small projects rather than large projects, Deane. It would still be MRO but if people are doing maintenance cleanup projects in a bigger way, sometimes will have somewhat larger orders. The order pattern had some of that but it wasn't tremendously high volume. Generally the volume was good across the broad in December and so I wouldn't read too much into the project business. I think the government flow has been very, very consistent, we continue to do very well, the military with federal government and we saw some state government strength as well.

Got it. And then, for pricing in Canada down 4% points, was that across the board or was it mostly energy and natural resource focused?

It is across the board, although the bigger head is in the energy and resource business given where volume is and that's been more challenged throughout the entire year last year. I would say that's true.

And then just last question from me if I could, maybe for Ron, really strong free cash flow conversion this quarter anything unusual in terms of timing of payments or anything like that?

Yeah. There was actually with regard to timing of payables, just there was a lot of inventory purchase near the end of the year, so our in transit inventory balance increased quite a bit and as a result our payable did as well. So, really just the timing thing there. Most of our favorability was driven by working capital. AR came down quite a bit in the fourth quarter versus the third which it always does but even more so this year and I think the timing, this time the time when holiday helped us in terms of when the holidays on a weekend we have more days to collect where our customers are open and we are in the office. So AR benefited as well.

Got it. And then, just lastly a comment that the extent to which voice of the customer matters and like Robert McCarthy's question, it'd be great if you guys would get consideration to do any of these calls. I think it's gone very well and we appreciate the insight. Thank you.

Thank you, Deane.

Thanks, Deane.

Thank you. The next question is from Andrew Buscaglia of Credit Suisse. Please go ahead.

Hey guys. Can you just talk a little bit about your Canada segment? I would have thoughts thing could will get a little better in Q4 but you got something going on there. How much, what's the trajectory of that business on the operating line through the year like, will we see a break even number by the end of '17?

Yeah. We are -- our plan calls for fourth quarter to break even with the business in Canada. Just to give you a little bit history there, given the reliance on oil and gas, obviously the down turn has a big impact and the added challenge has been, we put the new system in and we had some service disruptions as well. We focused very hard last half of the year on stabilizing the service and we are hearing very good things from customers right now in terms of providing service to them and so we feel like we are in a better position now to be able to do things like take price increases and drive volume but we would expect to be break even in the fourth quarter of next year of this year.

Okay, got it. Then just one other sort of a question on the EBIT line in your unallocated expenses. Looks like you're helped by some restructuring there. How come some, what was that restructuring specifically help that line item or like why would that go into that specific?

Yeah. There was some cost, we have easier comps in the fourth quarter of this year than last year because in the fourth quarter of '15 we had quite a few expenditures relative to the SAP project which went live in the first quarter of '16. So, from an expense perspective if that's what you are referring to we had easier comps but we also were taking cost out of the business as well as we've been doing everywhere, given the soft revenue.

Okay. So, that's the expense that helps you, looks like it helps you about $0.09 or so for --.

Are you looking at the adjustments page?

Yeah.

Oh, the adjustment. That had to do earlier this year. That wasn’t a fourth quarter item.

Okay.

Yeah. Earlier in the year just to be clear, I was answering fourth quarter.

Well, I was just looking at your unallocated expenses usually is a little bit higher in Q4 but for some reason this quarter it seemed like it helped your EBIT line.

Yeah. And I think I answered it, yeah. Easier comps.

This is an implication at the moment.

It's really easier comps.

Okay, got it. Alright, thanks guys.

Thank you. The next question is from Scott Graham of BMO Capital Markets. Please go ahead.

Hi, good morning and thanks for having this call. I just wanted to really understand a little bit a more about the price decreases that you are putting through for the mid-size customers and also the spot buys latter being discussed a lot at the Investor Meeting back in November. And the simple question is this since you indicated that at that time that you had begun that price reduction program or whatever you like to call it initiative it was about 18 months ago. So, just kind of hoping you can tell us how is that going for both, I mean how are the mid-size customer reacting, how are the sort of across the board if selective stock price reductions to various customers going on spot buys? Could you give us an idea of how that is going, are you starting to see those sales respond?

So, I would make a few points. Thanks for the question. So, with our large customers they have had competitive prices for a long time. We had changed to some degree our price structure to try to give them more price incentives to buy slower moving items. And that has gone reasonably well when we give category discounts or other discounts we do see volume increases. So, that has gone well. On the mid-size customer piece, we went through a fairly significant coverage change last year where we eliminated outside sales covering mid-size customers and started inside sales and that team has been working to get the pricing programs in place for those customers and again when we get to customers and we get them to sign up with the pricing program which we talked about Red Pass Plus a minute ago, that has gone well. The broad changes on the web have just started. So when we talked in November we talked about the beginning of the year starting those changes. It's too early to say how they are going and really what we've done so far is changed some prices to understand how the back-end systems would work and support those changes and so far that looks good. You'll see a lot more that happening over the next couple of months and we are getting a much better read on how on the impact of those changes and just to remind everybody the goal here is to provide a reasonable price for small mid-size customers and spot buys. And that price will be higher GP than the average GP. So it's still going to be not cheap but it's a reasonable price for those customers and those changes broadly are just starting now.

Excellent. Just one other question if I could you know. Your sales guidance for the year was +2 to +6 was given at time when let's just say optimism was not where it is today I think there is clearly a lot more optimism in the business community particularly in industrial land. I was just sort of wondering if you would be able to give us a opinion, I know it's only the first quarter but I suspect the +2 would be a little bit disappointing in that, somewhere within that range we are kind of thinking more at least the mid-point. Is there anything you could offer DG on kind of what you are thinking now on that sales guidance range versus two months ago given the changes that has taken place?

Yeah. I mean, I don't know that we've got a different perspective. I would say to your point around optimism, I have been with a number of customers this year and there is some optimism but that optimism hasn't yet translated into to activity. And in fact, some of the manufacturers had some concerns as well as optimism about the rush in things to do. So, I would say there is some optimism and if that were to bear fruit, certainly that would help us. So far we haven't seen it. So, I don't think our position has changed at all.

Fair enough. Thank you.

Thank you. The next question is from Adam Uhlman of Cleveland Research. Please go ahead.

Hi, good morning. Thanks again for hosting the call.

Good morning.

Just a follow-up on that last question. And then, I guess as this optimism has been building. At what point would the company think about adding additional growth spending to the forecast for the year. Will we have to be above the high end of the sales guidance or do you think you are pretty well set in terms of the additions that you planned for sales people, regardless of the demand environment?

Yeah. I think we are mostly set, I think with the large customer organization we are mostly set in terms of the coverage we have. We like the coverage we have and that group is going to get more productive given some of the tools we've given to them. I would say for mid-size customers what would get us to increase spending is if the results were positive in a way that was better than we expected, then we would spend the money. And so, I don't think it's necessarily external. It's more what happens to our own initiatives and if the initiatives bear fruit we will spend more. We are not really locked into to what happens in the economy for those actions.

All right, that's helpful, thanks. And then, Ron, have you made any changes to the cash flow assumptions for this year?

No. No changes.

Great. Thank you.

Thank you. The next question is from Christopher Glynn of Oppenheimer. Please go ahead.

Thanks, good morning.

Good morning.

Question on the OpEx line. OpEx to sales prove little more than a 70 basis points in 2016 and I know 2017 have incentive comp restoration and the DC ramp cuts, but not withstanding that is there kind of a ongoing opportunity to manage OpEx there within the context of nearly $3 billion spend line?

Yeah. I would say we are very focused on making sure that we get productivity out of our large pools of cost. We continue to get nice productivity out of our distribution centers which is a big cost. We are making changes in our context centers in 2017 to consolidate and take out some cost. We are working hard on the sales force and the tools we provided them so that we can grow without having to add headcount in equal parts to our growth. Really at every point in the organization we are focused on expense, spend money where customers care about it and then get productivity in every part of the organization.

Okay. And within the key line items of your guidance, gross margin revenue and SG&A would seem that that one is the most in your control to be able to guide conservatively. It has in fact on the again the ramp cost not withstanding?

So, our guidance is our expectation at this point. So, we are I am not sure that you stand but you may. Our guidance is our expectation.

Fair enough. And then, just finally you may alluded to but just wondering if any 4Q budget flush was also kind of seen in the manufacturing sector, January softer, it seems even January got softer even adjusting for the holiday timing.

Yeah, we are watching that closely. It's a little bit too early to tell and I think once we get through, just as a reminder, January last year was our second highest growth month of the year after December. So, there is some holiday timing, I think there is some weather we did sell more cold weather product in December than we are selling in January for sure given what we have seen in the weather. So, there is a number of factors there. I wouldn't read too much into the first three weeks necessarily.

Thank you. The next question is from Justin Bergner of Gabelli and Company. Please go ahead.

Good morning and thank you for taking my questions. So, the first question relates to I guess your comment that the US did a little bit better than you expected in the fourth quarter from the sales point of view. So, could you just maybe clarify if the overall company was sort of in line with your expectations and what part of the business came a little bit short of your expectations?

Well. So, keep in mind we were comparing that to our Analyst Day. What we talked about in Analyst Day December was a little stronger really across the board. All Canada, the US, both were stronger, the rest of the business was basically on what we would have expected. So, that's why we are a little bit better. Yeah. Just slightly better than expectations. I wouldn't read too much into that and we've been talking about what happened in December and November and January and how much of that was holiday timing and other stuff. So, I wouldn't necessarily read too much into that and really nothing was significantly below expectations for December.

Okay. And restructuring seemed to end the year around $45 million, which is a little bit light of $50 million or $65 million guide. So, should I make anything of that in terms of how that will affect 2017 restructuring spend or did you find reasons to cut back on restructuring spend a bit?

No. And some of that was estimates of what do we cost the restructure, sometimes were higher than we landed and so that won't have any impact. It should not have any impact on 2017.

Okay. Thank you.

Thank you. The next question is from Matt Duncan of Stephens. Please go ahead.

Hey, good morning everybody.

Good morning.

Good morning.

So, first thing just want to try dig a little bit more on the sales trend and maybe kind of look at some of the algebra here. My recollection is that January's comparison is 4.8 points harder than December and you had two points of holiday benefit in December and I guess there is based on your comments some chance there has been a negative hit in January. So, is the change from December to January simply the comparison and the difference in holiday timing and maybe the underlying demand is still kind of where it was if not improving just some thoughts that will be great.

I think it's a little early to tell. I think some of the points you make are certainly on point, I think on US a lot this may in fact be timing and seasonal. I think in Canada there is a specific issue for us which is last January there was a lot of customer pre-buy before we went live with the system and so Canada will let goofy in both January and February. February will be a very easy compare and January is a very hard compared given the flow of what happened around that. Other than that I think we don't see any reason to think the underlying demand has changed dramatically.

Okay, that helps. And then Ron, on gross margin the year-over-year decline there in the fourth quarter specifically was a lot less than what you guys had been experiencing. Can you walk us through what caused that?

Yes. With some easier comps essentially, or there was some unfavorable GP rate items in the fourth quarter of '15 that just gave us a bit of easier comp. And then some of the mix issues that we have with faster growth with some of our low margin businesses while they continue to grow. As they get bigger they have a lower mix impact, negative mix impact on GP, so as they mature and as their margins expand actually, the native impact of those businesses diminishes overtime.

Is there anything going on there with rebate levels given how strong December close down I mean you were flat at December 13 and came in up 6.5. You mentioned that you had a lot inventory kind of in trends in at the end of the year. So, just curious if maybe that you had a little bit better rebate accrual then you were then counting on previously?

Not materially. A little bit better but not material.

Okay. And then, last thing on Fabory.

Just because the thing is when you pre-buy, right, those rebates gets capitalized, you don't take those to the P&L.

Right, okay. Last thing from me on Fabory and I know it's a little bit of difficult discussion but it's been a while you guys have had trouble. You made good progress in trying to get it improved and making money for you. But it continues to be a little bit of a problem child. Is there a point in time in which you start thinking about divesting that business or is it a business that you feel like Grainger needs to be involved in going forward?

So, just to give you a little bit of history that the thesis when we got that, that those are really two pieces of the thesis. One was we could expand in Central Europe through a branch expansion strategy, the other was that we could diversify its product portfolio and make it a broad liner. We really struggled with those two, the first couple of years we had the business. We ended up having to reverse course, refocus it on fasteners, it is a fastener specialist. I think there is benefits to having specials in the portfolio. I think we understand how specialist compete. Having Fabory in the portfolio and we certainly get benefits from faster buy, from the company. But that said, it's not core to what we do. Right now we need to get it performing. We need to be performing better, we need to increase profitability, get it growing but we will always consider both term but what to do with the business but we are optimistic about the path it's on and we need to continue that path first before we consider alternatives.

Thank you. The next question is from Hamzah Mazari of Macquarie. Please go ahead.

Good morning, thank you. Just the first question maybe for DG. DG, could you maybe talk about your supply chain and any issues you may be looking at given potential for tear it's and credit agreement changes as you look at your global supply chain?

Yes. So, thanks Hamzah. So, we do a lot of analysis on our supply changes as a regular course of business to understand where we purchased whether we have unique exposure relative to competitors through our purchasing activities, we don't have much. So, trade agreements would certainly have an impact. We have alternative suppliers for many of those sources and we have those in place in plans if we need to go to those alternative sources. We don't feel like we will be unduly impacted by trade agreements. We don't buy more than our competitors do overseas as an example and we have alternatives for many of those suppliers. I think the broader issue, so for the sourcing that we own for our private brands that we globally source, I think we have a good set. For the branded product, there are some categories that really are not made much in the US anymore if at all and so trade agreements on those I don't know what would happen there and we'd have to figure that out and we haven't historically focused too much of our energy there because that hasn't been under our control but I think it's an interesting thing for us. We probably need to spend little more time thinking about that.

Great. And just last question, is it -- do you have a time line around when the Zoro business margins can get closer to your Japanese business? Is that realistic, it seems like there may be a lot of investments spend rolling through the P&L on Zoro. Just trying to get a sense of whether that business can mirror the Japanese business so is there anything structural there? Thank you.

Now, thanks. I think that Zoro's business will be very close to MonotaRO's overtime. And we continue to see expansion, we think it's going to be in the 8th this year in terms of operating margin and it will continue to get do that double digit number. Really the difference is advertising spend as we grow, so we invest a bunch to grow the business in Zoro. We are still acquiring customers that are really high rate. And as that business becomes more modest in its growth, more like MonotaRO, we would expect them the margins to be pretty much the same overtime.

All right, thank you.

Thank you. The next question is from Shannon O'Callaghan of UBS. Please go ahead.

Good morning, guys.

Good morning.

Good morning.

Hey, just one question on some of the improvement trends in December versus what they were in November. I mean, all the areas got better but the US was a little less improvement, so you had Canada went from down 13 to up two, that's a big move. Other went from up seven up 19, both of those have these kind of double-digit moves. The US went from -2 to +1. In that reason what that would be more modest than the moves in the other areas?

Well, I mean, I think in general our US business is less variable. So in down time it's down less and in up times it's up a little bit less and that's just the way the US business works. We serve the entire economy in the US, so we are very diversified. We are not as diversified in Canada, so if you have big projects, it can have a bigger impact. I think that's probably the basic dynamic there.

Okay. And then just a follow-up on kind of this first quarter gross margin. You are down 30 in the fourth quarter and that we are going to be down 80 to 130 in the first quarter. You mentioned that how comp but I mean I think you already changed the counting for the trade show stuff last year. So, and maybe why the first quarter is tough gross margin comp for this year?

Well it's really a combination of both. The fourth quarter was a easier comp and the first quarter is a tougher comp. So, there is a couple of swings to account for but I would just reiterate that especially in Canada where we saw a real pressure on margins in this last year. The challenge will be recovering that through pricing actions in the first half of the year. Those won’t happen just in the first quarter.

Okay. You mentioned that of course, that's really about Canada?

Yeah, that's a big part of it.

Okay.

And then the comps.

Okay, yeah.

Thank you. The next question is from Robert Barry of Susquehanna. Please go ahead.

Hey guys, good morning.

Good morning.

Good morning.

Lot of ground covered here. Maybe just a few follow-ups. First, on the much earlier commodity pricing question kind of when the commodities start to impact the pricing and I know it's not a precise dynamic but just as a benchmark like ISM prices component, right, which shows what OEMs are paying for inputs, it's been rising now for about 10 months. We've seen kind of what's been happening with the spot prices. I mean does it typically take that long to kind of trickle through and impact you or might be taking longer kind of through this cycle for some reason?

Well, I think so it depends I would say where your starting position is. Given that went down so far and now they have been upper 10 months, I think it's probably taking a little bit longer but if they continue to stabilize at higher levels I think you will see it flow through. So, I think it's just what you are seeing now is just a function of how far they went. They dropped before coming up and in many cases they dropped a lot.

Yeah. And remind us what's in the gross margin outlook, is there an assumption that you will start to get some benefit from pricing this year?

It's -1.

It's -1, is the expectation. Now we also have expectation we will negative cost inflation this year as well.

50.

Right.

About 50 basis points. So, if there was significant commodity increases that would, that would help us if that happens.

Got you.

But we don't have anything baked in there.

I mean, what is your thought on being able to put through pricing if it starts to come from your vendors, just given a lot of the end markets are still pretty sluggish and there is a lot of small mum and pops and pops kind of cutting price to stay alive. I mean, do you think you could kind of get material pricing in this environment?

Yeah. If it's well known that the commodity prices are up, we generally do pretty well and we're able to pass that through and I think that would still be the case here.

Got you. And then maybe just the last one on this clean energy. I think in November you expected that would be $0.10 benefit in '16, I think ended up being $0.15. So, is it all that $0.05 helping in the fourth quarter and was that just related to the weather?

Great. A lot of its weather, a lot of it is just whether the facilities are running at full capacity or not. It's the dynamic of both of those two. So, we ended the year at about $0.15 and we think next year '17 will in the $0.10 to $0.15 range, so very similar.

Thank you. The next question is from Joseph Ritchie of Goldman Sachs. Please go ahead.

Thanks, good morning guys.

Good morning.

So, just a couple of real quick ones. On the unclaimed property contingency just to be clear, there's no cash impact or is there a potential cash impact from that charge?

There is none today but over the next few years we'll make attempt to either return cash or issue credits to customers, so eventually overtime there will be.

Got it. And what would potentially trigger that, I am just trying to understand it a little bit better.

We will trigger it by actively pursuing many customers and then states as well.

Got it, okay. And then as it relates to I know typically we've talked about pricing a lot. I guess just asking it very specifically typically January, February, timeframe. Do you put through some type of pricing increase and see. If I miss the answer earlier is there an expectation that you are going to try to pass price through in January or February or is it just a too difficult for the period of time to be able to do that today?

Well, we are –- we have gone through a process and I'll focus on the US first. We are certainly going to have a price increase in Canada as we have talked about through the first half of the year. In the US, we are restructuring our price, we certainly have raised some prices and lowered others. We look at the market pricing and we've adjusted to that. So, there are some price increases in there and we would expect this to hold.

Okay. And then lastly one quick one on your just your import position. What percentage of your COGS do you import and we have it roughly 20% to 25%, I just want to make sure that we're ballpark correct.

Well, I take that to our earlier discussion. If you said what is the percentage that we import that is part of our private brand which is what we have talked about historically. Our private brand is 20% to 25%, most of that is imported now, so probably 15% to 20% would be imported. And then if you included the brands that goes way up, so the branded products in our estimate would be 40% roughly but we have some work to do to really understand that.

Thank you. And our final question comes from Nigel Coe of Morgan Stanley. Please go ahead.

Thanks, good morning. And this call has really helpful, thanks a lot for doing it. Just, so just -- Ron, I just wanted to double check that all of the one timers came through SG&A, correct?

Yes, that's correct.

Okay, great. And then the uptick in December --.

I'm sorry, in the fourth quarter they did. There were few early in the year that were excess and obsolescence for inventory, those would have been up in that GP. So, just to be clear, the fourth quarter that's true but earlier or in there is at least one or two.

Okay, great. -- My question.

I am sorry. One more thing, just also the discreet tax items, maybe it's obvious but those are below the lines, those are in tax.

Right, okay, good, thanks. Thanks, Ron. Then the uptick in December, I mean maybe this is getting a bit too down on the ways, but did you see any differential between store versus direct. I mean, I'm just thinking about the margin differential between store and online. Was there any noticeable impact on either channel or nothing to call up that?

It was, yeah, it was fairly even across both I would say. So, we saw upticks in all the channels.

Okay. And then going into January, the comment that slow down join to date, obvious Canada is the big part of that but is the same REIT for the US just given the time of the holidays and the comp?

Yeah. I would say January started out sluggish based on some of the comps in the holiday discussion we had before, yes.

Okay. And then just finally, obviously big changes on some of the sales force during 2015. How do we think about the productivity where we are on the productivity curve for your just picking on the inside sales channel?

So, we have installed completely new processes over the last year at a new system support for sellers to help make them more productive. On the inside sales team, we're giving them much more clarity on who to call on, how frequently to call, what the returns are on those calls, I think we have got a long path for improvement here since we are very early in that process and figuring it out but it's pretty exciting in terms of the data we have now and the ability to drive improvement going forward.

So, in terms of getting up to full productivity, is that a year, is it two years, I mean how long is the time line?

On the inside sales team in particular?

Yeah.

Yeah, it's going to take probably 15 months to two years for any individual seller to get to full productivity typically.

Great. Thanks a lot.

Thank you.

Thank you.

So, great I think we -- okay. So, thanks for the time, I really appreciate everybody being on the call. I would just summarize it the quarter basically from an operating perspective was at or maybe slightly above expectations. Hopefully, we helped to explain some of the unusual items that we had in the quarter and we are holding on guidance for 2017 and we are certainly excited about what we have done in 2016 to prepare ourselves to grow and gain profit going forward. So, thanks for your time. Have a great day.

Thank you, ladies and gentlemen. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.