Donald Macpherson - Chairman & CEO: Deidra Merriwether - CFO & SVP:

Greetings and welcome to the W.W. Grainger First Quarter 2024 Earnings Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the conference over to your host, Mr. Kyle Bland, Vice President, Investor Relations. Thank you. You may begin.

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

Thanks, Kyle. Good morning, and we appreciate everyone joining the call. Despite the unpredictable environment, the first few months of 2025 have panned out much like we expected. The business continues to perform well as our team stays focused on serving our customers and delivering value to our stakeholders. While tariffs are certainly a topic of conversation, customers remain acutely focused on running their businesses safely and efficiently. I recently had the chance to visit a large corporate campus where we work alongside a facilities maintenance organization to support this customer. Our team shows up as a trusted partner, helping the customer solve the challenges they face on the ground each day, including ordering, organizing and managing their MRO inventory. It was again apparent that local on-site execution is critical to creating value for our customers. This visit was a good reminder that no matter what the external environment. It is important to stay focused on what we can control to ensure that we capitalize on a significant opportunity in the market. Although it's largely business as usual on the ground the external environment remains highly fluid. We're working closely with our supplier partners to understand the full impact that announced tariffs will have on our business. Fortunately, the investments we've made in our product information and pricing capabilities our scale and the depth of our sourcing know-how position Grainger to effectively navigate the situation. As we move forward we remain committed to ensuring transparency with our customers and adhering to our core pricing tenants. Offering market relevant pricing while targeting price cost neutrality over time. Distributors generally benefit from modest inflationary environments and depending on the depth and duration of the tariff uncertainty. It may play out that way, but the situation remains highly unpredictable. In any case we…

Thank you, D.G. Turning to Slide 7 you can see the high-level first quarter results for the total company including $4.3 billion in sales of 4.4% on a daily constant currency basis. Within the period we saw gross margin improvement across both segments, which mostly offset SG&A deleverage and high-touch. This led to total company operating margins of 15.6% for the quarter down 20 basis points compared to 2024 but above our communicated first quarter expectations largely due to the timing of certain SG&A items, Diluted EPS for the quarter of $9.86 was up $0.24 or 2.5% higher compared to the prior year period. Moving to segment level results the High-Touch solution segment got off to a slower start as weather holiday timing and some government softness across January and February impacted results to begin the year. In Total sales were down 0.2% on a reported basis or up 1.9% on a daily constant currency basis. Results were driven by continued volume growth and modest price contribution within the segment and we deliver growth across all geographies and local days local currency. In the US specifically, we saw strong performance with contractors and healthcare customers which helped to offset slower growth in other areas including manufacturing. For the segment, gross profit margin finished the quarter at 42.4%, up 60 basis points versus the prior year. In the quarter gross margin benefited from favorable product mix and supplier funding tailwind related to the annual Grainger sales meeting. Each of these items contributed roughly half of the year over your gross margin favorability. For the quarter price cost was roughly neutral. SG&A cost for the segment increased over the prior year period, as we continue to invest in demand generating activities and reflect the P&L impact of the annual Grainger sales meeting…

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

[Operator Instructions] Our first question comes from the line of David Manthey with Baird. Please proceed with your question.

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

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

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

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

Perfect. Thank you.

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

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

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

Okay, that's helpful. Is that -- I mean does that apply to your private label offering or maybe so different ways? I assume the economics change quite a bit with the tariffs as they stand today?

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

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

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

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

Yes, so actually we've seen as the years gone we've seen actually some accelerated growth April is our best month yet. So we haven't seen a slowdown yet. But that said, you know the way this works on the tariffs is it takes -- we have inventory obviously and it takes months for that to sort of flow through. So, we wouldn't expect to see any tariff related impact on demand yet and probably starting this quarter. We might see a little bit, but we don't think it's going to be that much and more would happen later depending on. How things shake out and there's a lot of uncertainty there. I'd say, you know, I think most customers are embedding modest tariffs into their thinking. They don't expect it to be significant trade challenges, they think they're going to be able to get product at this point, they're really focused on running their operations and keeping their people safe and doing the things that they do every day it hasn't been a lot of conversations about tariffs specifically with my customer interactions and I think that's primarily because they think this likely gets worked out some way. But nobody knows which way, so. Yes.

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

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

Okay, thanks.

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

Thank you. I'm just following up on tariffs, maybe no surprise. Did you guys -- have you guys -- did you guys provide anything in the prepared remarks just around, how much price is flowing through from what's been announced to date including, some of the early action on 232 in China and then you know what we got here on the direct imports in May? And you guys did not change the gross margin guidance, is that just an assumption that you know gross margin can be held through this period of higher cost inflation? Thank you.

Hey Chris. So yes, we didn't prepare -- in the prepared remarks didn't state a specific number, but we did note that we put through increases related to the tariffs mainly on imported products and D.G. just notice a few other national brand suppliers, we believe that impact will be about 1% to 1.5% net impact for us. So he noted fairly modest. And then when you look at the gross margin outlook for the year, we did a little bit better. In the first quarter, we've taken some price that we know of. We are going to continue to target price cost neutrality over time. Within that price cost neutrality, D.G. just gave an example of where in some cases, because -- and if some of these very significant tariffs sustain over a period of time, we're going to have to come back and revisit how we price our product generally. But the goal will be to achieve that price cost neutrality over time. And due to the noise and the scenarios we have run, we believe based upon the range in line with the guidance for the year that is something that we should still be able to hit. But again, more to come. We feel like we're going to learn a lot in the second quarter. More negotiations will be completed. And we'll get a read on price elasticity as well.

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

Yes, no, appreciate the question. So a couple of things. What's not changing? We aren't changing our expectation of what market growth is going to be this year from a volume basis. We aren't changing our revenue projection. We aren't changing the fact that we think outgrowth, particularly on a volume basis, is critical for us to be successful long term. And we aren't changing our target. But what we're seeing right now -- so historically, IP manufacturing has been, I would say, close enough. We know it's not perfect. Our internal model takes into account things like government spending, trade flows, those types of things. It's much more accurate. But it was close enough and easy for everybody to understand. What's happened here is those two have really gotten to a different place this quarter. And as we look at sort of how we're performing around the competitive set, similarly, we're seeing more positive things for us than that metric would suggest. So given the noise, we're just going to focus on the annual number. We'll get back to you. You're right. There’s probably -- we know there's a better one, we know our internal model is more accurate. We can explain it to you, but it's relatively complicated. And so we've tried to keep things simple in the past, and that's been our goal.

Thank you. I appreciate that, D.G.

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

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

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

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

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

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

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

Thank you. I'll turn it back.

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

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

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

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

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

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

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

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

The private label is much -- yes, that's right. The private label is much higher China source. This is sort of end production location as well. So what's to note about this? This is sort of the end production COGS by region. Certainly, there will be some componentry that we don't capture in our branded product that comes from China. So that number will be higher when we look at that. We know some of that. We don't know all of that. So this is just end production at this point. And actually, China has gone down a little bit over the last several years. Not fast, but it has gone down a little bit. There's been a shift to Vietnam, as an example, for some categories. Mexico has picked up a little bit.

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

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

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

Great. Thank you. Appreciate it.

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

Hey, good morning. Hey, thank you. Thanks for the question. I'm going to go back to the price and tariffs. So I guess, I think, Dee, you mentioned that it was 1% to 1.5% net impact in 2Q. And I guess I'm just curious. So I understand, like, maybe it's not all, you haven't raised prices on everything at this point based on the tariffs. But just, like, if I think about the China COGS and the percentage of China imports to the U.S., I think I get to, with the 145% tariff, I think I get to a very robust price increase, like something in, like, the mid-teens level. And I guess just curious how to sort of bridge from the 1% to 1.5% to what's implied just by, like, China alone and, like, the mid-to-high teens. And I guess, like, yes, just thinking about, like, the different, I guess, like, getting from 1% to 1.5%, maybe it goes higher in the second half, and how to think about, like, the price increases on China. And, like, if, you know, the tariffs do stay in place, like, do we see pricing reach, like, 16%, 17%, 20% plus in your business? Thank you.

Yes. So just as a reminder, the tariffs that we took were on direct imports, meaning our own private brands mostly. We took a few increases on national brand product, but mostly it was our own product. And that's a relatively smaller portion of the product. And certainly some of those products did increase into the mid-teens. That is true. But as a percent of the whole, that's pretty small. And so that's where you get the 1% to 1.5% now. If -- and this does not contemplate any of the 145%. Obviously, that is a different thing altogether. And if we had to price that in, if our suppliers had to price it in, it would be quite a change. And so right now, the behavior we're seeing for our suppliers, they know that if they take the prices up that much, we're not going to sell anything in some cases. And so we're working through, basically we're working through what's going to happen and how we're going to handle that. But so far, it's been relatively modest.

Thank you. That makes sense. And then could you just provide a little more color on the price-cost dynamics through the year? I think there's a comment on the slide about being lumpy, but just want to understand expectations around price cost in 2Q and sort of how that cadence trends through the year?

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

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

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

No. What I would say is I generally focus on different end markets. And so Zoro's growth is typically its ability to acquire high-quality customers that are more midsize and smaller and then to get them to repeat. And most of their growth, frankly, is in their hands. And so it really isn't linked to High-Touch given -- High-Touch is focused on more industrial, larger customers with all kinds of added services. Zoro is a business that's very much a marketing-focused business. I'm trying to gain share with those midsize and smaller companies.

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

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

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

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

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

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

Okay. Helpful. Thank you.

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

Hi. Good morning. On the comparison of branded versus private label product, is there a rule of thumb or an average where your private label competes with a branded product? Like what percent discount in price the private label brand is to the branded product? And then what the difference is in gross margin between them? And then in terms of -- I know you've probably looked at this very detailed, is there a percentage risk that you're thinking about as a percentage of your private label portfolio that's sourced from China that would be non-competitive if the tariffs held at the 145% number?

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

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

We don't give all of those details, but some of the things that we have talked about in the past that I think are fair to reiterate is that freight as a percent of COGS is generally in the mid to high single digits for us. But this is the detailed work that we've done to be able to understand that. And by and large, you could assume that the product piece is the majority of the impact. But as D.G. noted, you really have to go through product by product costs and then composition of the product to really get to the tariff amount. And I know it's hard for you all to attempt to model this, but it's also difficult for us and as well as our supplier partners to get to the right answer here. And that's why we're really -- our teams are really taking a very measured approach. And I really appreciate that our supplier partners are doing that as well with us. And then we're also trying to partner on the other end with customers to help them understand that, you know, we have much more knowledge.

Thank you.

Thank you. Ladies and gentlemen, that concludes our question and answer session. I turn the floor back to Mr. McPherson for any final comments.

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

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