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WW Grainger Inc (NYSE:GWW)
Q2 2019 Earnings Call
Jul 24, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to the W.W. Grainger Second Quarter 2019 Earnings Conference Call. [Operator Instructions].

I will now turn the conference over to our host, Irene Holman, Vice President of Investor Relations. Thank you. You may begin.

Irene Holman -- Vice President of Investor Relations

Good morning. Welcome to Grainger's Q2 earnings call. With me are D.G. Macpherson, Chairman and CEO; and Tom Okray, CFO. As a reminder, some of our comments may be 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 their corresponding GAAP measures are at the end of this Slide presentation and in our Q2 press release, which is available on the IR website.

Reported results in the second quarter included a $3 million benefit to operating earnings, and a $0.03 benefit to EPS, primarily related to a reduction in lease obligations in Canada. This morning's call will focus on adjusted results which exclude the items outlined in our press release.

Please also note within our comments, we have removed the favorable timing impact of the North American sales meeting from gross profit margin and operating margin. The sales meeting had a positive 20 basis point impact on total Company gross profit margin and operating margin and a positive 25 basis point impact on US gross profit margin and operating margin.

Now, I'll turn it over to D.G.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Thanks, Irene. Good morning and thank you all for joining us today. I'm going to discuss our first half and second quarter results and share an overview of what we're doing to drive growth in the US and through our endless assortment model. Then Tom will provide details on the quarter. And we'll open it up for questions.

The demand environment has softened throughout the year. Having said that, our strategy is grounding and -- grounded is having a value proposition that resonates through economic cycles. Through our high-touch solutions model, we provide services and products to customers that help save their money, help them consolidate MRO spend, we manage their inventory, we provide solutions to simplify their purchasing process, we offer product substitution recommendations, we enable standardization across sites and we help them keep their operations running and their people safe. In times of slower growth, we partner with our customers to lower their cost which strengthens our relationships. We're confident in our ability to gain share in both up and down cycles with this model. With our endless assortment model customers value our streamline search experience and expansive assortment. We're investing for growth through this model and are bullish on the path ahead.

Turning to our performance so far this year. We delivered strong operating results in the first half of 2019, despite a slower global economy and significant investment in our endless assortment model. Year-to-date, total Company operating margin was 13% up 50 basis points and we've driven incremental margin of 42%. Operating cash flows through the first half of 2019 is up 14%. We're through much of the heavy lifting on our cost takeout initiatives and are now focused squarely on driving profitable growth through our US and endless assortment businesses. At AGI, the top line recovery has been slower than we anticipated. We made multiple changes in a short amount of time that cause disruption to our customer base and we've seen more volume loss than we expected.

Revenue dollars were stable from first quarter to the second quarter. Service is now once again strong when we started to win new business for the first time in a couple of years. We expect to see better performance in the second half of 2019. At Cromwell, we have made many changes to position the business for growth. We redesigned the distribution center and launched our UK leveraging the Cromwell supply chain. Performance is lagged in the short-term resulting from market conditions and our actions in the region. Performance in UK has been very strong. We remain committed to this market.

Our 2019 total Company outlook remains the same for gross profit margins, operating margins and EPS based on our strong operating performance so far this year. We are lowering our estimate for market growth to minus 1% to 2% and lowering our revenue guidance to 2% to 5% growth due to the weaker demand environment and performance at AGI and Cromwell.

Moving to the quarterly sales performance in the US, the US MRO market growth decelerated from 2% to 2.5% in Q1 to approximately 1% in Q2. We estimate US market growth included about 1 points in price. As a reminder, these are internal estimates of market growth. The factors that determine market growth are finalized over the next 60 days. We expect the slow market growth to continue in the second half of 2019. In the quarter, market growth slowed across all of our end markets with the exception of healthcare. The core Grainger business grew about 150 basis points faster than the market. US large customer daily sales growth was 2% and 11% on a two-year stack. US midsize customer growth was 5% and 25% on a two-year stack.

We got off to a slower start in the first half of the year for two reasons. First, as we've noted, we seen a meaningful decline in the US market growth from 2018. Second, we've implemented new initiatives to drive growth in 2019 and beyond and these activities take time to yield results. One example of this is our merchandising initiatives. We've completely revamped our category review process to include the voice of the customer more to ensure that we have the right assortment and that it is presented in the right way to our customers. This will lead to strategic product ads and improved product presentation. To date, we've implemented this approach on a small portion of our assortment and the early results are very promising.

We expect to be through about $1 billion worth of the assortment in the second half of the year and to accelerate these changes in 2020. We are confident in our ability to accelerate our share gain in the remainder of the year. Our updated sales guidance for 2019 implies US share gain of about 300 basis points in the second half and we are fully committed to 300 basis points to 400 basis points of outgrowth versus the market on average over the next several years.

Let me spend a few minutes discussing our US growth initiatives in the context of our value proposition. While we are in the early innings of these initiatives which I first shared in May, we are encouraged by the results and remain committed to their implementation to drive the business forward. We generally think about them in two buckets. The first our improvements to our foundation that ensure that we stay competitive. And the second, our incremental investments that contribute to our long-term goal of 300 basis points to 400 basis points of growth above market. In terms of what we call advantaged MRO solutions we are investing in our foundation to allow us to offer better solutions for our customers. We are improving our product and customer information and building new data platform, so that we can suggest more relevant solutions online over the phone at the branch and through our sellers.

We expect to start reaping the benefit of these efforts in early 2020. We are also investing in our website to make the search process easier. Feedback from our customers is positive and improving and we will continue to make enhancements to our website throughout the back half of 2019. To accelerate our growth, we are making incremental investments in marketing and merchandising. I've already talked about our merchandising initiatives. Our marketing investments are focused on both digital and media. This spread is extend to spread evenly throughout 2019 and we're seeing strong returns from these efforts.

Moving to our second pillar differentiated sales and services. From a foundation perspective, we are investing to refine our customer relationship management processes, increasing our efforts to serve specific markets more effectively and improving sales force effectiveness. In terms of inventory management, we've done some heavy lifting to realign our offer to drive profitability. KeepStock, which is the core piece of this offer is now profitable and ready to drive growth. Sales through this service represent 10% of net revenue in 2018 and total sales of these customers represent about 30% of US revenue. Over the long term, we expect sales through KeepStock to grow much faster than the overall business.

From an incremental perspective, we are expanding our service offering which includes partnering with suppliers and utilizing our safety and other technical experts to help customers manage total cost and keep their facilities up and running and their people safe. We're also looking at targeted expansion of our sales force where it makes sense. We are planning to strategically add sellers to address changes in how customers buy and to be more relevant in select segment. With corporate accounts, we have been very focused, the last two years on communications around the price changes. We are now in a position to deepen those relationships to drive significant growth. These relationships stretch from the plant floor to the C-suite. And we have a significant opportunity to gain share with these customers based on the service and the capabilities that we can provide. Our last pillar is unparalleled customer service. Our first priority is always to deliver a seamless customer experience. We are known for this in the market and are focused on retaining this advantage through our order to cash book. We have implemented a number of initiatives in the past year that have resulted in an improved customer experience. Our metrics have improved and customer feedback is at an all-time best in getting better.

In terms of fulfillment, we now have 600,000 product stocked in the US, very likely that when a customer places an order, we will have the products available for delivery next day and all in one box. We are adding capacity and capability with the addition of our distribution center in Louisville, which we expect to go live online in early 2020. Louisville will have the most capacity in our network and will enable us to stock up to 800,000 SKUs in the US, with potential for more. When we had stock to items we tend to see significant lift in revenue. And historically, outside of the pricing reset, we've had anywhere from slightly negative share gain to up to 300 basis points. When we've had share gain in the higher end, it's been by adding customer touches or products. The initiatives I've shared do both, increased marketing, improved product assortment and navigation, expanded services and sales force additions and the opening of our Louisville DC is expected to allow us to grow 300 basis points to 400 basis points faster than the market over the mid-term.

I also want to spend a few minutes on the investments we're making through our US to drive long-term profitable growth. You've heard us talk about expanding the product assortment. We plan to add 1 million new items to the Zoro assortment this year, we've already added 400,000. Overall, we plan to add 10 million items over the next three to five years. Product adds are driving revenue growth, similar to what we've seen historically at MontoraRO. Our investments in systems and people to help drive this growth are also going well.

We are going live with the new product information management system for Zoro this year, which will allow Zoro to add products at their own pace and to become less reliant on Grainger supply chain. We're also improving our analytics platform, which will help us better market our assortment to customers online. We are investing in Zoro for success. We expect the bulk of the infrastructure investments to be complete this year, we are optimistic on the trajectory of this business going forward.

Now, I'll turn it over to Tom, who will discuss the quarter's results in more detail.

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Thanks, D.G. Looking at our total company adjusted results for the quarter. Sales were up 1% daily and up 2% on a constant currency basis. Volume was up 1.5% and price was up 0.5%. Year-to-date, prices up 1%. More perspective, our US and endless assortment businesses, which represent approximately 90% of total revenue were up 5% but were offset by headwinds at AGI and Cromwell.

Moving to gross profit. Our GP rate declined 35 basis points. The decline in GP rate versus the prior year was primarily driven by the other businesses. We drove operating earnings growth of 5% in the quarter. Our operating margin grew 30 basis points versus the prior year due to gross margin in the US. Our cost takeout initiatives at AGI and cost discipline in the US and at the corporate level. For the quarter, we generated incremental margin of 39%. Operating cash flow was $323 million in the second quarter of 2019, up 30% driven by better operating earnings and favorable working capital versus the prior year period.

Now let's look at our performance in the US. As D.G. mentioned, the demand environment slowed sequentially from Q1 to Q2. Daily sales were up 2%, composed of volume growth of 1.5% and price inflation of 0.5%. Intercompany sales to Zoro contributed 0.5%, which were completely offset by the decline in Specialty Brands. Our GP rate increased 10 basis points. Excluding the remaining contract implementations, price cost spread was neutral. Gross profit margin also included a benefit from supply chain costs primarily related to freight and inventory optimization and positive mix.

With respect to the remaining contract implementation, we are on track to complete this work in 2019, with only 5% remaining. In the quarter, we pass through majority of tariff and non-tariff related cost inflation, while ensuring that our pricing was market base. We still expect price cost to be neutral for the year excluding the remaining contract implementation. And we've taken the following approach to mitigate any headwinds associated with price cost. With price, one of the main objectives of the reset was to ensure our pricing was market competitive. We can move web price fluidly throughout the year to ensure that we are priced appropriately. With contract customers, we can adjust price a few times during the year and we manage these relationships in terms of total cost ownership to ensure that customers are getting the most value.

On the cost side, we've been very happy with our ability to navigate the tariff environment. As a reminder, we have a cross-functional team that meets regularly and its work to minimize the impact. You may recall we originally expected about 2% COGS inflation related to tariffs. Our actual exposure through working with our supplier partners has proven to be much less. More specifically, we leveraged our scale and maintain strong relationships with our suppliers, allowing us to better predict and manage cost headwinds. Also, we continuously evaluate our product portfolio to ensure we have the best product at the best cost which includes optimizing sources of supply.

Moving to operating earnings. Operating margin was up 60 basis points in the US. SG&A was flat and sales growth of 2%. Our continued cost discipline has enabled us to maintain SG&A while growing revenue. And we remain fully committed to growing SG&A at half the rate of sales on an ongoing basis. In Canada, daily sales were down 23% and down 20% on a constant currency basis. Price was up 3% and volume was down 23%. Volume decline primarily resulted from the customer disruptions related to the turnaround activities we took last year. Gross profit margin was down 150 basis points in the quarter due to negative price cost spread. While we were able to pass through price in the quarter, cost was unfavorable due primarily to lower vendor rebates on softer volume and the foreign exchange impact of US denominated product purchases.

SG&A was down 26% versus the prior year driven by the cost takeout initiatives. Operating margin was down 30 basis points in the quarter, reflecting lower gross profit margin, partially offset by favorable SG&A rate. We expect performance in Canada to improve in the second half of the year. Late in the quarter, we saw encouraging data showing that service levels and web sales were improving. As D.G. mentioned, daily sales were flat from Q1 to Q2, indicating signs of stabilization on the top line. Recall, that most of the significant volume decline associated with the turnaround actions occurred in the second half of 2018. Therefore, we will have easier topline comparisons in the second half of 2019.

Moving on to other businesses. As a reminder, other businesses include our endless assortment model in our international portfolio. Daily sales were up 6.5% in the second quarter and up 9.5% on a constant currency basis due to strong revenue from our endless assortment model. MontoraRO continues to grow significantly and we're making good progress with our growth initiatives at Zoro. Gross profit margin for the other businesses declined 220 basis points, driven by promotional activities at Zoro, unfavorable customer mix at Cromwell and freight headwinds in Japan. Operating margins declined 290 basis points for the other businesses, primarily driven by investments in Zoro US to drive long-term growth and performance at Cromwell.

Page 15 covers our guidance for 2019. At the total Company level, we are reiterating our gross profit margin, operating margin and EPS guidance for the year. Our US segment operating performance is strong and it's more than offsetting slower performance at AGI and Cromwell. We expect US segment operating margin to be at the high end of the guidance range, while AGI is expected to be toward the low end of the range. For other businesses, we are updating our operating margin guidance from 6% to 8%, to 4% to 6% due primarily to performance at Cromwell.

Moving to our sales expectation. Our view of the MRO market has also changed from April. Instead of 1% to 4% growth, we now expect negative 1% to positive 2% market growth for 2019. Due to the slower demand environment, uncertain economic conditions, the early stages of our US growth initiatives and performance at both AGI and Cromwell, we are lowering our top line guidance from 4% to 8.5% and 2% to 5%.

Now, I'll turn it back to D.G. for closing remarks.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Thanks, Tom. I would like to close by reminding you of our long-term performance expectations. We expect our initiatives in the US to allow us to grow revenue 300 basis points to 400 basis points faster than the market on average over the next several years. We believe, Canada is an attractive market for Grainger to be in. It can grow faster than the market and be a double-digit operating margin business over the next five years.

We expect continued strong growth with our endless assortment model through the strength of MonotaRO in Japan and the investments we're making in Zoro US. Overall, we expect to drive strong SG&A leverage and continued operating margin improvement resulting from incremental margin from 20% to 25%.

Now I will open it up for questions.

Questions and Answers:

Operator

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from David Manthey with Baird. Please state your question.

David Manthey -- Baird -- Analyst

Hi, thank you. Good morning. Initially, you were targeting double-digit growth within the US medium customer set and now we're down to sort of a mid single-digit growth rate this quarter. You mentioned the fluidity of pricing. I'm just wondering if there is anything you can talk about there as it relates to price refinements to try to reaccelerate the medium customer growth that you've made recently or you plan to make?

Donald G. Macpherson -- Chairman and Chief Executive Officer

Yes, thanks. Thanks, Dave. So we still believe that we can grow midsize customers much faster than the market. We will need to grow them faster than 300 basis points to 400 basis points faster than the market to be able to hit our overall targets. We have some good signs with our midsize customers, I would say that covered customers have continued to grow very strongly which is a signal that the customers we've acquired are actually repeating at very strong rates, which is great to see. We feel like we have some efforts and initiatives going on with merchandising and marketing that can help us accelerate growth. I would point out that it's pretty new to us to be through the pricing changes and focusing on midsize customers. So we're learning every day, about what's working and what's not. And we're going to know more as we go forward, but we still feel confident we can really grow significantly with that customer group and it's important for the overall economics of the company.

David Manthey -- Baird -- Analyst

Okay. And then as it relates to the reduction in the revenue outlook, I would assume that has more to do with your outlook for US market growth just based on percentages than international or internal disruption. But if you run the numbers based on the full-year guidance to some extent it might imply flat to lower growth in the market in the second half of this year. And I'm just wondering your thoughts on how severe the slowdown might be and is there a recession in your forecasting right now?

Donald G. Macpherson -- Chairman and Chief Executive Officer

So, a great question. When we've talked about a lot, I would say we are -- we certainly not going to forecast a recession. And what we've seen in the market in the US has been slow growth but pretty stable over the last several months, but we don't see anything that implies that we are heading off a cliff in the US, obviously internationally, there is pockets that are more problematic than others, but in general, we are not forecasting negative necessarily. We think it's a possibility that probably not a probability at this point.

David Manthey -- Baird -- Analyst

Got it. Thanks, D.G.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Robert Barry with Buckingham Research Group. Please state your question.

Robert Barry -- Buckingham Research Group -- Analyst

Yes, hey guys, good morning.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Good morning.

Robert Barry -- Buckingham Research Group -- Analyst

So I just wanted to circle back on the price. I mean I think the price slowed from 1.5% in the first quarter to 0.5% in 2Q. I think the tariff headwinds are kind of moving in the other direction. So just curious how you're thinking about kind of tariffs and other inflation and how price might track over the next couple of quarters kind of vis-a-vis what's happening in the tariffs and inflation?

Donald G. Macpherson -- Chairman and Chief Executive Officer

Yes, I mean I would say that -- thanks, Robert. I would say that the tariff environment is still a significant uncertainty and we'll see what happens in the next couple of months in terms of either resolving it or not. Our philosophy is to make sure that we are priced to the market and we will continue to make sure we are priced competitively to be able to serve our customers well. And we will take actions to make sure we look at it every day basically, to make sure we're priced at the appropriate range. And so that's really our philosophy and that's what we're focused on. There is some uncertainty as to whether or not the tariffs are going to come through in a bigger way in which case, price may go up or not but our focus is really on making sure we're market competitive in terms of pricing.

Robert Barry -- Buckingham Research Group -- Analyst

Got it. I mean just to clarify a couple of things, I mean, since the List 3 did move up, I mean is that going to be a bigger headwind for you in the back half? And if you're pricing the market, does the fact that the pricing moderated at Grainger mean that what you're seeing in the market, I guess, it's to like customers are not getting as much price.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Yes, we've been planning for the List 3 change for quite some time. The way we've got it modeled is relatively small. As we said in the prepared remarks, we've been able to realize substantially less than the overall exposure. So we don't believe that the change in the List 3 is going to be that material for us.

Robert Barry -- Buckingham Research Group -- Analyst

Got it, got it. Could I just clarify one more thing? When you're talking about getting the outgrowth from what was I think 1 point in 2Q to 3 points in the second half, is it all these items on Slide 8, that you think are driving it? And are they all just adding like 20 bps or 30 bps or is there one or two of them that's going to like drive the lion's share of the acceleration?

Donald G. Macpherson -- Chairman and Chief Executive Officer

Yes, thanks for asking it. We will provide more detail going forward, and how much we expect it to provide. I will say that this is a pretty big shift for us and mindset shift in the sense that we've tracked market share in the past, but we've never targeted market share growth and we've never had a set of initiatives that we are expecting to align to that growth at least not explicitly and we do plan to become more explicit over time. I gave the example of merchandising in the prepared remarks, which I think is a good one where this is a little bit new to us.

We are having to break down some barriers to execute faster and move faster on some things and we're seeing good results. And we do expect that momentum to continue to build. And so we'll provide more of the specific details but know that yet Page 8 is pretty important for us right now, I would say.

Robert Barry -- Buckingham Research Group -- Analyst

All right, thank you.

Operator

Our next question comes from Christopher Glynn with Oppenheimer. Please state your question.

Christopher Glynn -- Oppenheimer -- Analyst

Yes, thanks. Just had a couple of questions about the endless assortment strategy there. With the incremental investment you're putting in this year, is that investment in the cost base or does it tailoff next year? And what are you thinking about timeframe for that business to be stand-alone capable?

Donald G. Macpherson -- Chairman and Chief Executive Officer

Yes. So that -- let me get to the last one second. Most of the investments that we're making in terms of getting platform and platform independent should be -- we should be through that by the end of this year. So we expect some of the cost we've added in terms of analytics and people to stay, but a lot of the cost will fall off next year as well. In terms of stand-alone, it will come in pieces. So one of the biggest things we're doing is developing the capability for that business to add their own items, and they add items with third-party shippers, which will make that business less relying on Grainger obviously for the core Grainger items, Grainger still fulfill. But that business will become less directly reliant on the Grainger supply chain over time. And so that should be, we're going to implement that, that system in the third quarter, by the end of the year, we should have that capability. Similarly, the data analytics platform should be complete by the end of the year. So a lot of this should really be through this year in terms of giving that business more independence, and that's really what we're targeting.

Christopher Glynn -- Oppenheimer -- Analyst

Okay. And then just a follow-up on the medium. If you go a little deeper into what you're seeing in terms of customer retention versus the pay positions and overall, how is the base holding on from the initial burst of growth there?

Donald G. Macpherson -- Chairman and Chief Executive Officer

So, the base is holding on quite well. As I mentioned, we've taken a portion of that base, about half of the midsize customers are now in some sort of coverage model and that has continued to grow at a pretty good clip. So the base has held on pretty well and we are acquiring customers as well. But, certainly we're happy with what we see with the base.

Christopher Glynn -- Oppenheimer -- Analyst

Thank you.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Deane Dray with RBC Capital Markets. Please state your question.

Deane Dray -- RBC Capital Markets -- Analyst

Thank you. Good morning, everyone.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Good morning.

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Good morning.

Deane Dray -- RBC Capital Markets -- Analyst

Hey, it was really interesting about what you did not say in your prepared remarks or in your Slides. There was no comment about weather. And we've seen all kinds of pressures on your peers, and you had to have felt some of the same pressures because this was a -- it's always an important HVAC opportunity for filters and refreshing refrigerants and so forth. But it didn't seem to impact you, and maybe you can clarify what sort of pressures you did see or did not see.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Yes, I mean the -- certainly the weather was not helpful, but it was a very small impact to us, it's less than 0.5% impact. So we didn't call it out as a separate item.

Deane Dray -- RBC Capital Markets -- Analyst

Good. I appreciate that. And then just to clarify and just make sure I'm clear on this. When you cut the sales high end of the guidance, you cut that more than what the market growth cut on the high end. So 3.5 points on the -- on your sales high end. So why are you cutting that more? Is that all Canada and Cromwell? Just to clarify that, please?

Donald G. Macpherson -- Chairman and Chief Executive Officer

Yes, it's a lot -- a lot of it is Cromwell in Canada being shrinking. So that's a big part of it, absolutely.

Deane Dray -- RBC Capital Markets -- Analyst

Got it. And just one last quick one. Really it's helpful on the appendix where you give the monthly progression. And can you comment on how June ended as being their strongest month? And what sort of setup are you seeing in July so far?

Donald G. Macpherson -- Chairman and Chief Executive Officer

Yes, I mean we don't want to over-index on any monthly trends given some of the noise that could happen in the month. I would say that we do feel like we gained a little bit more share in June and we do feel like the market, like I mentioned before is not falling off a cliff. We expect to be in a slow growth market moving forward and it's been pretty stable from our perspective over the last several months.

Deane Dray -- RBC Capital Markets -- Analyst

Thank you.

Operator

Our next question comes from Josh Pokrzywinski with Morgan Stanley. Please state your question.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Hi, good morning guys.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Good morning.

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Good morning.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

On the -- and I appreciate the color you guys gave on the tariff environment and the ability to navigate to add a little bit better as we move into the 25% on List 3. Maybe I missed it, but how would you kind of check that against the pricing environment out there? So maybe you have to ask for a little bit less price, but what's the appetite in the market? Some of the folks in this space have mentioned that's gotten a bit more challenging. What would be your take on those?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Yes, we're finding that we're able to pass on most of the tariffs related price increases. The one thing that we called out in terms of price neutral is the only thing impacting that that we excluded was the price reset. We've had a great relationship since the tariffs started working with our supplier partners, they want to sell their products with us and it's been going extremely well as the results show.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Got it, that's helpful. And then just coming back to endless assortment, obviously there's some kind of strategic synergy or operational playbook synergy from MonotaRO with Zoro. Once Zoro is further down the path and maybe just kind of learned all it can, is there a place for MonotaRO in the portfolio? Just given that it's a little bit more distant and probably doesn't get full credit from an external perspective given the strength of the business?

Donald G. Macpherson -- Chairman and Chief Executive Officer

Yes. So right now we're learning a lot from MonotaRO, there's a lot to learn from their success. There is probably more leadership synergy that might be easy to recognize in the sense that the leaders of all of the businesses get together frequently, and talk about what they're doing. We haven't talked much about Zoro UK, but Zoro UK is on a terrific path and will be profitable early 2020 that's partly because of the linkages they have with MonotaRO and Zoro US. It's a fair question, but for now we certainly feel like we're getting a lot of synergies out of the portfolio and it's an important part of our portfolio going forward.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Got it. Thanks for the color. I'll leave it there.

Operator

Thank you. Our next question comes from Ryan Merkel with William Blair. Please state your question.

Ryan Merkel -- William Blair -- Analyst

Hi, thanks. So first off, really nice job on the US margins. My question is what is surprising you positively to hit the high end as of operating margin guidance just given the slower sales trajectory?

Donald G. Macpherson -- Chairman and Chief Executive Officer

Well, I think it's been our ability to generate incremental margin. We know we're in a choppy slowing market and our sales growth isn't going to be as great as we had planned. We're doing a lot of good work on COGS as we described. I think managing the tariff environment very well. We're being very fiscally responsible on SG&A, while also really continuing to invest in our priorities, advertising digital. So it's really comes down to our ability to generate incremental margin. I mean we had -- we have very good results as we called out.

Ryan Merkel -- William Blair -- Analyst

Okay, that's helpful. And then moving to Canada, I hear what you're saying, average daily sales was stable from the first quarter, but the recoveries still seems to be tracking a little bit slower. So what are the main issues and then any change to getting to breakeven by the fourth quarter?

Donald G. Macpherson -- Chairman and Chief Executive Officer

So the main issues have been when we went through some of the changes, which were significant, and there were many changes that we made. We had some customer disruption that we weren't portfolio expecting. I would say the most important time for me is that the services improved in the business, we're hearing better things from our customers. We're starting to win back some customers, which is really, really important. I think the business is very well positioned from a cost and business model perspective now, and we need to get the topline going and that's taken a little bit longer than we thought. That's really the only thing that concerned just at this point until we get the topline going.

Ryan Merkel -- William Blair -- Analyst

And then breakeven by the fourth quarter of '19. Is there any update there that you can provide?

Donald G. Macpherson -- Chairman and Chief Executive Officer

Well, as we said in our guidance, which is 1% to 5% for Canada, we believe to be tracking to the low end. So, the answer would be yes, breakeven -- better than breakeven for the year.

Ryan Merkel -- William Blair -- Analyst

Okay, great. Thanks.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Welcome.

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

Our next question comes from John Inch with Gordon Haskett. Please state your question.

John Inch -- Gordon Haskett -- Analyst

Thanks. Good morning everybody.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Good morning.

John Inch -- Gordon Haskett -- Analyst

Can we talk about the trajectory in the quarter? Was there a step down from the first to second quarter, as we hit April? And then how did sort of medium versus large play out sequentially? If there is any color you could provide there that gives us -- I know D.G., you've said that it's stable. But it seems -- like the number seems sort of low, but it looks like they picked up, is there any color you could provide?

Donald G. Macpherson -- Chairman and Chief Executive Officer

Well, certainly, I would say May was lower across all segments if that's what you're referring to in June was better. I would say some of that are factors that are frankly not we're talking about from the last year or two in terms of setting the baseline that you're comparing to. But certainly, we don't see, like I said before, we don't see anything falling off a cliff, and we do see midsize customers growing faster than the rest of the business and we would expect to see that going forward.

John Inch -- Gordon Haskett -- Analyst

But it sounds like you're sort of downplaying the significance of at least the monthly June tick back up to 3%. Is that a function then of compares or is that just you don't want to get ahead of your skis by overpromising, just based on one month?

Donald G. Macpherson -- Chairman and Chief Executive Officer

Well, I mean, I guess I would downplay May being down as low as it was as well. So we would say that the quarter was if you average out the quarter, that makes sense in terms of what we've seen from market growth.

John Inch -- Gordon Haskett -- Analyst

And was there a disconnect between kind of the large versus the medium, going back to my prior question and as you exited, it wasn't really. So I mean it doesn't -- it seems like medium then it's going be pretty challenge to get back to double-digit. Is that fair? Or do you see those...

Donald G. Macpherson -- Chairman and Chief Executive Officer

In the short-term -- in the short-term, yes, that would be fair. Like I said, we're learning every day and we're doing things to continue to improve the trajectory and we like what we're seeing, but certainly in the short term, that's true.

John Inch -- Gordon Haskett -- Analyst

And then your margin guidance for the year right implies a significant step down from really commendable performance in the growth in our profit margin side, especially in the US to sort of the total guide, which remains unchanged for the back half. What exactly is that seasonality? Or are there other things going on there? Are you just being conservative? Or why didn't you -- why the step down, I guess, particularly at the midpoint?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Well there's -- you're referring to the US, is that?

John Inch -- Gordon Haskett -- Analyst

Well kind of the whole thing, right, I mean, just, you look at the guide, but then you look at the -- just the complexion of what's driving that, right.

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Right, OK. Yes, there is some seasonality. As you look at the way we performed historically, the gross margin, it does go down over the year, also recognizing the uncertain economic environment we're in, we just thought it would be prudent to be cautious and as we measured in our guidance range.

Donald G. Macpherson -- Chairman and Chief Executive Officer

So, Tom, there is no price cost dynamic. I mean, I know you talked about tariffs and you feel like you're on top of it, but there is no other price cost dynamic that's kind of playing out here that would be driving some of that disruption?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Yes.

John Inch -- Gordon Haskett -- Analyst

All right. Then it almost implies the guide could have a little cushion in it. Is that fair?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Seasonality and just the economic environment that we're in, I think it pays to be prudent.

John Inch -- Gordon Haskett -- Analyst

Yes. Great. All right, thank you very much.

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Welcome.

Operator

Thank you. Our next question comes from Justin Bergner with G.research. Please state your question.

Justin Bergner -- G.research -- Analyst

Good morning, D,G. Good morning, Tom.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Good morning.

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Good morning.

Justin Bergner -- G.research -- Analyst

Just on the guide, maintained margin guide at least at the Company level 2% plus lower sales, just mathematically would suggest that EPS would be 2% lower, but it seems like you're maintaining that. So should we also read that you're expecting operating margins to be a little bit above the midpoint of the guide at the Company level to offset the lower sales?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Well, I'm really not going to get into where we think we're going to land in the range other than what we've said in the prepared remarks. We've been running the play in the first half of not getting the sales we've wanted, generating very strong incremental margins and we're going to continue to do that in the back half, and we think it will work out well for us, but I really don't want to get into going forward, where we think we're going to land in the range.

Justin Bergner -- G.research -- Analyst

Understood. And then on repurchases, I guess you did healthy amount of repurchases, this quarter you've done $400 million year-to-date that would put you tracking at or above the high end of your range if you sort of annualize that. Are you potentially going to do more repurchases in your earlier guide or were they just more weighted into the second quarter?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

If I would go back to our capital structure tenants, so one of the tenants that we have is we don't want to hold any excess cash and we were in a good position where we had generated quite a bit of cash and we just used that to return back to the shareholders. So really nothing to read into that. As it goes to our initial guide, we're sticking with that and if it changes, we will talk about it in next quarter.

Justin Bergner -- G.research -- Analyst

Great, thanks for taking my questions.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Thank you.

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

[Operator Instructions] Our next question comes from Patrick Baumann with JPMorgan. Please state your question.

Patrick Baumann -- JPMorgan -- Analyts

Hi, good morning, D.G. Good morning, Tom.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Good morning.

Patrick Baumann -- JPMorgan -- Analyts

I just had a few follow-ups here. So a really good job on SG&A control in the first half of the year really. It looks like it was down year-over-year on a cumulative basis. Can you take it down again year-over-year in the second half? And I'm just trying to understand what the levers are for that, if you can. I ask because you said the cost actions are now, I guess, complete. So I'm just kind of curious what the levers are on SG&A.

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Yes. Our philosophy is that you can always optimize SG&A, and we will continue to look at that every day. The way we're looking at though is really trying to get to our 20% to 25% incremental margin. I mean that's the objective that the organization is focused on, but there is always ways to take out costs. I think in the prepared remarks, the cost -- cost takeout ending were primarily related to Canada.

Donald G. Macpherson -- Chairman and Chief Executive Officer

And I would also just add that I think if you look at our cost structure, a big part of our cost structure is process cost of distribution centers, contact centers. We've made some pretty big changes, for example, our contact centers. They are performing quite well now, they're going to continue to get better and better. So it's not. So maybe the restructuring is done, but we expect every single year to get continuous improvements out of our big operations and we continue to see that and would expect to see that going forward. So it's not like we're not going to improve our cost structure, is just that we may not have as much restructuring type things, so on.

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Yes, just finally, I would add one important thing is even in this down market, because of what D.G. talked about our focus on market share and our focus on growth, we are not backing off of any of our strategic initiative spending to hit an SG&A number. We're continuing to go forward full speed on that.

Patrick Baumann -- JPMorgan -- Analyts

Do you think SG&A can decline in the second half year-over-year? And what drives the -- I think last year, you had some big profit share and headwinds in the second half that were impacting the numbers there. And I'm just -- so maybe that's an easy comp. I don't know. I'm just trying to kind of tie those -- all those stuff together here.

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Yes, we do have an easier comp as far as variable compensation. What I would say for the second half as we expect the SG&A rate to be lower than the previous year for sure.

Patrick Baumann -- JPMorgan -- Analyts

The -- as a percentage of sales? Or you're just saying the absolute number?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

As a percentage of sale and we also expect the second half of the year to perform better than the first half of the year as it relates to favorability to the prior year.

Patrick Baumann -- JPMorgan -- Analyts

From a absolute dollar perspective?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

From a rate perspective.

Patrick Baumann -- JPMorgan -- Analyts

From a rate perspective? Got it. Understood. And was that profit sharing expense line, was that a help in the second quarter year-over-year? Was it a tailwind?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Sure. Yes.

Patrick Baumann -- JPMorgan -- Analyts

And then just -- go ahead, I'm sorry, I didn't mean to interrupt.

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

That's OK. That's OK. Yes.

Patrick Baumann -- JPMorgan -- Analyts

And then D&A, it looks like it's down year-to-date. What's driving that?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

That's compared to last year, we had some issues in terms of KeepStock write-off, some machines older machines that we replaced. We also had some capital expenditures at two of our bigger DCs. So we were -- we had a favorable compare there to last quarter.

Patrick Baumann -- JPMorgan -- Analyts

Thank you.

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Welcome.

Operator

Our next question comes from Bhupender Bohra with Wolfe Research. Please state your question.

Bhupender Bohra -- Wolfe Research -- Analyst

Hey, good morning guys. This is Bhupender here sitting in for Nigel. So, just, Tom, I think you mentioned you gave some guidance on the other businesses margin here. Can you just give some more color on those margin targets? And what's your confidence is actually in the back half to achieve those targets for the year?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Yes, we're -- we took on the other business unit operating margin target, primarily due to the performance in our Cromwell business unit. Obviously with the uncertainty of Brexit also that just combined with the transformation that we've got going on in that entity where we're really changing the business model there in terms of being decentralized with the branch network and trying to have more centralization. Some of the things that we've noted on Canada we're seeing there where we've disrupted the customer base, those types of things. So that's why we're taking down primarily for the other business units.

Bhupender Bohra -- Wolfe Research -- Analyst

Okay. And is investment spending a big part of that? Or is it pretty small? I mean, you guys are done with restructuring?

Donald G. Macpherson -- Chairman and Chief Executive Officer

So, certainly the investment spending in Zoro in the US is a big part. That was planned at the beginning of the year and we are spending that money and seeing what we want to see out of that. So we had always planned for the Zoro margins to come down in the year and that's what we're seeing. So, that's -- when we talk about investment spending, that's really what we're referring to.

Bhupender Bohra -- Wolfe Research -- Analyst

Okay, got it. If I can, another one here on pricing. As we saw in the first quarter, pricing was 1.5%, second, 0.5%. How should we think about the back half? Because when you look at last year, second half, I think we had pretty kind of close to 100 bps actually pricing every quarter. Are we going to see much more realization what we have seen in the quarter? Or as it kind of tariffs kick in, like in the second half, List 3? So if you can give some color on that? Thanks.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Yes, I think like we said before, I think our focus really is to make sure that we are market pricing everything that we do. Depending on how the tariffs play out, that could mean more price or less price, I think and that there is some uncertainty around that, but we are tracking and watching this very, very closely and our objective always to make sure that we'll price competitively and we will make sure we do that.

Bhupender Bohra -- Wolfe Research -- Analyst

Thank you.

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Welcome.

Operator

Our next question comes from Steve Barger with KeyBanc Capital Markets. Please state your question.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Hi, good morning.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Good morning.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Just looking at heavy manufacturing down low-single digit natural resources down mid single. In general, what are the customers or your sales force saying there, is there an expectation for improvement in the back half of those segments?

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

It's hard to tell. I mean, heavy manufacturing was basically flat for the second quarter. Actually, in June, the overall market, I'm referring to is actually negative. So it's hard to tell where that segment is going to go. Obviously, we've got a number of initiatives in play which D.G. referenced in the prepared remarks in the Q&A, we think, despite that down are slowing market, we're going to be able to gain share.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Right. And just more broadly, given softer markets, are customers leaning toward lowering reorder points or the amount of inventory they are willing to hold? And does that change how you think about inventory at the DCs?

Donald G. Macpherson -- Chairman and Chief Executive Officer

Generally not much, I mean, the reality is that customers don't hold the whole bunch of our inventory anyway. And the way we structured, most of our large customer relationships, we're helping them manage the inventory. We set MLQs that allow them to operate at a pretty lean level. So we don't see a lot of channel loading or anything like that with our customers given the business model and our business model is based on us entirely and helping them manage inventory effectively.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Got it, thanks.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Thank you.

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from John Inch with Gordon Haskett. Please state your question.

John Inch -- Gordon Haskett -- Analyst

Yes, just as a follow-up, I wanted to ask you about Europe. One of the things we've gleaned this quarter thus far from other companies is the European economies are actually starting to show up in a much more pronounced basis negatively. And it implied that the other business results were more UK Brexit oriented maybe a little bit of your own inflection. What's going on and actually with respect to Fabory and just what you're seeing in Continental Europe? And does that weigh on the results and have any sort of bearing on the second half in terms of your own expectations?

Donald G. Macpherson -- Chairman and Chief Executive Officer

I mean I think what we've seen over there as we've seen obviously the UK market has been struggling a bit, and we've seen some manufacturers ship some of their production from UK to the mainland of Europe. The Fabory business has had sort of a consistent modest growth this year. We think the market in the Netherlands and Belgium where they are, it's been up combined but not up significantly. Certainly there are signs of some pressures in the European market. But what we've seen in Fabory hasn't really weighed on results what we've seen in the UK has.

John Inch -- Gordon Haskett -- Analyst

And the expectations about DG because it -- do you think it's just more of the same coming or are there reasons based on just exit quarter trends or anything else? So things get better or little bit worse?

Donald G. Macpherson -- Chairman and Chief Executive Officer

Yes, I mean, I would just -- I would just remind they may get a little bit worse. I would just remind you that we are very small in Fabory, so they don't have a meaningful impact on us right now. So I don't -- and I also don't know that we have the best lens. I mean, we have the lens in the Netherlands primarily and some Belgium business. So we don't have anything really in France to speak, we have very little in Spain. So we don't really have much exposure to the big markets to have a position.

John Inch -- Gordon Haskett -- Analyst

Got it. Thanks very much. Appreciate it.

Operator

Our next question comes from Justin Bergner with G.research. Please state your question.

Justin Bergner -- G.research -- Analyst

Okay, thanks for the follow-up. With respect to neutral price cost, are you seeing any different dynamic between sort of the industrial part of your portfolio and the non-industrial part of your portfolio, just given some of the comments from other MRO distributors earlier in the quarter?

Donald G. Macpherson -- Chairman and Chief Executive Officer

I don't think about that. I'm not sure I have a great answer for you, to be honest. My inkling is probably not seeing much different, but I don't know that I could necessarily say that with certainty. We have looked at the total and I'd have to go ask some questions about that, it's interesting question.

Justin Bergner -- G.research -- Analyst

Okay, great. And then lastly, with respect to the endless assortment model, you use the term continuous growth versus accelerating growth. Does that just reflect more challenging end markets or is there anything sort of structural to be read into that change in language?

Donald G. Macpherson -- Chairman and Chief Executive Officer

I don't think it's anything structural. I think there's a sort of law universe which is Zoro has been growing over 20 for the first five or six years. If we wanted to continued to grow in the 20s, we need to do something else given as it gets bigger that becomes harder and harder to do. So we didn't want you to think that we're going to accelerate from the 20s to the 30s or 40s. We're going to try continue to have a strong growth rate great.

Justin Bergner -- G.research -- Analyst

Great. Thanks again.

Operator

Thank you. Our final question comes from Patrick Baumann with JPMorgan. Please state your question.

Patrick Baumann -- JPMorgan -- Analyts

Hi, thanks for giving me the follow-up. I just wanted to follow up. You've mentioned KeepStock, and you said it's now profitable and was 10% of the business in 2018 and will grow faster, I guess, than the rest of the business going forward. There hasn't been a ton of visibility here in the last couple of years, so just curious if you could give a quick update on kind of what you've been doing there. Was it losing money last year? And kind of what changes have you made to improve profitability to make you feel like you can grow it better and more profitably in the future?

Donald G. Macpherson -- Chairman and Chief Executive Officer

We -- about three years or two to three years ago, we made some changes and that's improved the profitability. We're now squarely in the phase where we're building new capabilities. We've done some work on software, we've done some work on visibility and analytics and reporting to help customers understand the value that we're bringing, and we're going to continue to push on those things. The comment really around, we had it for a couple of years, we hadn't been focused as much on capability broadening as we improve the profitability and now we're really focused on that. And so that's going to be our focus going forward.

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

I think it's important to note that in June, we had our fastest growth rate that we've had in two years related to KeepStock.

Patrick Baumann -- JPMorgan -- Analyts

Got it. Okay, makes sense. Thanks. Thanks again. Good luck.

Donald G. Macpherson -- Chairman and Chief Executive Officer

Thank you. Appreciate it.

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

Thanks.

Operator

Thanks. I will now turn the conference back over to Mr. D.G. Macpherson for closing remarks.

Donald G. Macpherson -- Chairman and Chief Executive Officer

All right. Well, thanks, thanks for joining us. I would just reiterate a couple of points. One is, in the US, given the profitability, we are really focused on growth in gaining share going forward. And it's a bit of a new orientation for us to say, we're going to gain share on a consistent basis. But we are wiring ourselves up to be able to do that and that's our primary focus. And the other is the online model continues to be very profitable and a fast grower. And so we're investing to make sure we can do that. It does two things go well, and we're pretty excited about the future. And I look forward to talking to you one on one. So, thanks, thanks for your time and I appreciate you on the call.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Irene Holman -- Vice President of Investor Relations

Donald G. Macpherson -- Chairman and Chief Executive Officer

Thomas B. Okray -- Senior Vice President and Chief Financial Officer

David Manthey -- Baird -- Analyst

Robert Barry -- Buckingham Research Group -- Analyst

Christopher Glynn -- Oppenheimer -- Analyst

Deane Dray -- RBC Capital Markets -- Analyst

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Ryan Merkel -- William Blair -- Analyst

John Inch -- Gordon Haskett -- Analyst

Justin Bergner -- G.research -- Analyst

Patrick Baumann -- JPMorgan -- Analyts

Bhupender Bohra -- Wolfe Research -- Analyst

Steve Barger -- KeyBanc Capital Markets -- Analyst

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