W.W. Grainger, Inc. (NYSE:GWW) Q2 2023 Earnings Call Transcript

W.W. Grainger, Inc. (NYSE:GWW) Q2 2023 Earnings Call Transcript July 27, 2023

W.W. Grainger, Inc. misses on earnings expectations. Reported EPS is $7.19 EPS, expectations were $9.13.

Operator: Good morning and welcome to the W.W. Grainger Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to our host, Kyle Bland, Vice President of Investor Relations. Thank you. You may begin.

Kyle Bland: Good morning. Welcome to Grainger’s second quarter 2023 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. Actual results may differ materially as a result of the various risks and uncertainties, including those detailed in our SEC filings. Reconciliations of any non-GAAP financial measures with their corresponding GAAP measures are found in the tables at the end of this presentation and in our Q2 earnings release, both of which are available on our IR website. This morning’s call will focus on our second quarter 2023 results, which are consistent on both a reported and adjusted basis for all periods presented.

We will also share results related to MonotaRO. Please remember that MonotaRO was a public company and follows Japanese GAAP, which differs from U.S. GAAP and is reported in our results 1 month in arrears. As a result, the numbers disclosed will differ somewhat from MonotaRO’s public statements. Now, I will turn it over to D.G.

D.G. Macpherson: Thanks, Kyle. Good morning and thank you for joining us. Today, I’ll provide an overview of our second quarter performance and then pass it to Dee to walk through the financials in detail. As we work our way through 2023, Grainger continues to stay focused on what matters most: providing our customers with the products and services they need through exceptional service. Everything we do is grounded in our Grainger Edge framework, which I’d like to highlight today in the context of our recently released ESG report. I would encourage you all to check out the full report at graingeresg.com. Grainger has long been a leader in ESG, both for our customers and in our own operations. Internally, we have laid out four near-term ESG focus areas that are important parts of both our culture and operations.

Early indications show that we are making meaningful progress. I will start with our customer sustainability solutions. In 2022, revenue in High-Touch U.S. business for our environmentally preferred products was more than $1 billion and has increased steadily over the last few years. Customer conversations around their environmental footprint have become commonplace and we are well positioned to help customers in this space. On the right side, you will see how we are helping our customers achieve their goals by tying sustainability to our product and service offerings. We recently worked with a large container terminal operator that was in search of an opportunity to offset fossil fuel-based energy use, enhance its group resilience and reduce cost.

Through our sustainability services offering, the customer purchased and will install more than 300 solar panels. These panels will help them avoid approximately 4,000 tons of CO2 emissions over the next 20 years, the equivalent of 9 million miles driven by a car. This is just one example, but we partner with our customers like this everyday, connecting them to our network of service provider partners and helping ensure we can be the go-to partner for everything they need to run safe, reliable and sustainable operations. Second, supplier diversity. Grainger plays an important role in champion businesses owned by underrepresented groups, including women, minorities, LGBTQ+ and people with disabilities through this program. Last year, we spent more than $2 billion on products from our diverse supplier base and continue to make further progress as we expand partnerships in this space.

Third, energy and emissions. Since 2018, we have reduced our global absolute Scope 1 and Scope 2 emissions by 26%, nearing our 2030 goal of a 30% reduction. And finally, diversity, equity and inclusion. DEI is a continuous journey. We are proud to have been named one of Fortune’s Best Places to Work for Women in addition to being recognized by other organizations for our work to celebrate and support all team members no matter their ethnicity, orientation, age, disability or veteran status. Each of these near-term priorities are an important part of our ESG focus and are helping us to scale our actions to make a greater impact for both Grainger and our customers. Our team will continue to follow the Grainger Edge as we make progress toward our own near-term initiatives and partner with our customers as they work to achieve their ESG goals, together positively impacting the communities where we operate.

Now to review highlights for the quarter. As you can see, we again delivered a strong quarter of performance as we continue to show up well in supporting our customers. As expected, year-over-year growth rates are decelerating, but demand remains reasonably steady. For the quarter, we finished with daily sales growth of 9% or 10.1% on a daily constant currency basis. Results again were driven by positive performance in both segments, most notably within the High-Touch Solutions segment, which outpaced the broader MRO market by approximately 525 basis points in the U.S. Total company operating margin was 15.8%, an increase of 190 basis points over the prior year as improved gross margin performance was driven primarily by continued supply chain efficiencies and lower freight and container costs.

Combine this with our strong top line growth and we delivered substantial EPS growth, robust operating cash flow and continued ROIC of over 40%. We also returned a combined $265 million to Grainger shareholders in the quarter through dividends and share repurchases. Alongside these great results, we continue to make progress against our strategic initiatives. In the High-Touch model, we are advancing our proprietary product and customer information management systems that fuel our growth engines and allow us to advance marketing, merchandising and seller investments in the U.S. The Endless Assortment business is seeing some macro-related demand softening in the U.S. But overall, the team continues to focus on providing reliable service while increasing repeat purchase rates with core B2B customers at Zoro and growing with enterprise customers at MonotaRO.

Lastly, a few weeks ago, we announced our plans to construct a new 500,000 square foot distribution center outside of Portland, Oregon, which will support our customers across the Pacific Northwest and is expected to open in 2025. In addition, we are implementing three smaller bulk-style distribution centers in Pennsylvania, Texas and North Carolina, which are each slated to open over the next few quarters. These investments enable us to keep up with strong customer demand and allow us to extend our industry leading service capabilities, which deliver a best-in-class experience focused on next-day complete fulfillment across the United States. As we remain focused on what matters, I am pleased with the progress we have made through the first half of 2023.

With our strong execution and as market demand remains reasonably steady, we are raising the midpoint of our full year 2023 revenue and EPS guidance. I will now pass it over to Dee to go through the details.

Dee Merriwether: Thanks, D.G. Starting with Slide 8 you can see the high-level results for the total company, including strong daily sales growth of 10.1% on a daily constant currency basis. Although year-over-year growth rates decelerated compared to Q1 as inflation cools and as we lap a tougher prior year comparison, daily sales dollars remained strong and we are on track to deliver a great year. Total company operating margin was up 190 basis points as expanded gross margins in both segments were further aided by SG&A leverage in the High-Touch Solutions North American segment. In total, we delivered diluted EPS in the quarter of $9.28, which was up 29% versus the second quarter of 2022. Diving into segment level details, for the second quarter, we continued to see strong results within our High-Touch segment, with daily sales up 9.9%, fueled by revenue growth in all geographies.

Although year-over-year growth rates have slowed as we lap prior year price inflation, volume growth remains healthy and was generally in line with our expectations for the quarter. In the U.S., we continue to see positive growth in nearly all customer end segments. However, this does include pockets of softness, including decelerating growth in manufacturing and commercial services. However, given our diversified customer base, this is countered by strong growth in other areas such as government and healthcare. In Canada, the economy remains stable and we are seeing strong results with Canadian daily sales up about 7% in local days and local currency. For this segment, GP margin finished the quarter at 41.7%, up 200 basis points versus the prior year.

Product availability levels remained high, resulting in fewer packages and shorter distance shipments in the current year as service returned to near pre-pandemic levels. This one coupled with lower fuel and container rates is driving significant fuel and supply chain tailwinds in the quarter. Product mix was also favorable primarily due to improved product availability and a higher mix of margin-accretive products and services. Price/cost spread was slightly negative after adjusting for non-recurring – a non-recurring 40 basis point supplier rebate benefit recognized in the quarter. As expected, the favorability captured in 2022 began to unwind in the second quarter and we expect this to continue for the remainder of the year as we turn towards our long-term neutrality target.

At the operating margin line, we saw improvement of 230 basis points year-over-year as the GP favorability fell to the bottom and revenue growth more than offset continued demand generation investments in headcount and marketing. Overall, this was another strong quarter for the High-Touch North American segment. Looking at market outgrowth on Slide 10, we estimate the U.S. MRO market grew between 4.5% and 5%, indicating that we achieved roughly 525 basis points of outgrowth in the quarter. Although this is a sequential slowdown from Q1, we comped a very strong prior year quarter and performance remains above our annual target to outgrow the market by 400 to 500 basis points through economic cycles. We are well on our way towards achieving that target again in 2023.

Moving to our Endless Assortment segment, sales increased 4.5% or 10.1% on a daily constant currency basis, which adjusts for the impact of the depreciated Japanese yen. Zoro U.S. was up 2.8%, while MonotaRO achieved 12.6% growth in local days, local currency. At a business level, MonotaRO continues to execute well and is driving solid year-over-year revenue growth as they increase registered users and grow the enterprise customers. At Zoro, while slower growth partially reflects a tougher prior year comparison, we are seeing slowing demand across their customer base. Similar to Q1, non-core B2C business remained a headwind in the quarter and was down in the mid-teens year-over-year. Further, we have seen a slowdown in Zoro’s core B2B business, which makes up a majority of Zoro’s revenue.

While we are still growing in the high single-digits with these core customers, macro-related factors are impacting demand given Zoro’s end market mix as well as their tilt to smaller sized businesses, which seem to be struggling more in this environment. We expect both of these headwinds to persist for the remainder of the year. Stepping back, Zoro has delivered great results over the last 2 years as we have added SKUs to our assortment, increased registered users and served both core and non-core customers well during the pandemic. As we plan for our next leg of growth, the new local leadership team is focusing their efforts to drive repeat profitable growth with core B2B customers. This should help propel our results through the cycle as we continue to provide a one-stop endless aisle with easy-to-find products and a no-hassle delivery experience for smaller, less complex businesses in the U.S. From a profitability perspective, gross margin for the segment expanded 50 basis points versus the prior year due to continued freight efficiencies and strong price realization at MonotaRO, which offset unfavorable product mix at Zoro.

Operating margins declined slightly year-over-year to 8.6% as gross margin favorability was offset by continued investments in marketing and slower-than-expected top line growth at Zoro. On Slide 12, we continue to see positive results with our key Endless Assortment operating metrics. On the left-hand side, in line with prior quarter growth, total registered users grew nicely with Zoro and MonotaRO combined up 16% over the prior year. On the right, we also continue to see growth of the Zoro SKU portfolio, which grew by 200,000 SKUs in the second quarter and stands at over 12.2 million in total. Now looking forward to the rest of the year. Given our strong share gain to date and the continued supportive demand environment, we are raising the midpoint of our full year 2023 outlook by increasing the lower end of our revenue and earnings ranges.

Our revised outlook includes daily sales growth of 8.5% to 11% for total company, which is roughly a 75 basis point increase at the midpoint compared to the prior range. High-Touch growth continues to trend slightly higher than expected as we continue to gain share amidst a reasonably steady demand environment. The strength in High-Touch is offsetting lower-than-expected top line performance with Endless Assortment primarily due to the softness at Zoro as previously mentioned. Altogether, at the total company level, we are confident in our ability to drive growth in the second half and achieve our updated estimates. Looking specifically at July, we’ve started the third quarter strong and reported month-to-date sales up over 8%, which is roughly 50 basis points higher on a daily constant currency basis.

From a margin perspective, both gross profit margin and operating margin rate expectations remain unchanged from our previous update. From a seasonality perspective, we expect Q3 margin rates to decline sequentially quarter-over-quarter as the one-time supplier rebate we captured this quarter falls off and as price/cost favorability continues to unwind. Couple this with the continued rapid demand generation investments, and we expect total company operating margins to be lower in the back half of the year. However, we’re still on track to finish 2023 with full year operating margins at an all-time high. All in, the resulting revised EPS range has been raised and stands between $35 and $36.75. Supplemental guidance covering cash flow and share repurchase, which have also been raised, can be found in the appendix of the deck.

In summary, I look forward to the remainder of 2023 feeling confident in our team’s ability to continue to serve our customers well, achieve profitable growth and drive strong results for our shareholders. With that, I’ll turn it back to D.G. for some closing remarks.

D.G. Macpherson: Thank you, Dee. I am very proud of the way our team continues to show up and support our customers. Our capabilities and deep understanding of our customers’ operation positions us well in the back half of the year and into the future. When we stay focused on the things that matter, helping our customers find the right products and solutions, providing exceptional service and investing in our supply chain and digital capabilities, we will continue to grow and gain share through any cycle. With that, we will open the line up for questions.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Tommy Moll with Stephens. Please state your question.

Tommy Moll: Good morning and thank you for taking my questions.

D.G. Macpherson: Good morning.

Tommy Moll: Dee, I appreciate the insight you gave on Zoro’s top line trends through the quarter on the B2C versus the B2B side. And you highlighted that even on the B2B side, there was some weakening though it was still up, I think you said high singles in the quarter. So my question is, is there anything more you can tell us about that B2B deceleration in terms of end market or customer type or anything else you could provide there would be helpful? Thanks.

D.G. Macpherson: Yes, Tommy, I’ll take that. Yes. So if you think about the vertical industry mix that Zoro serves, some of the fastest-growing segments in the Grainger model, the High-Touch model would be government healthcare, some manufacturing like aerospace, Zoro does not participate in those really at all. And then the other trend we’re seeing is Zoro is sort of small businesses a lot more than Grainger does. And those customers appear to be a little softer than the larger customers that we serve. So those two factors have a significant impact. Zoro did increase the repeat rate in the quarter, but they have some work to do to continue to increase the repeat rate. So we’re working hard to do that. But the segment mix is a pretty big impact on Zoro right now.

Tommy Moll: Thank you. That’s helpful, D.G. And then I also wanted to ask about the distribution center you announced for Oregon. I guess it’s a two-part question. One, just anything you can give us in terms of timeline to break ground, cut the ribbon, when most of the CapEx hits. And then second part, just a higher-level question. Should we view this as any shift in a competitive strategy or emphasis in that part of the country or it’s more you just outgrew the existing roof line you had and needed to expand? Thanks.

D.G. Macpherson: Yes. So we break ground in a couple of weeks, and like we said, 2025 is when the building will be fully up. And so that’s the time frame on it. What I would say is that we have been serving the Northwest out of our branches and out of a very small distribution center in Seattle, and we have outgrown that pretty substantially. And we’ve also been serving out of Patterson, California. So putting the building up in the Northwest allows us to have more SKUs in market, better service. It also allows us to lower transportation costs because we have much shorter routes from that building to our customers in Seattle, Portland throughout the Northwest. So it’s basically just a normal course of action where we evaluate our footprint and continue to expand where it makes sense.

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

Ryan Merkel: Hi, good morning, thanks for taking the questions. A couple of questions on gross margin. So how should we think about gross margins in the second half? Is it around 39? Is that the right metric? And then does it dip a little bit in 3Q and then increase sequentially a little bit in 4Q?

Dee Merriwether: So thanks for the question. I think if you kind of focus on the guide and then kind of look at what that implies for us, we’re expecting GP to decline slightly mostly due to the High-Touch impact and what we have been stating pretty much all year that we started at the beginning of the year related to the unwind of price/cost. If you recall, last year, we took price as we continue to say price and cost continue to be somewhat lumpy. We can’t time those things exactly right. And so we’re going to see higher costs sequentially as we go through the year and a little slightly lower price. So we expect GP to decline a bit in the second half.

Ryan Merkel: Got it. Okay. That’s helpful. And then just a higher-level question on gross margin. I think the guidance you put out there for ‘25 was High-Touch gross margin about 40%. We’re a good bit above that here in ‘23. Are you planning on updating that outlook anytime soon? Or how should we think about any new thoughts you might have there?

Dee Merriwether: So you’re exactly right. And what I would say is we’ve done really well through this period of cost inflation and our ability to price to the market and price well. As I stated last quarter, things still remain fluid. And while we’re gaining some supply chain efficiencies as we would expect as well as diesel fuel and things like that coming down from some highs, I’m still looking to have a couple more quarters here. And we will definitely take a look at our outlook here in the future and provide an update.

Operator: Thank you. Our next question comes from David Manthey with Baird. Please state your question.

David Manthey: Thank you. Good morning. Also on the sustainability of gross margin, in High-Touch, you cited freight and supply chain and mix, and then there are various factors on the Endless Assortment as well. Are these factors – are those – any of those really prone to reversion? Or should we expect gross margin at least within a band to be reasonably sustainable until we get that shift between High-Touch and Endless Assortment back? It seems like that trend is going counter to what the usual trend would have been, which would be EA to outgrow High-Touch. Can you talk about that a bit?

Dee Merriwether: Yes, I do think that’s the right way to look – to think about it. So we are getting some tailwinds that we have this year specifically related to supply chain and freight efficiencies, which are somewhat significant. And those can flip on us at any time. But right now, we feel like we’re in line with where diesel fuel is as well as we’ve gotten some benefits from those friction costs that we talked about, D.G. just mentioned this, talking about transportation costs and extra legs of transportation that we had over the prior years. We’re fairly normalized in those areas, getting close to pre-pandemic levels as it relates to that. We did have in the quarter some one-time favorability, about 40 basis points related to that one-time rebate.

And we are seeing as we kind of talked about price/cost in the quarter turned slightly negative, which we expect to continue. So, those are some of the puts and takes as it relates, but again, our target 40-ish 2025, we are not changing at this point in time. But I do feel very good about the stability of High-Touch margins in that range.

D.G. Macpherson: The other thing I would add to that, Dave, is that the transportation cost can fluctuate. The supply chain efficiencies, we are for all intents and purposes at this point back to where we were before the pandemic. Those should stay right. Those won’t reverse. That was all pandemic-driven in terms of all the efficiencies we had in the system. So, that should stay. Should that – those pieces of it should stay stable.

David Manthey: Okay. Thank you. And then you mentioned price as a driver for High-Touch, but then you have been saying you are in this negative price/cost position. Dee, you had mentioned that it’s a little tricky to line things up exactly from a timing standpoint. What opportunities do you have to take actions over the next six months, say, to reestablish price/cost neutrality if you plan to do that at all?

Dee Merriwether: Well, again, the U.S. team works really hard to remain price competitive. That’s our other tenet that gets us to price/cost neutrality and are always looking for opportunities to the price and optimize price with our customers over time. So, I would say that’s the biggest opportunity we have related to price in the future is ensuring that we are optimizing and each of our customer segments have the appropriate price for the goods and services that we are providing them. But remaining price/cost competitive is the key tenet here that really buoys our growth – our volume growth over the cycle.

Operator: Thank you. Our next question comes from Chris Snyder with UBS. Please state your question.

Chris Snyder: Thank you. I also wanted to ask on price/cost. And in the prepared remarks you said that price/cost was negative in the quarter and at least on a year-on-year basis. But then you also said that price/cost favorability will unwind in the back half of the year, if I heard that right. So, they kind of sound conflicting a little bit. I don’t know if it’s a year-on-year or sequential thing. But could you just maybe help me think through that? Thank you.

Dee Merriwether: Yes. So, price/cost in this quarter when you adjust for the one-time supplier rebate was slightly negative. And as we started the year, we provided an outlook that as the year continues to flow that we would become price/cost negative because we had favorable price last year. And costs did not come in as we had expected because we had the opportunity to continue to work with our supply base on the cost inflation, which is now coming this year. So, that is why price/cost will become more negative as we go into the second half of this year.

Chris Snyder: Okay. I appreciate that. Thank you. And then I guess maybe just kind of following up on the gross margin topic. I mean is there any way to think about that level of price/cost unwind into the back half of the year? And then also on the 40 basis points supplier rebate, any just more color on that? Usually that’s something that we think of coming into the fourth quarter. Thank you.

Dee Merriwether: Yes. So, I wouldn’t over-pivot on the one-time adjustment. It was related to the prior period. It’s not something that we would expect to continue. And I would say the other thing I would add, if you look at our price/cost over a longer period, maybe a 2-year period, we do not expect it to be negative. That’s how we end up hitting our target of price/cost neutrality over time. So, I would not read into that some of the impacts that we are going to have in the second half of this year are expected to continue any longer than that period.

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

Christopher Glynn: Thanks for taking the question. I had a question on Endless Assortment. Curious how you considered the thought that perhaps the fundamental kind of algorithm for 16% to 18% growth to ‘25 temporary lull or maybe more practical to reconsider long-term, perhaps high-single digits, low-double digits. I know Zoro is rationalizing some of the customer mix, and MonotaRO has some different strategies around customer demographics that have been a bit in flux as well. So, curious how – what might be a practical update on that metric.

D.G. Macpherson: Yes. So, I appreciate the question, Chris. I think similar to sort of gross margin outlook, we want to see probably a few more quarters of performance to understand how this plays out. The MonotaRO business in Japan has continued to perform pretty well and not obvious that they are going to be in a different place they have historically going forward at this point. And we do think that some of the Zoro’s issues are fairly temporary as they unwind some consumer business and some other B2B business that – changes that are going on. So, not really ready to talk about sort of changing the outlook in the future, but certainly, we will consider that as the year goes on.

Christopher Glynn: Okay. Great. And then I was just curious on the SG&A spend rate in the second quarter, is that a kind of good benchmark to think about stability in that kind of dollar rate range for the second half?

Dee Merriwether: Yes, I think that’s a good thing to consider.

Operator: Thank you. Our next question comes from Jacob Levinson with Melius Research. Please state your question.

Jacob Levinson: Good morning D.G. and Dee.

D.G. Macpherson: Good morning.

Dee Merriwether: Good morning.

Jacob Levinson: If you will humor one more price-related question and then we can move on just high level, trying to get a sense of whether your suppliers are talking about or have already put through midyear price increases or if they are talking about further price increases in the latter half of the year or whether with inflation coming down, we are really just past that cycle, if you will?

Dee Merriwether: We are working with our supplier base and get back to some of our normal inflation cadence that was not so normal during the pandemic. So, as it relates to this year, I think we have a good handle on what we believe our cost inflation will be, and we have embedded that in our guide. And of course, later in the year, we will start working with them on what 2024 looks like.

D.G. Macpherson: Yes. And we talked about this at the beginning of the year, Jake. I think that almost all of the inflation we are going to see this year is wrapped from last year. And so we are seeing puts and takes, ups and downs with suppliers. But in general, there is just not a lot of additional inflation coming in from our suppliers.

Jacob Levinson: Okay. That makes sense. Just switching gears to inventories for a second. I know your inventory is lose in dollar terms seem to have stabilized here. I am sure that there is some inflation math in there, but how are you thinking about stocking levels going forward, or maybe said differently, is there a new normal post the sort of supply chain disruptions and COVID issues that we have seen in the last couple of years that’s maybe higher than it was back in 2019 or so?

D.G. Macpherson: Yes. I mean – so what I would say is we generally have two premises when we think about inventory levels. The first one is to stock see service levels. So, based on the velocity of items, we have set targets for the service we want to provide on those items that is competitively advantaged. And we basically stock to that. The other is we look at wasteful inventory, inventory that isn’t productive and make sure to manage that down. I don’t think we are necessarily in a new world. We still have some elongated supplier lead times now. Those have mostly come down. And as those continue to come down, I suspect we can be mostly back to where we were historically from an inventory perspective to revenue.

Operator: Thank you. Our next question comes from Patrick Baumann with JPMorgan. Please state your question.

Patrick Baumann: Hi. Good morning. Just I got one more on price. Sorry about that. The – is there an update to how you think you are going to finish the year on price at High-Touch? And just curious if you are seeing any changes in like demand you will have to see with respect to – I think you make changes with your web pricing ahead of like making changes in the CRP. Just curious if you’re seeing any changes to velocity [ph] related to moves you are making there? And then on Zoro within the price discussion, has that been holding up as well as it has in the High-Touch segment?

Dee Merriwether: So, I will start. We have made some pricing changes earlier in the year. We don’t see in the U.S. the need to make any significant pricing adjustments for the balance of the year, but the pricing team is always in the market looking at price and making sure that we are competitively priced. The Zoro business, I would say, from a gross margin perspective operates a little bit differently and are targeting a different customer segment as D.G. alluded to. And they also have their own pricing algorithm and pricing team that is focused on remaining competitive with the customers that they are serving and have taken actions to price their products in line with the inflation that that’s been passed on to them.

Patrick Baumann: And then the price for the year there at High-Touch, prices at High-Touch for the year, do you have an update on that? That was part of the question.

Dee Merriwether: Alright. I understand. So, it still remains around 4% to 5%. That hasn’t changed.

Patrick Baumann: Okay. And my follow-up is on inventory again. I guess I am just curious what drove the better-than-expected cash guide, the upgrade to the guidance? Was it you are planning to hold a little bit less inventory than you previously planned, or is there something else?

Dee Merriwether: No. Really, the operating cash outlook is really due to the top line improvement at High-Touch that’s really flowed through. And as a result of that, we took the opportunity to update the operating cash flow guide about $75 million at the midpoint.

Patrick Baumann: Okay. Thank you.

Operator: Thank you. Our next question comes from Deane Dray with RBC Capital Markets. Please state your question. And Dray, your line is open. Please un-mute yourself.

D.G. Macpherson: We think it’s probably Deane Dray since we know…

Operator: Sorry Deane Dray. Your line is open, please go ahead, RBC Capital Markets. Here we will move on. And that’s the final question for today. So, I will now turn the floor over to D.G. Macpherson for closing remarks. Thank you.

D.G. Macpherson: Alright. Thanks for joining the call today. What I would say is the year is playing out pretty much as we expected. We talked a lot about price/cost. It’s actually played out almost exactly like we expected at the beginning of the year. So, there are really no surprises generally in the market at this point. We continue to feel good about our performance, our share gain, our profitability and feel like we are well positioned to have a really strong second half relative to the market. And so we are going to continue to work on that. And I just appreciate you being on the call, and we look forward to seeing you and talking to you down the line. Thanks so much.

Operator: Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you all for your participation.