固安捷 (GWW) 2017 Q3 法說會逐字稿

Greetings, and welcome to the W.W. Grainger Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I'd now like to turn the conference over to our host, Ms. Laura Brown, Senior Vice President of Communications and Investor Relations. Thank you. You may begin.

Thank you. Good morning, everyone. Welcome to Grainger's Third Quarter Earnings Call. With me are DG MacPherson, Chairman and CEO; and Ron Jadin, Senior VP and CFO.

As a reminder, some of our comments today may be forward looking based on our current view of future events, and 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 Q3 press release, which is available on our Investor Relations website.

DG will be making some opening comments regarding performance of the company with an update on our pricing actions in the U.S. After that, we will open the call for questions. DG, to you.

Thank you, Laura. Good morning, and thanks for joining, everybody. Before I begin, I wanted to acknowledge the many natural disasters that we have collectively faced in the third quarter; to say that it has been an unusual period would be a great understatement. Multiple hurricanes across Texas, the Southeast Florida, Puerto Rico and the islands, the earthquakes in Mexico and the wildfires out West have all challenged our team members and our customers. We're relieved that all of our team members have stayed safe, and we are really heartened by the support that we provided to these communities during this unusual period. Our team members have worked selflessly and diligently to help these communities. I've received countless personal notes of how our team members supported individuals and companies, and it makes me very proud to be a part of this organization with 23,000 team members. These natural disasters didn't have a material impact on our financial results this quarter, but the value that we bring to communities and customers during these times is really impressive.

So let me move on to the quarter, and the quarter -- the messages are pretty simple. Overall, it was a solid quarter, and there were some very positive signs. We continue to implement our pricing initiatives, which are driving solid growth, as we expected. Removing pricing as a barrier in the U.S. allows us to do what we do best, which is to create value for our customers. We do that through our seller and on-site relationships, our fulfillment capabilities, our technical support and by helping customers take out cost.

We continue to manage our expenses tightly and to make progress on improving our cost structure. We continue to make progress on resetting our Canadian business for profitability. Our single channel online model continues to drive solid growth and margin expansion. And we continue to invest for the future in critical areas, most notably with digital investments to make sure that our digital capabilities are advantaged; and our supply chain to make sure that we can handle the volume with great service and by providing tools to help our frontline team members be more effective. And we are acting with urgency across the entire business to make sure that our business is set for profitable growth going forward.

Now, before I go into details in some of these areas, I'll discuss the overall company results. We'll start with our reported results on Slide 4, which include the impact of restructuring in the U.S. and Canada. The U.S. adjustments include restructuring primarily related to the consolidation of contact centers, partially offset by gains on sales of assets, branches and other items. Canada restructuring includes branch and headcount reductions. So this morning's call will focus on adjusted results, which excludes the items outlined in our press release.

So our adjusted results, which are on Page 5, are in line with our expectations. Total company sales were up 2% or 3% on a daily basis. Volume was up a strong 8%. Price was down 4% as the entire assortment went on web pricing August 1 in the U.S. Hurricane-related sales growth was offset by lower seasonal sales in the quarter.

Our gross profit declined 150 basis points, which was in line with our expectations. We continue to get strong operating expense leverage on higher volume. Operating expenses increased 3% and volume up 8% in the quarter. And operating cash flow was up slightly despite the price write-down as we focused our investments on the highest-return areas.

I'll cover Other Businesses first. As a reminder, Other Businesses includes our online model and our international businesses. Sales in our Other Businesses were up 13%. That's 15% excluding foreign exchange headwinds on a daily basis. The online businesses, which include Zoro in the U.S. and MonotaRO in Japan, continued to expect operating margins. Our international businesses performed in line with our expectations as a group. And operating margin as -- of note, operating margin expanded versus the prior year, excluding our investment in the digital platform. So we put our digital investments in the Other Business category. And if you excluded those, operating margins would have been 6.1% in the quarter.

Let's move to Canada. In Canada, sales were up 7%, which is 2% in local currency on a daily basis. Expenses in Canada were flat in local currency. And as you know, we're in the midst of a substantial transformation of the business in Canada, and we'll discuss our plans in Canada in detail in a few weeks at our November Analyst Meeting.

Turning to the U.S. We had encouraging results and trends from the volume response to pricing actions and an improved demand environment. Sales for the quarter were up 1% on a daily basis. That included volume of 7% and price deflation of 5%. As a side note, this volume growth puts us in the 6% to 8% range that we've talked about for annual growth -- volume growth in 2018 and 2019.

We had a strong fiscal year end from the federal government after several months of delayed spending. Hurricane-related sales added 1% to sales as did intercompany in the U.S. They were completely offset by holiday timing and seasonal sales, so the 7% is really true volume in the quarter. Now the growth was somewhat aided by demand tailwinds. Our current analysis suggests the U.S. market will grow 2% to 3% for the year.

Operating expenses in the U.S. were flat, demonstrating leverage on volume growth. We continue to be diligent in managing expenses and are confident that we're going to achieve the cost targets that we've outlined previously. Operating margin declined 220 basis points driven by the GP impact of our pricing actions.

So taking a little closer look at large customers in the U.S. We continue to see sequential volume improvement with large customers. A note here, hurricanes affect large and midsized customers differently. Hurricane-related sales growth was more than offset by lower seasonal sales and holiday timing with our large customers, so this really is pure volume. The benefit from the August 1 pricing rollout started in August but really accelerated in September. Technically, what happened was we turned on the web prices on August 1. We basically make sure that everything is working correctly, and then we started investing in digital investments after that point about a week later.

We talked last quarter about government slowing down in the second quarter. That continued into the third quarter, but then we saw a pickup in activity at the end of the quarter. U.S. had 2 notable growth areas: large spot buy volume, which have been declining for years, grew in the quarter; and large noncontract volume, which had been declining for years, also grew in the quarter. So those are very positive signs looking forward.

Turning to midsized customers. We had a significant improvement year-over-year and versus the second quarter of 2017. All of this business is now competitively priced. We are acquiring customers digitally, and we're seeing strong drop through margins to the bottom line. For the first time in a long time, we had significant growth with midsized customers at attractive margins.

Now, as a reminder, the actions of August 1 resulted in all prices for all customers being more competitive. This helps us speed up customer retention efforts. It accelerates the acquisition of new customers, and it simplifies our pricing to make it much easier for customers to understand. And these actions are critical to achieving our 2019 operating margin objectives.

Turning to guidance. In terms of 2017 guidance, we narrowed the range. We kept the midpoint the same. Our performance was in line with our expectations for the quarter. We would expect that given the changes we're making in Canada, which are significant, we would expect performance for that business to be challenged versus our expectations for the remainder of the year. And we would not be surprised if the U.S. was a bit stronger than expectations given what we've seen.

Sales midpoint is slightly lower because we divested a specialty business in the quarter. We've maintained our operating margin rate and our EPS midpoint. And of note, Q4 expenses are higher sequentially during -- due to normal timing of expenses and investments we're making in the single channel online business and digital marketing.

So in close, we had a solid quarter. The U.S. volume growth was very encouraging. Digital marketing enables us now to acquire customers. The online model grew nicely, and profitability expanded. We had solid expense management throughout the company, and we continue to work to turn around Canada.

The U.S. pricing actions remove a barrier. They allow us to focus on creating value for our customers. We do that by helping take cost out of the customer's business. We help them manage their inventory in what is a very messy category. We provide exceptional fulfillments, and our sales and service teams help businesses succeed.

So this is our first third quarter call, which comes at an interesting time given our Analyst Day is only a few weeks away. At our Analyst Meeting, we'll cover a number of topics in more depth, including price and volume response in the U.S., the Canada turnaround, our digital strategy and our cost actions.

So with that, I'll open it up for questions.

(Operator Instructions) Our first question is from Ryan Merkel from William Blair.

The first question I have is on U.S. sales in September, up 5%. What was the U.S. volume growth ex-hurricanes and ex-divesting the specialty business?

For the large customers?

For the U.S., for the U.S.

For the U.S.

I was thinking up 8%, maybe 9%, but...

Oh yes, for volume. Yes, you got it. Yes, I'm sorry, yes, yes.

Okay, and that's relative to 7% for the quarter, so (multiple speakers)

It was 9%. It was 9% for the month.

9%, okay.

For the month, yes.

Good. Okay, so that's encouraging. And then my second question, in the fourth quarter, do you expect U.S. volume growth to improve from the 7% that you did in the third quarter? Now you just did 9% in September, so I'm assuming the answer is yes. And then also tell us what you think U.S. price will be down in the fourth quarter just to calibrate our models.

So I would say, Ryan, that our volume expectations haven't changed. We should -- we would expect to see continued improvement, a slight improvement in volume, and our GP expectations are what they were before. Sequentially, we expect our gross profit to be down 20 to 40 to 50 basis points, and that's just because we have the full effect of the pricing actions in the quarter. So that's our expectation.

Our next question is from Matt Duncan from Stephens.

So on the U.S. large customer business, you went from a 4% in the 2Q to a 5% in the 3Q. I'm curious, is there any way to sort of sort through how much you think you were able to get from the -- it sounds like the spot-buy volume did start to pick back up again. How much of a benefit did that add? And then economically, were the tailwinds a little better in 3Q versus 2Q? Or was it sort of the same environment?

Yes, thanks. So we've experienced modest tailwinds that continued to increase throughout the year, I'd say, so it's kind of a little better, it seems, every quarter. And in terms of the large customers, both the spot-buy and large noncontract customers, which effectively are all spot-buy, showed some growth for the first time in a long time, and that helped. And our contract customers continue to grow similarly to what we've seen, continue to improve slightly. So that's -- no real change there in terms of the path that we've been on.

Okay. And then shifting over to the medium-sized customer base then. A 3% to a 15% is obviously a very big change. It sounds like maybe 5 points, give or take of that, was hurricane related, but still, 3% to 10% is quite nice. Did you -- -- when did you kick in the digital marketing? How much volume would you attribute to that? And are there any correlations we can draw here in terms of time line to when we started to see this volume really pick up as we look over to the U.S. large customer business and think about sort of the time line of how long it takes for the price actions to help with growth there?

Yes. So just to be clear, so the 15% is net of the hurricane impact, so the actual growth for midsized customer is higher when you include the hurricane impact. And yes, I would say it's a fairly clear path in terms of continued growth post the price changes. And mid-August, we really started digital marketing in earnest, and so that certainly helped the growth post that period.

Our next question is from Robert McCarthy from Stifel.

Congratulations on a better-than-expected quarter. I guess the first question I have is in terms of the gross margin, could you just talk about the walk in kind of the U.S.? Because I think the total company was benefited by a gross margin benefit in Canada in the quarter, lower inventory adjustment, something along those lines? Could you just talk about what was the pure compression in GP in the U.S.?

Well, in the U.S., the year-over-year compression was -- we're looking at 150 basis points in the U.S. And so that -- which is exactly what we expected. And sequentially, it was 180- basis points from...

180 basis points from Q2?

Yes.

Okay. Which was in line with your expectations, it sounds like.

Yes, it's almost exactly in line with our expectations.

Okay. And then just a follow-up on Canada. Obviously, fairly dynamic there, and obviously, some updates for '17. But how do we think about -- and you gave us some updates around '17 in terms of Canada being worse and U.S. being a little better versus your expectations. But how do we think about going into the target sort of '19 in terms of -- where is the incremental pressure on '19 targets now given the run rate of what you're seeing in your businesses?

So we'll talk a lot about that in a few weeks, Rob. I would say that our expectation and in terms of the actions we're taking in Canada, we expect our profitability to be better than we've talked about Canada being in 2019, and so we're taking actions now to make that happen. It's a messy process. There's some significant change that we're making to the business, but we'll give more clarity on that in a few weeks.

Our next question is from Scott Graham from BMO Capital Markets.

Like Rob, I congratulate you on the beat. I have 2 questions for you. The first is hopefully easy. You note on Page 9 that spot-buy and large noncontract business volume was -- turned positive in the third quarter. I'm just wondering, are we to read that, that your price actions went beyond spot-buy and into large noncontract?

So yes. So keep in mind that a large noncontract customer would almost have the same price change or similar to midsized customers if they didn't have pricing that they've gotten historically. And so noncontract large customers will have more of a price write-down and a better volume response similar to midsized customers. It's not quite as severe because there are some large noncontract customers that have price deals historically. And so yes, you should read that, that's -- that the price change should have a very big impact on that group, we would expect.

Okay, because that's a little different than your message previously, right? Or am I not understanding (multiple speakers) area, right?

Well, yes, we've lumped historically spot-buy in with large noncontract in some of what we've shown, but there are -- there's a significant portion of the volume that's noncontract. And so we'll (multiple speakers).

Right. Fair enough. I understand that now. The other question I had for you very simply is with spot-buy better and midsized customers better, did we have a positive mix in the U.S.?

We -- yes. So not quite, although the trends would suggest that could happen is what I would say.

That should happen, though. Do you agree, in '18?

Yes. Once we lap the price changes, it should happen, for sure.

Our next question is from Robert Barry from Susquehanna.

Could I just clarify a couple of things you said earlier? The 15% growth in medium, you said, is -- would have been higher?

Yes, yes.

So the hurricane -- sorry.

So we -- yes. So the way that works is when we have a hurricane, our branches, we typically load the branches with hurricane-type products, and they skew more to midsized customers. So we see more midsized customer hurricane volume than we would see with large customers. We see a lot of it everywhere, of course, but -- so it had a bigger impact. But we've taken that out with the 15%.

I see. So whereas in the large, the hurricane was offset by the holiday timing and seasonal, it was a net benefit in the medium?

Yes, exactly.

Got you. And also to clarify, you said September in the U.S. was up 9% on volume. Is that also kind of a clean number? I'd have thought the hurricane would have been mostly September, the weather maybe mostly August. Like, that volume number (multiple speakers)

Yes, yes, I mean, that's -- it excludes it basically, yes.

Got you. Okay. And then if I could just ask a quick question about what's going on with inflation. I know there are a lot of puts and takes impacting the gross margin this year, but if you just look at product cost inflation, how much of a headwind is that you're absorbing this year? And are you getting any price to offset it, say, in the large customer contract business?

Yes. So our COGS inflation this year is going to be very slightly negative. And so we aren't seeing inflation. Now, we are starting to see inflationary pressures a little bit more than we've seen in the last few years, of course. But so far, we have -- that has not showed up in our COGS line.

Why is that still minimal given what we've seen with commodity inflation headlines?

Well, we've done -- yes, we've done a whole bunch of work at looking at product categories and optimizing our product categories and costs. So we have a rigorous process where we're following, we call it PPO, which basically helps us get the right assortment at the right cost.

Our next question is from Andrew Buscaglia from Crédit Suisse.

Can you just comment on that spot-buy? You guys didn't provide more data in the slides this time around, but can you provide us with the number relative to that negative 3% you saw in Q2?

Yes, it's gone from -- it was negative 3%, and it's low-single digit positive for the quarter. Yes.

Okay. And you -- would you attribute that to some of the new -- I mean, first off, how did that do relative to your expectations? And then, do you attribute some of that to new things like Gamut? I mean, I know you had -- Zoro has been strong, or that continues to be strong. But what would you say (multiple speakers)?

Yes. The spot-buy is with large contract customers, and that would not have anything to do with Gamut at this point. It would be just the price changes that we make and making sure that we're actually selling the value and getting more of the customers' pie.

Okay. And then if I could just squeeze one more in. Your OpEx was flat on that 7% volume number. But what can we expect in terms of -- I mean, I know that you probably will talk more about this at the Analyst Day. But looking into '18, what your -- what that OpEx increase would be? Like what's the framework to think about that for the long term?

Yes. So we'll talk about that at the Analyst Day. Obviously, we expect to get continued leverage, we expect expenses to grow slower than volume, but we'll talk more specifically in it in a few weeks.

Our next question is from Christopher Glynn from Oppenheimer.

I just had a question about the price trend in the negotiated large customer contracts that you said are about done. I think long term, that's still a percentage kind of role every year to a degree. So wondering your visibility and conviction that price concession remains an incremental piece long-term of those negotiations or if that's similarly kind of off the table and stabilized.

Chris, this is Ron Jadin. We're expecting carryover impact next year on pricing probably, you know, minus 2% range, and we'd expect that to then flatten out in the following year and turn positive with inflation.

Okay. Great. And then just curious, fourth quarter tax rate and placeholder for ongoing tax rate.

Yes. So we've guided for the balance of the year for tax rate already, and we'll give a guide in our November Investor Day for next year. But -- and I know there's been a number of ranges published already this morning from some of the sell-side on taxes. And it's difficult for us to comment on third quarter taxes versus consensus, but I think it's a little bit more straightforward for us to talk about it year-over-year. And when we look at our reported tax rate in the third quarter of last year, it was about 34%. And this year, it's 31.7%, and that's in our press release.

If you look at that in dollar weighted to last year's earnings before taxes, it's an improvement of about $6 million in lower taxes or about $0.10 EPS. And about 2/3 of that is driven by our clean energy investments, and the other third is driven by some of solar credits and foreign tax credits. So for us, year-over-year, normalized, it's about a $0.10 pick up, and about 2/3 of that also would have been -- because this is done on a year-to-date true-up, 2/3 of that $0.10 is probably from the first half of the year. So there's a lot there to consume, but that's our perspective on a year-over-year basis.

Our next question is from Chris Belfiore from UBS.

Congrats on a great quarter. So I'm just trying to kind of go back to the mix a little bit. So if possible, I'm trying to understand the benefit that you guys might have seen from any cost actions on the margin improvement in the United States versus the mix. Given some of the numbers you kind of gave with the one you just gave of a low-single digit improvement on spot, it kind of implies that the recurring side kind of actually decelerated from the -- from 1Q to 2Q to 3Q, so the mix kind of does seem better. So just trying to understand that a little bit, kind of understanding that how you have -- you're still kind of in negotiations with the recurring side for the large contracts, so how that may change going forward a little bit.

So I think maybe I can help just talk about. So we have renegotiated most of the contracts that we would want to at this point. There's some that we can't because of contractual reasons, and we'll get to those over the next year. The way this works, it's a little bit odd to look at spot-buy independent from the total volume or nonspot-buy with a large customer, because the goal here is to grow the entire customer and to have more of the share beyond spot-buy. So the nonspot-buy basically has been fairly consistent in terms of the growth in the business, but we start to see that spot-buy. That means more of the mix is non-negotiated, which just makes it easy for the customer and makes it easier for us, and actually is helpful for everybody. So that's the goal in changing this at this point.

Okay. And then I know you said that you'll kind of give a lot of details in November, but in terms of Canada, I mean, you guys have been targeting breakeven operating margins by year-end, and it seems like that's probably not the case. Just kind of any commentary around that or the trends that you're seeing in the region just from like an (multiple speakers) standpoint.

Yes. So we're seeing decent volume growth. We'll come back, as I mentioned before, in about 3 weeks and talk through the plan for Canada. And the plan for Canada, as we've hinted before, is substantial and I think gets us to a place that is much more profitable in 2019, which is what we're looking for. So we'll talk about that very shortly.

The next question is from Deane Dray from RBC Capital Markets.

I'd like to get some color, further color, on the hurricane impact. Specifically, what's your sense of the mix for those medium customers relative to the segment average? And then what is the expectation for fourth quarter impact from hurricane?

Fourth quarter impact, Deane, will probably be very small, if even noticeable. In terms of mix, most of the time when we have hurricanes, I think this was no different, product mix is similar in many ways to the rest of the mix. We end up spending a little bit more money, frankly, to deliver the products. So we do a lot of things that you wouldn't naturally do, and so things like freight costs go up in the short term to serve the customer. It's not really a big net benefit or decrement to the GP rate.

And just as a follow-up, have you quantified what the digital investment in the quarter was just from a dollar amount but also what exactly you were spending it on?

We have not quantified that. We'll talk about that in a couple -- in a few weeks. That's going to be a part of the discussion we have in the Analyst Day.

Our next question is from Luke Junk from Robert W. Baird.

First, DG, just wondering if you could help size the benefit from higher government spending in September. Is it kind of in the same area as the drag that you saw in June?

So I would say fiscal year-end, in general, was similar to past years. It wasn't either really strong or really weak. So it was a similar fiscal year-end to what we've seen before. Net-net, there have been some bumps in terms of government procurement that sort of happened from mid-May through mid-August, probably in the negative for the year so far. But year-end was -- it was pretty good, so -- but not unusual.

Okay, that's helpful. And then, second, a little bigger picture question. Just wondering, as you're ramping up your efforts to acquire customers in the midsized area, what I'm wondering is where and how do your digital marketing activities, which I know picked up in mid-August here, and the inside sales efforts intersect. So differently, from a prospective Grainger customer, how is that marketing effort going to appear to me? And say, if they do place an order, what kind of follow-up or sales cycle could I expect to see?

So the basic funnel -- and again, we'll talk about this in a few weeks -- but we will use digital marketing, in many cases, to acquire a customer. We'll learn who that customer is. We'll figure out what the right price and service offering for that customer is. And then if they get big enough and attractive enough, inside sales will cover them. And so once an inside sales person is covering them, most of the digital investments will be email digital as opposed to discounting digital. So there's a funnel and a process for customers as they get more mature that leads them to inside sales if the characteristics of that customer make sense.

Our next question is from Joe Ritchie from Goldman Sachs.

This is Evelyn Chow, on for Joe. I'd like to dig into the large spot-buy acceleration. Great to see, very encouraging sign. Just wondering if there's any tilts this quarter towards certain customer or product categories that you've seen.

No. The growth has been pretty consistent across the board. So if you look at the overall customer growth, it's been similar in the spot-buy.

Got it. And then maybe turning to the divestiture of the U.S. specialty business, just wanted a little bit more clarification on the rationale and any potential impact to margins this year.

Well, it was a relatively small business that made a little bit of money. It was not core to what we do. And so some of our acquisitions we've integrated into the core, and this one never really made sense to integrate into the core. We brought some of the products into the business. But frankly, this business ended up joining another business that's similar and has a much better chance of success in that portfolio than it does with us.

Our next question is from Justin Bergner from Gabelli & Company.

My first question is similar to some other questions that have been asked, which is if the spot-buy and noncontract buy for the large customers sort of drove the acceleration and the actual contractual buy was at a similar growth rate as last quarter, I mean, it would seem that with the market accelerating a bit, holding the contract purchases at similar growth rate might be underperforming the improvement in the market. Is that true? And if so, why?

No, we actually don't think that's true. And if you look at sort of the large customer results, what you'll see is the spot-buy and the noncontract customers went from negative to growing low-single digits, which means the rest of it had to grow faster than the average. And so that is -- and we think that's gaining share at a similar pace to what gained share before.

Okay. That's great to know. And then on the acceleration in the Other Businesses, I guess the volume accelerated from second quarter a touch, but the single channel number decelerated fairly materially. So what's offsetting the deceleration in the single channel business to hold the other business volume consistent with prior quarter growth?

Well, we've seen nice growth with the single channel online model even through this quarter. The Japan -- Japanese business grew in the 20s. But there are other businesses. Mexico grew strongly, very, very strongly, so we're seeing growth in some of the other international. The U.K. grew a little bit. So we're seeing nice growth in that portfolio as well.

Our next question is from Hamzah Mazari from Macquarie Capital.

The first question is just on market share. DG, large customer market share for you guys, and correct me if I'm wrong, is maybe 14%. Is -- can you get to double-digit market share on the medium customer side? Or is there anything structural that prevents that? And then secondly, are you maxed out on large customer market share because that's a pretty big number when you look at the overall industry?

Yes. I think we're not maxed out on large customer market share. I think we have opportunities to grow. When I do customer visits, there are frequent discussions about how to expand the relationship, find more contacts, sell our value into places where we don't have value -- add value today. So I'm not concerned that we've tapped out. Midsized customers, I guess, when you're as low share as we are, we'll see. My -- when you talk to the midsized customers, they really love Grainger and the value that Grainger provides, and they just haven't been buying from us largely because of pricing; we haven't actually been reaching out to them. So we'll see. I don't -- I'm going to reserve that answer for a time, but I think there's a long playfield for us to grow at midsized customers.

All right. Great. And then just to follow up, any comments around the CFO search and what you're looking at there? I appreciate it.

Yes. So we have a search firm and a number of candidates that are -- that we are working through, and we will get you an update when we have the CFO. We have a very good pipeline.

Our next question is from Patrick Baumann from JPMorgan.

Had a quick question on the pricing. You had a couple of months now under your belt with the new cuts or price reductions. Are you seeing any noticeable competitive response on pricing? And if so, from where?

Yes. So maybe I should start by -- what we've done with pricing, I think, was probably more unique to us than to the market, where our prices were out of market the way we go to market. And so we expected modest reaction, and that's pretty much what we've seen. There hasn't been much, much reaction. The reality in our space is that everybody goes to market differently, has their own strategy. And so we haven't seen a lot of direct response to our actions, and our prices aren't the lowest now and won't be.

Got it. And then just a cleanup question on tax rate. And I know you talked about the year-over-year change, but how much -- or did tax rate at all add to the midpoint of your EPS guidance relative to your prior guidance? And if so, how much?

No. This is Ron. We stayed with the midpoint. We think the benefit overall on taxes is in the $0.05 to $0.10 range, and it's really offsetting some -- a little bit of lost earnings from the specialty business we sold, very small, and then just a cautious look at Canada for the year.

And then last one for me. Sorry, just one more cleanup. The revenue guidance, the kind of tightening around the low end, it seemed like. Is that all because of

(technical difficulty)

That's because of the specialty business sale, I think that was your question. So yes, it's specialty business sale.

Our next question is from Steve Barger from Keybanc Capital Markets.

Just back to the comment on working to get the right assortment at the right cost to offset inflation, does that mean you're desourcing or resourcing some product to different vendors? Or how does that work?

Well, it typically is at a category level. And by category level, I would mean 500 SKUs, 200 SKUs. And effectively, we look at all the customer feedback and what customers care about. We look at the assortment we have. And in some cases, we're adding vendors. In some cases, we've consolidating vendors. It just depends on what the customers care about, and then we try to get the lowest cost we can. And so there's not a single formula. You have to do it category by category.

And do you expect you can keep a lid on that inflation as you go through the end of this year and to the first part of '18 based on your efforts?

Yes. Yes, we do. We think we'll keep a lid on inflation. I think if we didn't have that program, we would be seeing some inflation, for sure. But that program helps us to offset that inflation.

Okay. And one more quick one. Sorry if I missed this. Are there any other noncore business divestitures we should be looking for or is the portfolio where you want it now?

Portfolio is pretty much where we want it now.

Our next question is from Jiayan Zhou from Morgan Stanley.

So first one, I just want to understand a little bit better kind of the revenue and income profile for the specialty business you guys divested. It was a 1 point headwind this quarter, but I think you guys sold a business in late July. So can you just give us a color -- some color maybe the potential impact into 4Q?

It was -- we sold it in mid-July, and it was a...

Its revenue was in the $6 million to $7 million a month range, maybe.

Yes. Yes, exactly. So $7 million to $8 million.

$7 million to $8 million?

Yes, $70 million to $80 million business, yes.

Yes.

Okay, got it. And is it a slightly lower margin business compared to the rest of U.S.?

Yes.

Okay. Got it. And then on the pricing outlook, so pricing was down 5 points, and it was, I guess, a full quarter of pricing impact. Are you guys still looking for like about 6 point of run rate in terms of price decline?

Yes. So keep in mind that the price changes happened mid-quarter. For the last 2 months, the price changes were in effect. And so it's not a full -- 5 is not a full quarter.

That's U.S.

That's U.S.

Right. So 6 is still the number you guys are looking for on a run rate basis?

5 to 6 in the fourth quarter. 5 to 6.

Our next question is from John Inch from Deutsche Bank.

Just to circle back to the tax issue, I don't think we got the answer. What -- Ron or DG, what is the effective tax rate you are guiding to in the fourth quarter to get to your implied $2.13 midpoint EPS?

For the full year, it's 34.5% to 35.5%. And for the quarter, it's about 35% for the fourth quarter.

35%. Yes, 35% for the fourth quarter. Okay.

Sorry if I wasn't clear enough on the other comment.

No, it's okay. Now I got the year. I just -- it's hard to triangulate because you're excluding the $11 million, it's just hard to triangulate. I was going to ask you, if hurricanes were 1% of contribution in the quarter, what does that imply -- doesn't that imply there were sort of 3 points of contribution benefit in September? I mean, you're giving your numbers ex-hurricanes, but I'm just trying to understand that.

I'm sorry, I don't -- John, I don't understand the question. I didn't track that.

Okay. So if hurricanes were 1% of benefit for the quarter and the impact of hurricanes, per your commentary, happened in September, does that imply the actual September results were boosted by about 3 points, just literally taking the 1 versus 1 month?

No, it's around -- it's 2 in September.

And you said margins are slightly worse for these tails. Is that correct?

Yes. Yes, generally. It's not a major impact on the mix I would say.

Our next question is from Robert McCarthy from Stifel.

Sorry, just a quick follow-up. As you think about the medium-sized business going forward, how do we think about the pricing actions you've taken or contemplating and kind of the gross margin and OpEx mix as we go into '18? What's the embedded assumption there given what -- we have new information now?

So we'll -- we're going to have to wait 3 weeks for that one, Rob. We'll talk at the Analyst Day about that.

And then finally, just finally, on Canada, is there anything you can say about breakeven or not? Or we would expect a small loss in the fourth quarter? It seems that you guys sort of imply a small loss given your comments around the narrowing of the range.

Yes, that would be our expectation, and we'll get a lot more detail at Analyst Day.

Our next question is from Justin Bergner from Gabelli & Company.

On the corporate expenses, I guess they were meaningfully down year-on-year and modestly down quarter-on-quarter. What -- is there any sort of change to the view for the annual corporate expenses embedded in your narrowed guidance range?

This is Ron. Not really. We had some favorability in the third quarter driven by the low share price and stock compensation, the expensing of that, and that will probably bounce back with a bit higher stock price in the fourth quarter. So there's some timing there but -- that drives sequential variation. But for the year, we don't expect anything unusual.

And we continue to work very hard to make sure that our costs are necessary. And so we're really focused on making sure that our expenses are well managed, and I think that -- this reflects that part.

Our next question is from Ryan Cieslak from North Coast Research.

Really quick, just on the volume guidance in the back half of the year in the U.S., originally 6% to 8%. Have you changed that guidance at this point based on what you saw here in the third quarter and your expectations? Sorry if I missed that. I just wanted to make sure that, that was clear.

Yes. So I would say we're -- in the U.S., we're optimistic about what we're seeing, but we're not -- it's a fairly short time frame, so we're not going to change our guidance per se. But we are happy with what we're seeing.

Okay. And then thinking about the longer-term operating margin targets you guys have out there for 12% to 13% by, I think, 2019, can you just refresh us on what you guys are assuming for annual COGS inflation in -- to get to that '19 framework?

So we don't typically do that. I would say we don't actually plan annual COGS inflation necessarily in that math. We look at price/cost spreads. So from our -- our question is, will we manage COGS as well or better than our competitors, and will we be able to pass through whatever the market COGS is over time? So we typically plan our financials that way as opposed to sticking with a specific number because that number could fluctuate pretty quickly. But we'll talk about our expectations again in a few weeks.

All right. Well, thanks, everybody. I think that's our last call. Just to summarize, we had a solid quarter; U.S. volume growth was encouraging; continued strong growth and profitability expansion in the online model; continue to really focus on cost management; and we're in the midst of a significant turnaround in Canada. Look forward to seeing most of you in a few weeks, and thanks for your time.

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