Global Industrial Company

Good afternoon, everyone, and welcome to Global Industrials' third quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Mike Smargiasi, Investor Relations. Sir, please go ahead.

Thank you, and welcome to the Global Industrial Third Quarter 2021 Earnings Call. Leading today's call will be Barry Litwin, Chief Executive Officer, and Tex Clark, Senior Vice President and Chief Financial Officer. Formal remarks will be followed by a question and answer session. Today's discussion may include certain forward-looking statements. It should be understood that actual results could differ materially from those projected due to a number of factors, including those described under the forward-looking statements caption and under risk factors in the company's annual report on Form 10-K and quarterly reports on Form 10-Q. The press release is available on the company's website and has been filed with the SEC in a Form 8-K. This call is the property of and is copyrighted by Global Industrial Company. I will now turn the call over to Barry Litwin.

Thanks, Mike. Good afternoon, everyone, and thank you for joining us. We delivered a solid third quarter performance and are very pleased with our execution across the business. Despite a modest decline in net sales, customer demand was strong and accelerated in the quarter, with continued growth in core product lines led by private labels. Continued constraints within the supply chain contributed to a significant increase in open orders, which negatively impacted top-line results in two ways. First, due to delays in order fulfillment times, our conversion of customer demand and net sales was much slower than our typical conversion cycle. Second, we believe that the combination of both extended lead times as well as the volatility of in-stock positions of key products caused customers to defer buying decisions and limited our ability to maximize sales. Gross margin set a new quarterly record of 36.8%, and we delivered over $30 million of operating income in the quarter, with operating margin of 11%, matching our quarterly margin record. This was a significant achievement in a difficult environment. Our operating performance reflects the efforts of our associates as they continue to execute on our ACE strategy and manage through supply chain challenges. This includes strong execution in a number of key areas, including price intelligence and analytics. Our enhanced pricing capabilities were essential to our top line and margin performance in the quarter. Investments in this area are providing timely insights that allow us to capture price in line with the market while continuing to deliver value to our customers. Also, private brand. We have seen continued growth in our global industrial and other private branded products. which deliver a high-quality and attractively priced offering to customers, as well as driving a higher composite gross margin. It also allows us to leverage more than 40 years of private brand experience to deliver product innovation while providing greater insight to our procurement process and control of our supply chain. Also, digital initiatives and new branding. Our continued investments in digital capabilities is generating a better online customer experience through our new search engine, taxonomy, and personalization. And our name change to global industrial companies, new logo, company awareness campaigns are helping drive brand recognition and casting a wider net to attract customers. Finally, our one-to-one managed selling organization under the leadership of Claudia Hughes is driving increased demand and advancing our selling strategy. As we move forward and look to 2022 and beyond, we are making further investments in the business to position us for sustainable growth, profitability, and success. We are continuing to invest in talent, and in September, we welcomed Alex Tomei to the newly created position of Chief Merchandising Officer, where he will be responsible for developing and driving merchandising strategy and operations. On the heels of this appointment, we introduced our Trash Talk e-connected trash cans and a floor care equipment line. We also recently launched a new GPO relationship and look forward to developing this new business development opportunity. Finally, next week, we will host our National Trade Show in Nashville, Tennessee, and look forward to showcasing our global product offering and extensive vendor relationships. In conclusion, there's a level of excitement across the company because the challenges of last year and a half have made us stronger, more creative, and more resilient, while elevating the value we bring to market. We are executing on our strategy and enhancing our ability to deliver an exceptional customer experience. There are signs that the general business environment remains healthy, as indicated by our demand for core product categories. While supply chain, labor, and freight disruptions continue, we are proactively managing these challenges and utilizing our operational flexibility and entrepreneurial approach to address them. and we have been very pleased with our ability to deliver strong margins in the current operating environment. We are investing strategically in the business, remain disciplined in our cost management, and believe we are well positioned for the future. I will now turn the call over to Tex.

Thank you, Barry. I will now address our performance in more detail. In the third quarter, revenue was $277.4 million, a decline of approximately 3% over Q3 of last year. U.S. average daily sales declined to 3.5%, while Canada average daily sales increased to 1.3% in local currency. Sales improved each month during the quarter, and in an effort to normalize results against the surge benefit of PPE sales in 2020, I would note our two-year CAGR was 6.6%. We saw a continued growth in core product lines, and our private label offering once again increased as a percentage of total sales. Our performance was highlighted by growth in our managed sales channels, as well as e-commerce orders, which continued to increase as a percentage of total transactions. Customer demand expanded in the quarter, and the rate of growth improved each month. However, due to the supply chain environment, we experienced extended fulfillment times and continued to see an elevated number of open orders for both stocked and drop shipped products. We are cautiously optimistic that the supply chain will normalize over the next six months. Consumable products within the pandemic assortment, including PPE and sanitizing supplies, made up approximately 3% of sales in the third quarter, which is in line with the second quarter of this year and our pre-pandemic levels in the low single digits. This compares to approximately 11% of sales in the third quarter of last year. Customer demand for non-PPE products was healthy in the quarter, reflecting the continued mixed shift to core product lines. I would like to remind everyone that the fourth quarter of 2021 will have 61 selling days, and the fourth quarter of last year contained 66 selling days. In addition, fourth quarter of 2020, ADS improved approximately 16%, and PPE and sanitizing supplies made up roughly 9% of sales. Gross profit for the quarter was $102 million, roughly flat from last year. Gross margin was a quarterly record of 36.8%. up 100 basis points from the prior year, and up 80 basis points on a consecutive quarter basis. Gross margin performance reflects the impact of price rationalization, favorable product margins as the private label offering captured a larger share of our sales mix, and the benefit of lower-cost FIFO inventory sell-through with increasing selling prices. While supply chain pressures, including ocean freight, remain elevated, to date we have been able to largely mitigate their impact. We anticipate that our ongoing initiatives to drive higher margin sourcing channels, price analytics, and freight optimization should help us maintain our margin profile in the current environment, subject to the normal variations arising from product and customer mix, which do vary by season. Selling, distribution, and administrative spending for the quarter was $71.4 million, or 25.7% of net sales, up 90 basis points as a percentage of sales from last year, and down 120 basis points on a sequential quarter basis. SD&A primarily reflects increased marketing investments to support customer demand shift to core product lines and private label, and away from PPE, as well as increased distribution center compensation. We continue to maintain strong cost controls, but as the labor market remains tight, we do expect to see additional wage pressure. Operating income from continuing operations was $30.6 million, and operating margin was 11%, equal to our record high margin quarter realized in the third quarter of 2020. Total depreciation and amortization expense in the quarter was $0.9 million. Capital expenditures for the third quarter were $1.3 million, and we expect total 2021 capital expenditures in the range of $4 to $5 million, primarily comprised of maintenance-related capital. Operating cash flow from continuing operations was $18.8 million in the quarter. Let me now turn to our balance sheet. We have a very strong and liquid balance sheet with a current ratio of 1.6 to 1. As of September 30th, we had over $54 million in cash, zero debt, and availability of $72.5 million of our $75 million credit facility, which was recently extended through October 2026 on largely the same terms. We maintained significant flexibility to fully execute on our strategic plan and continue to fund our quarterly dividend. As a result, our Board of Directors declared a quarterly dividend of 16 cents per share of common stock, and we anticipate continuing a regular quarterly dividend in the future. This concludes our prepared remarks today. Operator, please open the call for questions.

Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then one using a touch-tone telephone. To withdraw your questions, you may press star and two. If you are using a speaker phone, we do ask that you please pick up the handset before pressing the keys to ensure the best sound quality. Once again, that is star and then one to ask a question. Our first question today comes from Ryan Merkle from William Blair. Please go ahead with your question.

Thanks, and good afternoon. Hi, Ryan. Hey, Ryan. So I wanted to start with your comments on limited product availability and the increase in open orders. Were the product shortages broad-based, or was it isolated to several items? And then are you going to book the open orders next quarter? And if so, how big is the impact?

It's a great question, Ryan. And I would tell you that I think there was a fairly even balance between the type or I'd say the mix of products that we saw flow through. I mean, certainly our private label balance of sales has been very strong given the core growth. But certainly in terms of open percentages, we definitely saw a fair mix between both stock and dropship. and the extended lead times that are occurring in the supply channels that support each of those markets. We definitely have seen, you know, as we said in the prepared remarks, elevated, you know, open during the period as our revenue continued to grow, at least book demand. And we've seen a fairly smooth percentage of backorder reductions. We've been very – creative relative to how we're trying to drive the flow-through of the supply given the challenges in the channel right now. We continue to see some fairly healthy customer demand come through, and I think the organization has been fairly resilient in how we're trying to pull through products both from dropshippers as well as overseas manufacturers. So we'll see a fairly smooth and consistent flow-through of that product as far as we can see right now.

Okay, that's helpful. And just a follow-up, is there a way to quantify the impact in the quarter? Was it a couple points of sales growth that you lost, or was it bigger?

Yeah, it's not something that we – Yeah, go ahead, Barry.

Yeah, it's not something we necessarily, you know, kind of quantify or disclose really in the marketplace. But certainly, you know, if you're out of certain key products, it's definitely going to impact some of your top-line growth. And, you know, we definitely had that impact in the period. But I think our, you know, our book to bill rates, you know, relative to how we looked at the business, you know, was challenged due to that. So we certainly had plenty of demand. And I think we're going to continue to try to quantify and look at, you know, what that impact is longer term. But, you know, I think from the actual numerics, we usually don't go through that and disclose it.

Yeah, Ryan, I can supplement that a little bit. So if you think about, Ryan, we reported net sales down 3%, but our customer demand was up, actually, year over year. So we saw growth. So when you think about that, that delta is going to be, again, more than three points, clearly, but in that kind of single-digit range of impact. So it was not de minimis. And obviously, the supply chain challenges do continue to exist, but we are fairly – cautiously optimistic that we'll continue to get a normal fair share of our flow through into Q4 and then into the new year.

Got it. Okay, that's helpful. And then for my follow-up, I was impressed with your gross margins this quarter. Obviously, you improved it a lot since the first quarter. What was the growth rate of private label, and if you have it, the percent of sales in the quarter? And then I'm curious if higher inflation boosted your gross margin tax. I think you might have mentioned that in your remarks. If so, how big was the impact?

Yeah, and I'll take that, Barry, and then you can supplement. So, Ryan, obviously, private label products, while, again, we tend to update that on an annual basis rather than quarter to quarter, it was our fastest-growing sourcing channel in the period, which obviously does contribute to a – increase in gross margin rate and also provides that sustainability that we see as it's really part of the core strategy of moving product and moving our customers to that high-value product that we reproduce under our private brands. So that's an ongoing opportunity. And absolutely, there is a benefit from price increases in the market and being able to time those, really monitoring the market, using our analytics and intelligence capabilities, the software we use to really monitor pricing. where you're able to capture some price on the front end as costs are going up. And again, you get that FIFO benefit to be able to sell through. So the pricing definitely played a part in it, both strategically and timing to help support that growth, but continue to improve. And again, you mentioned obviously Q1 as a reference point. As you remember, Q1, we had some pretty significant impact of ocean freight and some other freight challenges in that period, which kind of highlighted those are the domestic freight challenges and costs are really behind us. That was a transitory impact in the first quarter, and we're really working through those ocean freight costs, which continue to be elevated, but we've done a pretty good job at this point of being able to pass those through to our customers.

Great. Thanks. All right. I'll pass it on.

And, ladies and gentlemen, with that, we'll end today's question and answer session as well as today's conference call. We do thank you for attending today's presentation. You may now disconnect your line.