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spk01: Good afternoon, ladies and gentlemen, and welcome to the Global Industrials Second Quarter 2022 Earnings Call. At this time, I would like to turn the conference over to Mike Smarjasi of the Plunkett Group. Please go ahead, sir.
spk02: Thank you, and welcome to the Global Industrial Second Quarter 2022 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 on a Form 8K. This call is the property of Global Industrial Company. I will now turn the call over to Barry Litwin.
spk05: Thanks, Mike. Good afternoon, everyone, and thank you for joining us. Second quarter performance reflects the continued implementation of our ACE strategy and strong execution by the Global Industrial team. Revenue reached a quarterly record of over 318 million, growing nearly 17% with solid demand throughout the quarter. Gross margins remain healthy, but pulled back from the record performance in the first quarter of this year, reflecting the impact of freight fuel surcharges, certain promotional activities on excess and seasonal stock, as well as the flow-through of some higher-cost inventory. In terms of our bottom-line performance, we delivered solid operating leverage and generated over $30 million in operating income, a 23% increase from the year-ago quarter. and operating margin improved 50 basis points to 9.6% from Q2 of 2021. Overall, we were very pleased with our second quarter performance as we made further progress on key digital, sales, marketing, customer, and distribution initiatives. We believe these investments will strengthen our competitive position and help us drive growth and capture additional market share in the highly fragmented industrial distribution marketplace. We remain focused on new business development, which is reflected by our expansion into additional end markets and sales channels. This includes our entry into larger government and private sector accounts and recent entry into the healthcare vertical. These efforts allow us to establish new customer relationships while leveraging Global Industrial's core product offering and sales organization. Our one-to-one managed sales team continues to drive our growth, and we are making investments in tools and technology to empower our team. putting the right data in their hands to improve efficiencies and enhance their value as a resource and partner to our customers. Recently, we commenced the launch of a new digital e-commerce platform, which we are rolling out to customers in a phased approach. This new user interface and customer experience highlights our digital leadership and puts a spotlight on the solutions and resources we provide. It's been a tremendous undertaking, drawing on talent from across the company to deliver a better experience for our customers. It includes easier mobile navigation, personalized recommendations, auto-reorder functionality, faster checkout, and the addition of pertinent knowledge center content to product category pages, to name just a few of the new features. In June, we held Global Industrials National Trade Show in New Orleans. It was a tremendous success and provided an important opportunity to interact face-to-face with customers and our vendor partners. One of the key takeaways for me personally was direct customer feedback around the value our subject matter experts provide and praise for our sales team's ability to address questions and help solve problems. This highlights the direct impact of the customer-focused ACE initiative, the investments we're making, and the value our associates deliver every day. As we enter the second half of the year, we remain focused on driving operational excellence, furthering our digital transformation, and investing in private brand, logistics, and our peoples. We believe we are well positioned to continue to deepen relationships with our customers and capitalize on our growth initiatives. While there remains a good deal of uncertainty around the economy, we have tremendous flexibility in our operations and have proven our ability to react quickly and proactively manage the business during the past several years. From tariffs to the pandemic and supply chain issues, we have addressed each one of these challenges head on, and as a result, we've become a stronger company. I'm pleased with the progress we have made this year, excited for the numerous opportunities we have in front of us, and believe we remain well positioned to drive strong bottom line performance and value for our stakeholders over the long term. I'll now turn the call over to Tex.
spk03: Thank you, Barry. In the second quarter, revenue was $318.5 million, a quarterly record, and increased 16.8% over Q2 of last year. U.S. revenue increased 18.2%, while revenue in Canada improved 2.4% in local currency. Open orders reduced moderately in the quarter and are flat from the beginning of the year. We expect to make further progress fulfilling backorder positions in the second half of the year as lead times continue to normalize. Gross profit for the quarter was $113 million, up 15.3% from last year. Gross margin was 35.5%, off 50 basis points from the prior year. As highlighted in previous quarters, we chose to prioritize product availability for our customers during a time of substantial supply chain disruption. These strategic investments have enhanced our ability to serve the customer this year, but have resulted in higher levels of inventory. In addition, this inventory was acquired at a higher cost due to ocean freight inflation. As supply chain reliability has stabilized, ocean costs moderated, and inventory availability improved, we are actively working to lower inventory to more historical levels. We continue to believe that long-term margin gains are achievable as we drive higher margin sourcing channels, continue to invest in pricing analytics, and working to optimize our freight profile. Selling, distribution, and administrative spending in the quarter was $82.5 million, or 25.9% of net sales, an improvement of 100 basis points from last year. SD&A primarily reflects targeted expense management and fixed cost leverage on sales growth. We continue to maintain strong cost controls, but expect to see higher levels of SDNA in the second half of 2022, primarily due to the expansion of our Canadian distribution network, as well as continued investments in e-commerce and other technology enhancements. We recognized initial costs from this new Canadian facility late in the quarter, and we'll see an increase in these costs as we continue to build out and transition operations from the current DC throughout the second half of the year. Operating income from continuing operations was $30.5 million in the second quarter, a 23.5% improvement from the year-ago period. Operating margin expanded 50 basis points to 9.6%. Total depreciation and amortization expense in the quarter was $0.9 million, while capital expenditures were $1 million. We continue to expect 2022 capital expenditures in the range of $7 to $9 million, inclusive of the new distribution center in Canada. Let me now turn to our balance sheet. We have a strong and liquid balance sheet with a current ratio of 1.7 to 1. As of June 30th, we had over $23 million in cash, $30 million of debt, and over $41 million of availability under our $75 million credit facility. Our debt position reflects increased borrowings to meet working capital needs related to inventory investments to support longer lead times in our supply chain, as well as the value of inflationary costs within that inventory. We currently expect inventory levels to reduce in the second half of the year. We maintain 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 18 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.
spk01: Thank you, and we will now begin the question and answer session. To ask a question, you may press the star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question today will come from Anthony Lebodzinski with Sidoti & Company. Please go ahead.
spk04: Good afternoon and thank you for taking the questions. Certainly very strong top line performance. Just wondering as far as pricing versus volume in the quarter, just wanted to get a better handle on that if you can.
spk05: Yeah, hey, Anthony, how you doing? Nice to have you on the call. Yeah, we definitely saw pricing and volume moving both in a positive direction during the period, which was nice to see. And I think certainly as we continue to drive more and more item availability, which is improving sequentially quarter over quarter, we'll continue to see both those moving in a strong direction, particularly the volume side.
spk04: Got it, okay. All right, so... Yeah, so obviously, so you have been able to outperform, you know, the market, you know, just looking at the MRO market, it seems like you've continued to certainly outpace that. So as far as, you know, kind of the main reasons, is it the ACE strategy that's working or is it something else? And kind of like, how should we think about the sustainability of that?
spk05: Yeah, great question. I mean, we're certainly pleased with the performance in Q2 and actually first half, you know, overall. revenue. We definitely saw a good customer demand environment. We continue to see that, that really held consistent through the second quarter and continued to bid into July. We saw good, strong growth on the category side, both in core and private brand. As you mentioned, our goal is to drive above-market growth in the long term. I think some of the growth that we definitely saw came from a few places, traditional small and mid-sized customer base, We also saw continued growth from our larger enterprise accounts, which is really starting to do a nice job for us in helping our top line. And we're starting to see some new growth coming from our new healthcare channel, which actually launched in May. We're in early stages of that, but it's doing nicely. At the end of the day, our managed sales team has been really strong in leading our growth. We definitely see this team as essential to our growth, certainly over the next several quarters. I think, as I mentioned in some of the early comments, they provide a really strong, personalized, high-touch customer experience. And as we continue to expand our customer base, we like the solutions that they deliver and generally results in great revenue growth for us. So, great. Thanks for the question.
spk04: Sure. No problem. So, Barry, as you mentioned, obviously there's a lot of uncertainty about the economy, where we go from here. Just wondering, when you look at your different end markets, are you seeing any pockets of perhaps some slowdown? Or just curious if you are seeing it. And if you are, then if you could just comment on what those might be.
spk05: Yeah, great question. Certainly that's on everybody's mind these days. I mean, we still see a fairly robust market environment. you know, for us. There's certainly, you know, the economists and prognosticators talking about, you know, recessionary market conditions. You know, we're, you know, certainly not extending ourselves. I think we're being prudent in overall financial management of the company and how we're looking at our cost structure going forward to prepare. But we are, you know, we're definitely continuing to invest in growth. I've not seen necessarily any subtle slowdowns in any particular end market. And as you know, we have a fairly fragmented industrial supplies industry with a lot of different players. So we feel that our, a strategy that helps to drive kind of our selling and marketing approach will help us drive some new business and share growth. You know, if there, if there's some pending downturn in the market right now. But at the same time, Um, you know, I've not seen any necessarily differential in any of the end markets. Um, we have a fairly, fairly good outlook, you know, going forward over, uh, over the next couple of quarters. So, um, but we're, we're constantly asking our sales organization, um, customer sentiment. You know, it's one of the questions that I ask each week, you know, how are customers feeling? Are we seeing budgets tighten? Um, those types of questions, and we stay pretty close to it. So the minute we start to see anything, we'll react appropriately. But definitely a great question.
spk04: Got it. All right. Well, thanks a lot. That's all I have. Best of luck.
spk05: Thanks, Anthony.
spk01: And our next question will come from Ryan Merkle with William Blair. Please go ahead.
spk00: Thanks. Good afternoon, everyone. Hey, Ryan. Hi, Ryan. So I wanted to start off with the inflation question. Are you still seeing price increases from your suppliers, or is that starting to peak out at this point?
spk05: That's a great question. That's very timely. We're definitely seeing some raw materials and price increases impacting us. I mean, we are starting to see on the freight side, particularly on ocean, starting to come down. They're still at record levels. They're not at where we saw in 2019, but they are starting to succeed a little bit. And we think that's going to help us with some price flexibility in the outer quarters through the end of the year. Supplier side is kind of mixed. We are seeing improvement in the supply chain side, both on the domestic and international side. Like I said, it's not to, let's say, 2019 levels. But I think that that's reflected in some of the improvements in item availability for us, particularly items coming from overseas. And as we start to see item availability improve and some of the costs come down, like I said, it's going to give us more flexibility as we get into the later quarters of the year. But it's still there. I mean, my own prognostication, Ryan, is I feel like we're at the apex of it. I feel like we're at the top. And, you know, we'll kind of keep playing it day by day.
spk00: Yeah, well said. And since you mentioned container rates, I think they've come down quite a bit, you know, at least on a spot basis. Is that something that you give back to your customers in pricing, or is that something you keep? How do we think about that?
spk03: Well, certainly during... Yeah, go ahead. Yeah, hey, Ryan. Ryan, thank you. Yeah, so with the container rates, obviously, they have come down from the peaks that we saw in the kind of late winter or late fall, early winter and through the first quarter. And as we think about that, that's a component of our cost of goods sold. So as we think about our inventory levels managed through the inventory, through our FIFO layers, as that inventory starts to flow through lower cost, we do have the ability to be more flexible in our pricing. And obviously, competitive pricing is always that leading North Star with how we want to price our products and really be able to make sure we're there for our customer, have the right product in stock at the right time. So, again, as those costs do come down, we'll be continuing monitoring and really monitoring the market and the industry to see how quickly we can pass that back through. But right now, again, pricing has been fairly stable for some time. But as that market cost comes down on those container rates, again, we do hope that we can be able to pass that back to our customers.
spk00: Okay. Makes sense. And then I want to ask a couple on gross margin. You explained why gross margins decline sequentially. How should we think about the second half? Can you see a lift into 3Q if some of these items you mentioned, the press release, you know, change or return to normal?
spk05: You know, I mean, I could take, we could take it kind of a couple different ways. Yeah, go ahead, Barry. Yeah, we certainly came back, you know, a little bit on that. I mean, I think As I mentioned to you, you know, we're kind of at the apex on inflation and certainly we're pushing through a lot of our high cost inventory to get that flow through so we can access some of those lower cost FIFO layers, you know, into the outer period. So we feel good about kind of the progression of where inventory is going for us. I think we've got kind of an extra chip in our effort to be able to go at that piece and it's moving nicely. Fuel costs have been another driver. I think we've definitely seen, it feels like we've seen the height. Hopefully some of the carriers start to come off of some of the incremental fuel costs that they've applied during the period. That could be helpful. We have taken some surgical clearance pricing actions modestly just to be able to drive some additional capacity. You know, we do expect to get, you know, to get a strong margin profile through the end of the year. You know, as costs come down in the back half, like ocean freight and other areas, like I said, I think it's going to give us additional price flexibility. Either we take it to the customer or we take it, you know, ourselves to margin. So I still believe we'll, you know, we'll have a solid margin story for the year and The one ace in our sleeve is really our private brand shift. And we've talked to you guys a lot about that. We've got almost half our volume sitting there. And that's a great margin story for us, despite whether we're Costco. We have a defined strategy to really help drive more value through our private brand. And that's a nice multiple change in margin when we shift to private brands. So we continue to move that way. We continue our product development in that area. And I think that will help us offset any additional margin pressures we're going to get, but it's not necessarily going to be an easy ride. We got to work every day to be able to maximize margins, but we spend quite a bit of effort doing it. And I, you know, I would suspect that, you know, we'll still deliver strong margin results for the year.
spk00: Perfect. Thanks for the color.
spk01: And this will conclude our question and answer session. Also concluding today's call, the conference is now concluded. Thank you for attending today's presentation, and at this time, you may now disconnect your lines.
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