Global Industrial Company

Good day and welcome to the Global Industrial Company first quarter 2023 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 then one on a touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I'd now like to turn the conference over to Mike Smarjasi, Investor Relations. Please go ahead.

Thank you, and welcome to the Global Industrial First Quarter 2023 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 8-K. This call is the property of Global Industrial Company, I will now turn the call over to Barry.

Thanks, Mike. Good afternoon, everyone, and thank you for joining us. First quarter performance reflects a continuation of the recent demand environment, with average daily sales declining 3.7%. Price was neutral in the period and volume remained muted, reflecting cautionary purchase behavior, specifically within our core small and medium business customer base. These trends have continued into the second quarter. we recorded strong growth from our largest accounts in the quarter. In addition, customer retention remained healthy overall, which we believe reflects the value of our one-to-one managed sales organization. We were very pleased with gross margin performance of 35.9%, a slight decline from sequential quarter results, but as expected, off from record results in the year-ago period. Product margin was solid and expanded each month as we moved through the quarter, reflecting a continuation of the benefit we are receiving from lower-cost inventory flowing into our cost of sales. Our focus on the customer continues to drive our strategy, and we made further progress on operational excellence and digital transformation initiatives during the quarter. Recent e-commerce sales performance on our new web platform has been below our expectations. We have identified a number of user experience changes that are increasing friction while navigating our e-commerce site. We aggressively worked to address these issues. In this regard, we recently completed navigation enhancements on the product experience to enhance shopability, and additional optimization efforts are ongoing. With the current customer environment focused on value and price, we believe we are well-positioned for the long term. Our position is centered on providing exceptional product and service solutions to customers, and through our leading exclusive brand assortment, strong national brand assortment, and our pricing analytics, we continue to provide significant value to customers while generating healthy gross margins. At the same time, we continue to make marketing investments to help increase customer acquisition and feed new business into our e-commerce and managed sales channels. In the quarter, we increased total marketing investment, and we expect to continue to make further target investments in an effort to support growth and market share gains. Looking forward, the customer demand environment remains challenged and our small and medium business base cautious. That said, we believe we have the tools and resources to navigate the current market conditions and remain committed to investing in key growth initiatives to drive our long-term success. Across the business, we are focused on delivering an exceptional customer experience, driving operational excellence, and proactively managing our cost structure. We believe we have a powerful customer growth model that allows us to efficiently migrate customers up our sales funnel while building deep and loyal relationships. Global Industrial's private brand offering, one-to-one managed sales team, operational flexibility, and the efforts of our associates allow us to deliver significant value to our customers. The industrial distribution market remains highly fragmented, and we continue to see numerous opportunities for growth. With an exceptional balance sheet, we remain well-positioned to execute on our strategy, invest in future growth, explore organic and strategic growth opportunities, and build long-term value for our stakeholders. I will now turn the call over to Tex.

Thank you, Barry. First quarter revenue was $273.8 million, down 5.1% over Q1 of last year. Average daily sales were off 3.7%. U.S. revenue was down 3.7%. while revenue in Canada was off 17.3% in local currency. Excluding the benefit of a large one-time deal last year, Canada's sales declined approximately 6.4% in local currency. Price was neutral in the quarter, in contrast to pricing benefit recognized throughout most of 2022. We did see contraction in AOV in the quarter, primarily attributed to a lower number of large opportunities in the period. Demand softened as we moved through the quarter, and we have seen a continuation of this trend into the start of the second quarter. Overall, we believe customers remain guarded in their buying decisions and the pricing environment remains competitive. Gross profit for the quarter was $98.4 million, down 8.7% from last year. Gross margin was solid at 35.9%, a slight decline from sequential quarter results, but off from the record 37.4% in the prior year. The year-ago period benefited from strong price realization and lower-cost FIFO inventory sell-through, both of which have fully waned. Product margin trends improved as we moved through the quarter as we benefited from lower total landing costs, primarily the result of declining ocean freight costs. We do expect to see favorable LTL costs as we move through 2023 as we rebalance our carrier mix with a key focus on cost, quality, and speed of service. We've remained focused on maintaining our margin profile in the current environment. However, we expect continued variability throughout 2023 as we navigate seasonality, work through select categories of inventory that maintain a higher cost profile, manage the increasingly competitive pricing environment, and look to continue to drive value for our customers through competitive price initiatives. Selling distribution and administrative spending for the quarter was $80.6 million, or 29.4% of sales, an increase of 230 basis points from last year. SD&A primarily reflects the fixed cost nature of the business, including compensation expense, which included the impact of our previously announced reduction in force, planned marketing investment, and the expansion of our DC network. We continue to maintain strong cost controls and will evaluate additional steps to optimize our structure. Operating income from continuing operations was $17.8 million in the first quarter, and operating margin was 6.5%. With a strong commitment to invest in our long-term growth initiatives and fixed costly leveraging given the current demand environment, operating margin is likely to remain challenged near term. During the quarter, we generated cash flow from continuing operations of $28.5 million. Total depreciation and amortization expense in the quarter was $1.1 million, while capital expenditures were $0.7 million. We expect 2023 capital expenditures in the range of $6 to $8 million, which includes primarily maintenance-related investments and equipment within our distribution network. Let me now turn to our balance sheet. We have a strong liquid balance sheet with a current ratio of 2.2 to 1. As of March 31st, we had over $48 million in cash and no debt. We ended the quarter with approximately $116.6 million of availability under our $125 million credit facility. The continued improvement in our debt position reflects decreased working capital needs as inventory levels normalize and total inventory landing costs moderate. We maintain significant flexibility to fully execute on our strategic plan and to continue to fund our quarterly dividend. As a result, our Board of Directors declared a quarterly dividend of $0.20 per share of common stock. This concludes our prepared remarks today. Operator, please open the call for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Anthony Levizinski with Sudoti. Please go ahead.

Thank you, and good afternoon, and thanks for taking the questions. So, yeah, appreciate the color as far as talking about the large account segment and SMB as well. But just curious, within the SMB business, were there any particular vertical markets that stood out one way or the other, or was the weakness that you saw kind of broad-based across your core customer group?

Yeah, it's a great question, Anthony, and thanks for joining us. I would say that we have, from an SMB perspective, I would say the softness was fairly broad across the whole network. And obviously, we play in everything from retail to manufacturing, logistics, and some of the new markets that we're in as well. So I would say it was fairly broad.

Mm-hmm. Right. And as far as those new markets that you've talked about previously, as far as, you know, healthcare and hospitality, did you see any, or maybe, maybe you could just quantify any sort of revenue impact for the quarter? Yeah. You know, anything meaningful?

Yeah. Those two segments, Anthony, as you know, and we've talked about that for some time, those are fairly new segments for us to grow into both hospitality and healthcare. So they're kind of at a, early stage in terms of growth. So I would be pressed to say that there was really any material impact on some of the newer markets. I think in terms of some of our core broad-based end-use markets, I think those are where we saw more broad-based softness, and particularly within the SMB segment as opposed to more of the larger enterprise accounts.

I understand. Okay. And then as far as the comments about the new web platform, you talked about identifying a number of user experiences, changes as far as navigation and so on. So can you go into a little bit more depth as to what happened there and what you've done to improve the situation? Sure, sure. It's a great question.

You know, in Q1, we saw some data trends that we really didn't like in the product navigation shopping experience and browse experience. And I would tell you, Anthony, this was really an event during the period and not an ongoing concern. We addressed it aggressively in the first quarter with a number of navigational experience changes and believe at this point that it's cured with some of the trends normalizing. And I don't expect it to really have negative impact going forward.

Okay. Got it. Okay. And then you talked about the gross margin improving as the quarter progressed. Has that trend continued into the second quarter?

Yeah, you know, we're continuing to manage gross margin really well. We were pleased with kind of the strong performance at 35.9. You know, as we mentioned during the call, I think, you know, supply chain issues have really retreated at this point and we're enjoying some of the benefit of lower landed cost, you know, relative to ocean freight reductions. I think we're spending some, I think, really good effort around price and diligence to keep us competitive in this market. I mean, amidst the backdrop of no price appreciation, you know, really in our revenue, I think the customer market for the most part has turned more to value and price. And I think we're managing that well and have shown good discipline, you know, in overall margin management. I think we're definitely going to look at going forward and part of our plan now is to focus on COGS improvement, you know, both out of our private brand and strategic supplier relationships. I think that's going to be important to our overall margin expansion going forward and obviously keeping close and maintaining a competitive price position and a value-based market through other tools and capabilities that we have. So I do, I do expect a stable gross margin, you know, as we go forward.

Gotcha. All right, well, thank you. I'll pass it on, and best of luck.

Sure.

Thanks, Anthony.

This concludes our question and answer session and concludes our conference call today. Thank you for attending today's presentation. You may now disconnect.