Global Industrial Company

Good afternoon, ladies and gentlemen, and welcome to Global Industrial's Third Quarter 2023 Earnings Call. At this time, I would like to turn the call over to Mike Smorjasi of the Plunkett Group. Please go ahead.

Thank you, and welcome to the Global Industrial Third 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. During the call, we will reference both GAAP and organic metrics. Organic reflects the performance of the global industrial business of the May 2023 INDOS acquisition. In addition, the third quarter of 2023 had one less selling day in Canada versus the year-ago period. 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 by the SEC on a Form 8-K. This calls the property of Global Industrial Company. I will now turn the call over to Barry Litwin.

Thanks, Mike. Good afternoon, everyone, and thank you for joining us. Third quarter total revenue was approximately $355 million, an increase of 18.8%, which included the addition of end-off for the full period. On an organic basis, we returned to growth as revenue improved 3.2%. This represented a nice rebound from the second quarter as we benefited from volume improvement, which more than offset continued price headwinds. Gross margin was 32.8% and was primarily impacted by the inclusion of Endoff's lower margin profile. During the quarter, we further normalized our inventory position, generated strong cash flow from operations, and fully paid off the outstanding balance on our credit facility. Topline performance was once again led by our e-commerce channel, as recent investments and proactive actions to drive digital transformation and enhance the online shopping experience are delivering returns. We continue to leverage digital marketing to deliver healthy customer acquisition and retention rates. Our web and marketing teams have been doing an outstanding job executing on our strategy, and we've been very pleased with the recent e-commerce performance. Our direct one-to-one sales channel remains a key focus to deepen customer relationships, build larger accounts, and expand into new end markets. While we did see some nice gains in select national and public sector accounts and overall order volume improved, we continue to see muted large order volume. This reflects the cautious customer behavior we have observed throughout the year. The customer remains at the center of everything we do. We are committed to making further investments in areas such as sales, marketing, price analytics and intelligence, and private brand that will continue to differentiate us in the market and drive our long-term performance. These efforts are designed to strengthen our competitive position and help us focus on the customer experience and the solutions they need to succeed. Q3 marked our first full quarter with Indoff, and we believe it has been a strong addition to global industrial. The business is performing in line with our expectations, and we've been pleased with initial efforts to capitalize on cross-selling and private brand opportunities. We remain excited by the new customers and markets it brings, as well as capabilities in project management and engineering solutions that broaden our offering and strengthen our value propositions. Finally, in October, we hosted two events that really highlight our core values and who we are as a company. The first was our annual national trade show on October 19th in Memphis, Tennessee, which was a tremendous success. We had exceptional customer turnout and supplier support. The show provided an invaluable opportunity for the team and me to meet with our customers and vendor partners in person. These discussions allowed us to strengthen relationships, gather critical feedback, and kick off 2024 planning. It reaffirmed how our ACE strategy is resonating throughout the business and the positive impact it's having. The second event was the corporate day of service we held last week in partnership with Helen Keller National Center, which is located near our corporate headquarters in Port Washington, New York. We worked side by side with the staff and residents at Helen Keller, assembling and installing an assortment of our outdoor furniture and products to enhance their campus, as well as introducing our first Braille water bottle filling station. This was a rewarding experience and exceptional opportunity to give back to the local community and build a lasting relationship with a world-class organization. Planning and executing these events took a tremendous amount of work and effort, and I'm really proud of the team and our partners who supported us. In closing, we believe we have the right strategy in place to drive long-term performance and value for our stakeholders. We're executing against the core pillars of our ACE strategy, committed to delivering an exceptional experience to customers and focused on operational excellence in every part of our business. The investments we are making in growth and productivity initiatives are designed to strengthen our competitive position. And while the environment remains one of caution, our proactive management approach and ability to adjust to market conditions places us in a position to continue to win in the market. In addition, with our strong balance sheet, we have the resources to execute on our organic and strategic investments. growth opportunities. I will now turn the call over to Tex.

Thank you, Barry. Third quarter revenue was $354.6 million, up 18.8% over Q3 of last year. Organic revenue was $308.2 million, up 3.2%. Absolute volume was up throughout the quarter, and price headwinds moderated to low single digits. Organic U.S. revenue was up 3.1%, and organic revenue in Canada was up 8.2% in local currency. While the demand environment remains tentative and customers guard it in their buying decisions, positive Q3 trends continued into the beginning of the fourth quarter, and we expect price pressure to moderate further throughout the period. Gross profit for the quarter was $116.3 million, up 9.1% from last year. Gross margin was 32.8%, down 290 basis points from the year-ago period, and includes a 170 basis point impact from the contribution mix of end-off. End-off gross margin was 21.6%, and in line with their historical performance. Organic gross margin rate was 34.5%, a 120 basis point decline from the year-ago period. Organic performance reflects the impact of proactive promotion and freight actions as part of our competitive pricing initiatives, as well as the sell-through of certain pockets of high-cost inventory, specifically within our cooling category. Management of our margin profile remains a key area of focus. While the pricing environment remains competitive, we expect modest sequential organic margin improvement in the fourth quarter as we benefit from more normalized inventory costs. Given INDOF's impact to our composite margin profile, we expect a consolidated gross margin decline in the fourth quarter as compared to last year. Selling, distribution, and administrative spending for the quarter was $88.1 million, or 24.8% of net sales, an improvement of approximately 170 basis points from last year, and approximately 90 basis points on a sequential quarter basis. SD&A primarily reflects an increase in planned sales and marketing investment, which is more than offset by other key cost control measures, as well as a reduction in variable compensation. Operating income from continuing operations was $28.2 million in the third quarter, and operating margin was 8%. Organic operating margin was 8.3%. With the addition of INDOF and its comparatively lower operating margin rate, our composite operating margin may remain lower than historical periods. During the quarter, we generated strong operating cash flow from continuing operations of $38.3 million, which benefited from a further reduction in inventory and strong working capital management. We believe inventory has likely reached a more stable position with normalized seasonal variation. Total depreciation and amortization expense in the quarter was $1.9 million, while capital expenditures were also $1.9 million. As a result of the end-off acquisition, the company incurred approximately $0.7 million in amortization expense in the quarter. We expect 2023 capital expenditures in the range of $5 to $6 million, which includes maintenance-related investments in equipment, as well as facility upgrades within our distribution network. 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 September 30th, we had $34.3 million in cash and no debt. We have now fully paid down the $40.3 million balance on our $125 million credit facility, which was utilized to fund a portion of the end-off purchase price. 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 20 cents per share of common stock. This concludes our prepared remarks today. Operator, please open the call for questions.

Thank you. If you would like to ask a question, please press star then 1 on your telephone keypad. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Once again, ladies and gentlemen, that's star then 1 if you have a question. Today's first question comes from Anthony Lebedzinski with Sidonian Company. Please go ahead.

Good afternoon, and thank you for taking the questions. So, you know, first, you know, nice to see organic sales turning positive in the quarter here. You talked about some price headwinds, however, just wondering, was this, you know, most of your categories or across the board? I know, Tex, you mentioned that this seems like the price pressures have eased up, so that's good to hear. But just wanted to get a little bit more color as far as, you know, the pricing environment, how you saw that progress throughout the quarter, and were there any categories that you could single out?

Yeah, I mean, I would tell you, Anthony, and thanks for asking the question. Pricing, we think, is still going to remain competitive. you know, just given the cautious customer environment. So, and we've been, you know, in a sense in a negative price position for, you know, several quarters here. So I think we are kind of well prepared and understand kind of the pricing environment going forward. The category mix was fairly broad, you know, relative to, you know, your question around what categories were impacted, we're seeing kind of, I would say, pressure across the board on most core commodities as well as consumables. So hopefully that gives you some color.

Got it. And I think, Barry, you also mentioned in your prepared remarks that in your one-to-one sales channel, you saw some customers being cautious with some of their orders. Is that something you expect to continue here in the short term or you think we're kind of the past the worst of that?

I think we were really pleased with the volume performance relative to the business on the order side. And we saw order contribution, you know, coming from both large and SMB customers. However, the impact was probably more in terms of the larger orders. So I think the cautious customer environment still remains on larger orders where you may see extended lead times and much more direct pricing competition at that level. But we were really pleased with overall order volume performance for us, and I think A lot of the work we did around our pricing throughout the year, good price discipline and understanding where we needed to be in the market is certainly contributing to that order growth.

Anthony, I would add to that. If I could supplement that a little bit. When we think about the pricing pressure, a lot of it has to do with where our prices were last year. Not as many of our price changes this year. So as we had some higher prices last in the prior year comp periods, primarily related to following that increase in cost associated with inbound ocean freight that we've talked about in the past, as that's been stabilized for quite some time. We've been able to normalize. And when we think about that normalizing and stabilizing over the near term, that's really looking at how our prices fell in the fourth quarter and beginning part of this year. So we think that comp will be a little bit easier in terms of the price performance. So that's where we think it will moderate a bit as we get into the fourth quarter.

Got it. Okay. Thanks for that additional color text. So just in terms of the end-off revenue contribution, it was a bit less than what we had modeled. And looking at the third quarter versus the second quarter, where you only had part of the quarter, actually, that had the end-off contribution. Just wondering if there was anything unusual there. I know it's largely a project-based business, but just wondering if there was anything for end-off in the third quarter that may have affected their results.

I would tell you that, and, you know, we've talked about, you know, Indoff is kind of a unique model in that it's a project-based business with more engineering support around it. So the business for them, I would tell you from a demand perspective, they feel very positive. in terms of where they are with the business at this point. We're certainly pleased with the performance of the business. We've certainly been in since May, since we consummated the transaction, and certainly learning and growing with the business. So I think that right now the demand market for them, you know, they see pockets of strength. And I don't see necessarily a significant change in the demand profile for them going forward.

Gotcha. Okay. That's good to hear. And then, you know, last question here for me. So, you know, certainly a nice job on your balance sheet with your Inventory debt reduction. So do you think there's more room to go as far as inventory decreases by the end of the year? Or you think you're kind of tapped out with that?

I'll take that one, Barry. So, Anthony, I think on inventory, as you saw in my prepared remarks, that we think that we're back to more of a normalized level of inventory. There's always going to be, as we, every category of inventory turns a little bit differently. So there may be some price inflation still in some of our inventory, but generally we think we're at a point where it's much more stable and overall inventory change will be less of an impact to the cash flow generation of the business. There will really be more seasonal variations with inventory as we're making individual stocking strategies. But I think that in the general inflation that was built into our inventory, we've been able to work through the majority of that and we're at a more normalized level.

Okay. Sounds good. Well, thank you very much and best of luck. Thanks, Anthony.

Thank you. And ladies and gentlemen, there are no further questions at this time. So this concludes the question and answer session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.