Global Industrial Company

Good afternoon, ladies and gentlemen, and welcome to the Global Industrials' fourth quarter 2023 earnings call. At this time, I would like to turn the call over to Mike Smarjasi of the Plunkett Group. Please go ahead.

Thank you, and welcome to the Global Industrial fourth 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 exclusive of the May 2023 end-off acquisition. 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 captioned 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 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. In 2023, we continue to execute against our ACE strategy. Revenue reached a record $1.27 billion as we benefited from the acquisition of EndOff, while organic revenue performance reflects the soft start to the year. We enter 2023 with an uncertain economic outlook, cautious customer purchasing behavior, and deflationary pricing. As we move through the year, the demand environment improved, pricing pressures eased, and we delivered solid second half results, growing organic revenue 4%. In fact, Q4 produced our best top line growth of the year. Total revenue was $320 million, an increase of 22.9% year over year. On an organic basis, we posted our second consecutive quarter of growth as revenue improved 5.1%. These gains reflect continued volume improvement and strength in our e-commerce channel. Gross margin was 33.8%, a 100 basis point uptick on a sequential quarter basis. We ended the year with a modest increase in our cash position. Even after fully funding the $72 million Indolf acquisitions, Given the strong cash flow generation of the business, today we announced a 25% increase in the quarterly recurring dividend to 25 cents a share, the eighth consecutive annual increase. Looking back at 2023, I'm really proud of how our entire team executed against the key pillars of our customer-centric strategy, from distribution, web, marketing, and sales to merchandising and customer service. Across the company, we advanced operational excellence and strengthened our long-term competitive position. We expanded our go-to-market channels with the addition of INDOF, made enhancements to the user experience in our e-commerce platform, which helped drive web performance and grew the enterprise offering while making investments in sales resources to support both new and existing customers. We remain committed to making the investments that will drive our future performance. As we look to build upon the progress of last year, we have a number of customer-focused initiatives to ensure we further enhance the buying experience and take care of our customers at every part of their journey. First, we'll continue to elevate Global Industrial's ability to solve problems for customers and bring a more comprehensive solutions-based approach to our offering. Internally, we look to be solutioneers for our customers, delivering product content, support, and knowledge to help them make informed decisions and succeed. We are enhancing product training for our subject matter experts and leveraging INDOF's project management and installation capabilities to expand the service offering. And through our voice and customer feedback process, we will drive alignment of these efforts with the needs and solutions customers are looking for. Second, we'll prioritize a renewed focus on the quality and value we provide. From the extra chip in the cookie we deliver through Global Industrials exclusive brands, to a new quality team to evaluate, improve, and monitor our processes. We will emphasize quality of the buying experience every step of the way, from product sourcing to delivery to the customer. We will also fine tune our product assortment to ensure we have the right selection of core products and complimentary consumables for our customers. With these initiatives, we're improving the quality of our offering and highlighting the value we bring to market. Third, it is our aim to make it even easier to do business with Global Industrial. You have heard us talk about providing an exceptional end-to-end shopping experience that delivers a frictionless transaction. We have several ongoing efforts to improve category merchandising and drive shop ability and a new customer service agent training program, all designed to deliver a five-star experience. Finally, we are making further investments in sales, marketing, and profit performance areas to improve the tools and the team we have to grow, retain, and deepen customer relationships. This includes technology investment to drive efficiencies in sales, optimize digital marketing, and enhance pricing intelligence and analytics. As we enter 2024, I believe we have the right plan in place to build upon the progress of last year. Initiatives across the business are designed to elevate and highlight Global Industrial's position as an indispensable business partner and the value we bring every day to our customers. Investment and key performance areas are designed to strengthen our competitive position, drive operational efficiencies, and help us capture share. The market environment remains one of caution, and we have seen modest organic growth to start the year. With strong cash flow from operations and an exceptional balance sheet, we remain well positioned to execute on our strategy, invest in our growth drivers, evaluate strategic opportunities, and build long-term value for our stakeholders. I'll now turn the call over to Tex.

Thank you, Barry. Fourth quarter revenue was $320.1 million, up 22.9% over Q4 of last year. Organic revenue was $273.9 million, up 5.1% year-over-year. our largest growth rate of the year. Growth was consistent throughout the quarter with volume up and price headwinds in the low single digits. Organic US revenue was up 5% and organic revenue in Canada was up 7% in local currency. E-commerce and broader digital sales were once again our leading channel and ended the year representing more than 60% of total annual order volume. Private brand demand remains robust and represented approximately 50% of total sales in 2023. Gross profit for the quarter was $108.2 million, up 15.4% from last year. Gross margin was 33.8%, down 220 basis points from the year-ago period, primarily due to the contribution mix of end-off and its relatively lower gross margin profile. End-off gross margin was 21.5%, and in line with their historical performance. Organic gross margin rate was 35.9%, in line with the year-ago period, and up 140 basis points sequentially. Organic margin performance benefited nearly 40 basis points from a one-time settlement with a former LTL freight carrier in the quarter. Management of our margin profile remains a key area of focus. Performance will continue to reflect the impact of proactive promotion and freight actions as part of our competitive pricing initiatives. As a reminder, given NDOT's impact to our composite margin profile, we expect a consolidated gross margin decline in the first quarter as compared to last year. In addition, as a result of shipping disruptions in the Red Sea, we have seen double-digit increases in ocean freight costs in the first quarter. This is something we are closely monitoring and may be a gross margin headwind in future quarters, depending upon the duration of the disruption. Selling distribution and administrator spending for the quarter was $86.8 million, or 27.1% of net sales, an improvement of approximately 210 basis points from last year. SDNA primarily reflects the benefit of INDOF's lower cost structure, as well as general cost controls within the organic business. Operating income from continuing operations was $21.4 million in the fourth quarter, and operating margin was 6.7%. Organic operating margin was 7%. 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 operating cash flow from continued operations of $8.2 million. Total depreciation and amortization expense in the quarter was $1.9 million, including approximately $0.8 million associated with the amortization of intangible assets associated with the end-off acquisition, while capital expenditures were $0.7 million. 2023 capital expenditures were $3.9 million, and we expect 2024 capital expenditures in the range of $6 to $8 million, which primarily includes maintenance-related investments to equipment within our network. Let me now turn to our balance sheet. We have a strong and liquid balance sheet with a current ratio of 1.9 to 1. As of December 31st, we had $34.4 million in cash, no debt, and $101.2 million of availability under our credit facility. 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 25 cents per share of common stock that reflects an increase of 25% from the previously declared quarterly dividend. 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 telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then 2. At this time, we'll pause momentarily to assemble our roster. Our first question will come from Anthony Lebedzinski with Sedoti and Company. You may now go ahead.

Good afternoon, gentlemen. Good afternoon. Thank you for taking the questions. So just wondering if you guys could comment on the cadence of your sales in the fourth quarter. Maybe give us some more details as well about the first quarter to date trends. I know a couple of your peers have talked about some severe winter weather in January disrupting sales. So if you could comment on that, that'd be great.

Yeah, I mean, I think from a Q4 exit period for us at Organic on a 5.1 basis, we were pleased with that performance as it relates relative to the winter season. Winter season, I think, was kind of short. It had a quick burst in the early phase. And certainly, we have a seasonal business for winter products that gets helped by that. We didn't see a tremendous amount of disruption, to be frank. in that area. So we felt we fared pretty well with those products. So it was a relatively good season for us. You know, as we kind of go through exit Q4 and into Q1, we certainly see some modest organic growth, you know, flowing through. So I think, Anthony, in general, you know, I still think we see a fairly cautious sentiment in the market. relative to where customers are today. I think they're still prioritizing price, so I think there's always going to be some headwind there. I also think that from a growth perspective, industry-wide, we certainly see kind of MRO being in low single-digit growth in general. But it's a fragmented market, so we think we have opportunity to continue to grow. But it's certainly a competitive market relative to price and freight. So right now, our prospects are very reasonable. We continue to – we're only halfway through the quarter, and we'll continue to pursue our initiatives to get us to a good result.

Understood. Okay. And just wanted to follow up. So on your third quarter call, you guys talked about the caution, especially with large orders. Some customers, I think, were spreading their orders through multiple shipments. Did you see less of that or kind of more of the same as far as just the large orders? Just curious to get your take on that. Mm-hmm.

Yeah, I think it's been fairly consistent, Anthony, relative to large orders. You know, like we said in our remarks, I mean, e-commerce has been a very good channel for us, and typically that drives a little bit lower order size. But I think we've seen fairly consistent performance on large orders even through the last reporting period.

Yeah, that's absolutely right, Barry. It's been very consistent, Anthony, on that approach.

Gotcha. All right. And then Barry, you talked about, you outlined several initiatives that you guys are focused on, you know, as far as, you know, out of the three or four that you outlined, I mean, which one out of those you think will have the most immediate impact on the business and the kind of which ones out of those initiatives kind of will take longer way out?

Yeah. So great, great question. I think, um, With our focus this year, we're really putting huge emphasis into quality across the organization, one that I'm really excited about. Being a company that typically ships big and bulky items, you're always suspect to damages, and damages have an impact on long-term retention. And although our acquisition and our retention rates right now are very good and very pleased with them, we're investing in as an organization to make sure that the end to end experience from the time we source a product, from the time it comes into our warehouse, that we have a quality team that's inspecting those goods and based on being able to reshift those items back out to customers, making sure that we have the appropriate quality audits and programs in place to really drive a great experience to the end user. So we've been Focused on quality since ACE was created back in 19. And we continue to improve our processes and invest into that experience. And we believe that as that continues to get better, that will continue to increase retention rates for the company and drive long-term customer value.

Gotcha. Okay. And then lastly, just a quick housekeeping, I guess, thing. So you're... tax rate was a little bit higher at Q4. Anything there to call out and anything you can say as far as 24 tax rate?

Yeah, I think I'll take that one. I think it should be a little bit more consistent in next year. This was related to some Canada income and some foreign income and treatment of NOLs. But ultimately, we would expect a more consistent and normalized tax rate right under 25% for 2024. I'm sorry, yeah, for 2024. Perfect.

All right, well, thank you very much, and best of luck. I'll pass it on to others.

Our next question will come from Michael Francis with William Blair. You may now go ahead.

Hey, guys. This is Mike Francis on for Ryan Merkle. Thanks for taking my questions. Sure. Yeah, thank you. I think to start, I'd like to ask a little bit about gross margins in 24. I know you're lapping end-off, and you had a little bit of headwinds there organically. How should we think about the business overall with a full year of end-off involved? Is there going to be any –

accretion with with that acquisition um or growth with that acquisition coming in the in the next year yeah barry if you don't mind i'll take that question so in regards to gross margin i mean again right now we're breaking out gross margin and sharing it obviously with the market both organically and then on a consolidated basis indel for a long time at a very um stable margin profile but there's definitely activity that we're working on with that with those um with their sales reps and their sales partners to be able to move their gross margin up over time. But again, it's naturally a slightly different business model that will have a little bit lower gross margin rate. In regards to the organic business, where we think about, I mean, this quarter was both the third quarter and the fourth quarter were fully consolidated businesses. So if you look at our gross margin, the second half of 2023, we should expect to see that continue in as we're always focused on maintaining that gross margin profile. Like you said, there's always some headwinds that we face in the marketplace right now. Ocean freight, as we called out. I mean, currently with some of the disruptions in shipping lanes around the world are driving some rates up. But we think that's going to be fairly short-lived, and we'll be able to work through that. And that's really why we invest so heavily in our pricing team and pricing analytics to make sure that we can capture price where appropriate. But maintaining gross margins is always a key priority of the company. Okay.

And then I also wanted to ask about private label a little bit. You mentioned it's 50% of sales. Is there a target that we should think of when we think of where you want to get with that? Are you happy with where you're at now or is there more room to grow there?

You know, A couple of pieces. I'll take that. Mike, I think one is, you know, we're usually not providing like long-term guidance on private brand penetration, but I can tell you, we do believe that there's upside. And I think it could come in two ways. I think one relative to global's organic business today, we really take a good, better, best approach in the assortment. And we continue to refine the assortment where we see private brand to be the best fit because private brand in our mind is really creates an added advantage in terms of the capabilities that we offer to the product. And if we can continue to provide that at a best value price in the marketplace, we'll continue to emphasize those sales going forward. The other piece where there's upside, I think, is relative to kind of what Tex covered. I think the Indoff business model, which typically was, you know, really a drop ship model. Part of our approach there is to be able to penetrate that assortment with private brand. And so, you know, between all the efforts we have relative to training and educating on the products and our new product development, we think that will create some upside and additional expansion in private brands. So we absolutely think there's growth upside where we are certainly beyond the 50% business today. And, you know, that's a core strategy of ours going forward.

And then one last one here. You talked a little bit about the Red Sea and shipping up. How much of your shipping is coming through that or your product is coming through that channel?

You know, very little bit is actually coming through that channel. However, that's increased the overall rates across the industry as the overall container flow has been disrupted with people moving around the – Cape of Africa and other areas, we've seen just an overall increase in the rate. So we're not actually seeing delays due to our product coming through there, but the overall market has had rate increases. I think that's not unique to us. That's fairly, I mean, readily available information in the market about the different – the current rate increases that ocean carriers are passing through. Again, we think that it's ideally transitory in terms of the cost increases, and after Chinese New Year's, we hope that that will also begin to settle out as demand normalizes as well. So it's an area we're monitoring, but it's something that we have a key focus on trying to mitigate that where we can.

All right.

I'll pass it on.

Thanks, guys. Thanks.

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