Global Industrial Company (NYSE:GIC) Q2 2023 Earnings Call Transcript

Global Industrial Company (NYSE:GIC) Q2 2023 Earnings Call Transcript August 1, 2023

Global Industrial Company beats earnings expectations. Reported EPS is $0.56, expectations were $0.43.

Operator: Good day and welcome to the Global Industrial Company Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Now I’d now like to turn the conference over to Mike Smargiassi, Investor Relations. Please go ahead.

Mike Smargiassi: Thank you and welcome to the Global Industrial second 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 Litwin.

Barry Litwin: Thanks Mike. Good afternoon, everyone and thank you for joining us. Overall, we had a very productive second quarter as we continued to execute on our strategy and made further investments in growth initiatives. The big news in the second quarter was the addition of Indoff to the Global Industrial family in late May. Indoff is an exceptional, strategic and cultural fit with our business. It diversifies our operations, broadens our reach to new customers and markets, strengthens our one-to-one selling approach, and provides core product alignment, specifically within material handling, indoor and outdoor furniture and storage and shelving. In addition, it delivers new capabilities in project management and engineering that strengthen our value proposition.

I have been very impressed with the Indoff team. The level of expertise they bring to the table really expands our skill set and the depth and tenure of their customer relationships is impressive. We have made good progress on operational enhancements in sales, customer service and logistics as well as general coordination and support between the two businesses. We are excited by the addition of Indoff and are on track to drive our combined success. Turning to our financial performance. Total revenue improved 2.3% in the quarter, which includes approximately 6 weeks of Indoff results. Organic global industrial revenue was off 5.2%, reflecting price deflation and a continuation of the cautious purchasing behavior within our SMB customer base’s manufacturing sector.

Given improvements in our online shopping experience, web growth expanded throughout the quarter. Customer acquisition and retention are healthy, and we ended the quarter with modest volume trend improvement. We continue to be very pleased with our margin performance. Gross margin remains solid at 34.7% as we delivered modest improvement organically, offset by Indoff’s lower margin profile. In the quarter, we’ve made further progress against our key pillars of our strategy. We remain committed to making investments that strengthen our competitive position and enhance the value we bring to customers, which we believe will drive long-term growth. Within our e-commerce channel, digital transformation continues as we enhance the product shopping experience and optimize our digital marketing.

This resulted in improved wet sales performance as the quarter progressed, with e-commerce growing to more than 60% of total sales transactions. Our direct sales channel remains soft year-over-year, primarily on cautious purchase behavior within certain segments of our customer base and lower average order value. As we look to further accelerate customer acquisition and growth, we expect increased sales and marketing investment in the second half of the year as we implement targeted campaigns and engagement efforts. We also continue to optimize our value proposition, taking a strategic approach to pricing. Our goal is to ensure competitiveness in the market and pass along savings to customers where we can. We are making investments in pricing initiatives with a focus on maximizing total value, including freight and product components.

And while we are investing in our growth, we are also proactively managing our cost structure and driving efficiencies across our operations. For example, within our distribution network, we have seen productivity improvements resulting in lower total cost per order and increased product delivery speeds to the customer. These successes are great wins for both customers and Global Industrial. As you can see, our efforts center around the customer. One way we measure the impact of these initiatives is through our Voice of Customer surveys. They reflect the customers’ experience, and in turn, the health of our business and progress against our age strategy. I’m pleased to report that recent surveys highlight improvements in customer satisfaction, which is a direct reflection of the efforts of our associates and the value we provide to customers.

Finally, in October, we will be hosting our annual trade show in Memphis, Tennessee. This is always a terrific event that showcases our broad product assortment, strengthens our national vendor relationships and is a great time to connect and listen to our customers. In closing, we remain focused on strengthening our business, driving operational excellence and delivering an exceptional experience and value to our customers. We are making investments across our web and direct sales channels to enhance our competitive position and long-term growth profile. While the macro market environment remains uncertain, we believe we are well positioned to drive our performance as customer sentiment improves. With strong cash flows and a strong balance sheet, we are confident in the resources we have to navigate current market conditions and execute on our organic and strategic growth opportunities.

I will now turn the call over to Tex.

Tex Clark: Thank you, Barry. I will reference both GAAP and organic metrics in my remarks. Organic reflects the performance of our Global Industrial business and is exclusive of the May 2023 Indoff acquisition. In addition, since the second quarter included 64 selling days in both 2023 and 2022, average daily sales will align with reported sales results. Second quarter revenue was $325.8 million, up 2.3% over Q2 of last year. Organic revenue was $301.9 million, down 5.2%. However, absolute volume improved throughout the quarter and year-over-year declines narrowed as we exited the second quarter. Organic U.S. revenue was down 5.2%, while organic revenue in Canada was approximately flat in local currency, a significant improvement from Q1 of this year.

Price was negative in the quarter in a range of low to mid-single digits in contrast to neutral pricing in 1Q and a benefit in the year ago period. While uncertainty remains in the demand environment, volume trends have improved in the early parts of the third quarter. Overall, we believe customers remain guarded in their buying decisions and the pricing environment remains competitive. With regards to Indoff, given their large project-based business, there is often variability in their quarterly revenue performance as a result of when projects are completed. Gross profit for the quarter was $112.9 million, flat from last year. Gross margin was solid at 34.7%, down 80 basis points from the year ago period. The period benefited from an organic gross margin rate of 35.7%, a 20 basis point year-over-year improvement, while Indoff gross margins were 21.7% and in line with their historical performance.

Management of our margin profile remains a key area of focus. However, we expect continued variability throughout 2023 as we navigate seasonality, work through select categories of inventory that maintain a higher cost profile and look to continue to drive value for our customers through competitive price initiatives. On a historic pro forma basis, the addition of Indoff would have resulted in approximately 200 basis points of lower gross margin rates due to the margin profile of their business. Given this impact to our composite margin profile and the other factors I noted, we expect a consolidated gross margin decline in the third quarter. Selling, distribution and administrative spending for the quarter was $83.8 million or 25.7% of net sales, an improvement of 20 basis points from last year.

SD&A primarily reflects the fixed cost nature of the business, along with the inclusion of approximately $0.7 million in transaction-related expenses in the quarter. Offsetting these non-recurring charges was a reduction of approximately $2.2 million in variable compensation related to performance against internal plans. We continue to maintain strong cost controls and evaluate additional opportunities to optimize our structure. Operating income from continuing operations was $29.1 million in the second quarter, and operating margin was 8.9%. Organic operating margin was 9.3%. With a strong commitment to invest in our long-term growth initiatives as well as the addition of Indoff, our composite operating margin is likely to be lower than historical periods.

The company is actively working to introduce cross-selling and private brand opportunities for Indoff sales partners to enhance the margin profile of the Indoff business. During the quarter, we generated strong cash flow from continuing operations of $37 million. Total depreciation and amortization expense in the quarter was $1.5 million, while capital expenditures were $0.7 million. As a result of the Indoff acquisition, the company incurred approximately $0.4 million in amortization expense and expect amortization after this year will be $3 million annually. We expect 2023 capital expenditures in the range of $6 million to $8 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 1.6:1. As of June 30, we had $44.9 million in cash and $40.3 million of debt. We utilized our $125 million credit facility to fund $50 million of the Indoff purchase price, $10 million of which was paid down in the quarter, and ended the quarter with over $79 million of availability under the facility. We anticipate continuing to pay down the loan balance using free cash flow generated from the consolidated businesses. 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.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Ryan Merkel with William Blair. Please go ahead.

Ryan Merkel: Hey, Barry. Hey, Tex.

Barry Litwin: Good afternoon, Ryan.

Tex Clark: Good afternoon, Ryan.

Ryan Merkel: My first question is on the price deflation comment that you made. Can you just quantify for us how much was price deflation in the quarter of the 5% organic sales decline? And then what’s the source of the deflation? Is it competitive price pressure? Or is it just container costs coming down and you’re passing on lower cost to customers?

Barry Litwin: Yes, I would say from a standpoint of the rationale around it, I think there is two elements, Ryan. I think, one, certainly, customers are looking for value, right? So we’re looking at competitive price position each day and moderating selling prices in that manner. So I think that’s the state of where we see the customer base right now. Really, price is a big deal. So I think right now, we’ve been adjusting. But at this point, I think much of our pricing to the market is fairly stabilized. Certainly, we benefited from lower-cost containers. That’s helping the business. Certainly, we’re continuing to try to drive out higher cost inventory and attaching to lower cost inventory rates as we drive more turns and rebuys, which is certainly going to help us throughout the balance of the year and sort of at the beginning, but that’s the primary driver of what we’re seeing right now from a market perspective.

Tex Clark: And Ryan, I’ll expand on that just a bit as well. As you noticed our organic gross margin was 35.7% as we highlighted. So we did see some improvement in that. So a lot of that was that, that pricing was passing through those lower costs, as Barry mentioned, as we’re taking advantage of that is mixing into our FIFO layers, and we’re able to push that through. But obviously, we’re obviously constantly monitoring what the pricing is in the market of many of our product lines. So again, low single digits was the impact of the pricing, kind of the price pullback in the period, and we expect that to be stable going forward.

Ryan Merkel: Okay. That’s helpful. And then I understand the small and medium customer is a bit cautious here. I’m hearing that from others. What about the enterprise customer? Are you still seeing growth there?

Barry Litwin: Yes, I think when you look at the end use markets, Ryan, I would say that we are probably seeing the manufacturing segment challenged a little bit more than some of the other segments we are participating in. I would say that’s primarily coming off our managed sales organization, which deals with the larger customer segments. We have seen even the ISM index has produced, I think for July came out today as well, fairly flat to slight contraction as well. So, I think it’s a good signal in terms of where we have seen manufacturing. And that’s where we have kind of seen most of the softness. But I think from an organizational perspective, we are continuing to invest in sales and marketing to help drive penetration into those key customers look for new opportunities and continue to fight against some of the downward pressure there.

Ryan Merkel: Okay. And then last one, and I will pass it on. You mentioned trends improved through the quarter and at the end of the quarter. Anything to call out there that you have heard from customers, or is it company specific, some of the things that you have been working on that you think are showing up and helping sales?

Barry Litwin: Yes. It’s a good question. I think certainly, we have seen nice improvements on the e-commerce side of the business, certainly, as we have made significant enhancements into the website, and we continue to do that. We have seen some nice growth there as well, which we highlighted in the call. I think from a customer perspective, I think when you think back to Q1, kind of early Q2, there was – certainly, customers have been a little bit more cautious. We have seen some volume that has started to materialize that may have been negotiated and quoted early, very early in the period, even dating back to the early part of Q2 and end of Q1. So, I think we are seeing possibly some of those customers starting to come to the table and then look to transact.

Ryan Merkel: Got it. I will pass it on. Thanks so much.

Operator: Your next question comes from Anthony Lebiedzinski with Sidoti & Company. Please go ahead.

Anthony Lebiedzinski: Hi. Good afternoon and thank you for taking the questions. So, first, just a follow-up about the price deflation, is that kind of across the board in terms of the merchandise categories, or is that kind of concentrated into some certain parts of your business?

Barry Litwin: Yes. I think when we tend to look at pricing, and we talked quite a bit about pricing intelligence, we use a lot of tools to help us understand where the market is. Anthony, I would tell you that it’s – I would say that you would see it really across the board, across much of our core products as well. As we leverage kind of some of the cost benefit, we are starting to see come down in the market. Relating to the ocean freight container cost and as we negotiate our COGS in the business, our goal has always been to kind of pass on that value to customers and keeping ourselves close to the competitive nature of our business on pricing. We have seen most of our major category segments. We have gotten a little bit sharper there.

Anthony Lebiedzinski: Understood. Okay. And then switching gears to the Indoff acquisition. Can you talk about the synergy opportunities that you may have there? I know you mentioned private label expanding your own products to Indoff. So, maybe you can maybe talk about as far as timing, when should we expect that to happen?

Barry Litwin: Yes, it’s a great question. Look, we have been really happy with the process so far. We made the acquisition in May. We think it’s going very well, primarily because we believe it’s a really strong strategic and cultural fit with the broader Global Industrial, helps diversify our operations. It does give us new reach into new customers and markets and I think strengthens the direct sales approach and provides a lot of core product alignment for us. When we went into it, certainly, their margin profile is a little bit lower given the nature of what they sell. And our private brand assortment creates a good opportunity for them to sell a higher value product into the market and do so at a little bit higher margin rate.

So, it’s been progressing really well. I think Tex mentioned in his comments, we have put a focus around educating that organization on our private brand assortment. It’s been – it’s come across very, very well. We have incorporated a ton of training up until this point with their sales force. And it’s hard to train everybody very quickly. It’s an ongoing process, but the sentiment of their organization to participate with our team and working together as a collective group to try to drive our volume has been very, very well received. We have been really happy with this acquisition at this point.

Anthony Lebiedzinski: That’s great to hear. And then today Indoff is primarily a project-based business. So, how much visibility do you guys have into that business? And are those projects more or less kind of whatever or – whatever is happening, are those kind of set in stone, or are those cancelable? I know you mentioned that there could be variability quarter-to-quarter because of this. So, I just wanted to get a better handle on how to think about that.

Barry Litwin: Well, I think the project-based business, by its nature, it becomes a little bit more lumpy throughout the year where the Global Industrial business is a little bit more on kind of an everyday business. We have been transitioning more to that. So, we do have – their organization is – and leadership there on the sales side has been together for a very long time. They have a good perspective of deals that they have in the pipeline, and we share that information and discuss it. And as we start to connect some of the data between the new business, particularly as it relates to sales and product performance, we are getting very good visibility. And I think utilizing some of our tools here at Global Industrial, I think the Indoff team has been enjoying some of the capabilities that we have that is making visibility to their business even better.

So, like I said, it’s very early days, Anthony, being we just consummated the deal in May. But I think we will get a lot better visibility with the business as we go along.

Anthony Lebiedzinski: Alright. Well. Thank you and best of luck.

Barry Litwin: Thank you.

Tex Clark: Thank you.

Operator: This concludes our question-and-answer session. The conference has also now concluded. Thank you for attending today’s presentation. You may now disconnect.