Q2 2021 Global Industrial Co Earnings Call

Good afternoon, ladies and gentlemen, and welcome to global Industrials second quarter 2021 earnings call.

At this time I would like to turn the conference over to Mike Smart Jossey of the Plunkett Group. Please go ahead.

Thank you and welcome to the global Industrial second quarter 2021 earnings call.

Leading today's call will be Barry Litwin, Chief Executive Officer, and Tex Clark Senior Vice President and Chief Financial Officer.

<unk> 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 other risk factors and the company's annual report on form 10-K, and quarterly reports on form 10-Q.

This press release is available on the company's website and has been filed with the SEC and our form 8-K. This call is the property up and is copyrighted by global Industrial company.

I will now turn the call over to Barry Litwin.

Thanks, Mike Good afternoon, everyone and thank you for joining us.

Today marks our first call as global Industrial Company and January we launched our new brand identity and in June we changed our name and ticker to reflect our new long term strategic vision and position as the leading pure play industrial distributor.

The business that is today global industrial was founded and $19.49 and has always been at the core of who we are as a company.

This was an exciting change and we're now fully aligned with all stakeholders under the global industrial brands.

Turning to our results we delivered a strong second quarter performance on both the top and bottom line revenue increased double digits for the fourth consecutive quarter growing over 12% of $272 million.

Customer demand was healthy throughout the quarter with solid performance across core categories and within global industrial branded products.

And we were very pleased with profitability as we delivered gross margin gains on both the year over year and sequential basis, reflecting continued execution on our strategy and completion of the transition to a new third party logistics partner the elevated costs associated with the transition and are now fully behind us.

Ahead of the timeline, we shared on the first quarter call.

Our success continues to be grounded and our <unk> strategy and the execution of our playbook across the organization. Our associates have fully embraced our customer centric mission and we are accelerating our ability to deliver an exceptional and frictionless customer experience.

And the reopening of businesses and a growing economy has helped fuel the recovery and core product lines and we are seeing strong demand for global industrial branded products and both traditional and new product categories.

Private branded products remain our fastest growing offerings, which is a direct result of efforts to increase the share of total sales and continued life line expansion.

Investments and pricing intelligence are helping us navigate the challenging inflationary and supply chain environment, and providing timely insights into movements and the market. We are watching price dynamics closely to maintain both the margin rate and price competitiveness, we have and will continue to capture price in line with the market while.

Ensuring we are delivering value to our customers.

Supply chain labor availability and freight disruptions continue to be widely reported across all segments of the economy similar.

Similar to how we responded to the need for PPE products last year, we are utilizing our operational flexibility and entrepreneurial spirit to proactively manage these challenges and our teams are doing a terrific job.

While we have seen temporary stock shortages and select pockets of our offering overall product supply has remained healthy.

Importantly, we have good visibility into our supply chain with many of the constrained products currently and transit. We believe supply of these products will continue to improve as we move through the second half of the year.

And the sales and marketing front, we are seeing improving sales efficiency and a significant enhancement of our digital presence, we have modernized and improved the online checkout process and launched the global industrial knowledge center of digital content rich resource designed to empower customers with expert advice.

And knowhow and the topics they need to succeed and growth.

It includes original articles entertainment and information of short and long form videos info graphics and Webinars.

Our annual National trade show will be back as a live event and the week of November 8th and Nashville, Tennessee. The Tradeshow provides a unique opportunity to once again engage customers face to face and allows us to highlight our leadership vendor relationships and breadth of offerings.

And the show provides an excellent opportunity to generate new digital content that will be featured on our website.

In conclusion with our a strategy in place we are strengthening our position as a trusted business partner to our customers. We are making strategic investments that allow us to better execute operationally enhanced digital capabilities and deliver and exceptional customer experience and.

And as we execute on these efforts we are building, a scalable and infrastructure that will support future growth and positions us for long term success.

With the powerful customer growth model, we remain well positioned to further capitalize on the shift to <unk> E Commerce global industrials, bringing additional value driving satisfaction levels, increasing loyalty and building deeper relationships with customers.

I'm proud of the progress we've made and the first half of the year and look forward to a successful 2021.

I'll now turn the call over the text.

Thank you Barry.

I'll now address our performance in more detail.

And the second quarter revenue grew 12, 6% over Q2 of last year revenue was $272.6 million U S. Average daily sales growth was 12, 3%, while Canada average daily sales growth grew 4.9% and local currency.

We saw weekly sales volume growth each month during the quarter compared to last year and exited the exited the quarter with low single digit growth and June I guess increasingly strong growth comps last year.

I would like to remind everyone that we had a record performance in the third quarter of 2020 with revenue growing 17% and record profitability with PPE and sanitizing supplies, making up roughly 11% of sales.

Customer demand was strong throughout the second quarter and outpaced our invoiced net sales growth.

Open orders increased as we moved through the period due to supply chain constraints, which delayed our ability to fulfill select dropship and stocked products.

Many of these products are currently and transit and we expect to maintain a more normalized inventory position moving forward.

We recorded growth across all sales channels led by ecommerce, which accounted for approximately 57% of our transaction count of 100 basis points from the prior year.

Sales benefited from the continued rebound of core product lines and our private label offering once again increased as a percentage of total sales.

Consumable products within the pandemic assortment, including PPE and sanitizing supplies made up of approximately 3% of sales and the second quarter, which is in line with pre pandemic levels in the low single digits.

And this compares to approximately 20% of sales and the second quarter of last year, which was our pandemic peak for PPE as a percentage of total customer demand.

Gross profit for the quarter was $98 million and increase of 15, 6% from last year.

Margin was 36% up 100 basis points from the prior year and up 520 basis points on a consecutive quarter basis.

We were very pleased with the rebound and margin from the first quarter of the year.

Gross margin performance reflects freight cost normalization as we address the impacts of our transition to a new carrier network favorable product margins as private label offering and capture a larger share of the sales mix price rationalization and the benefit of a lower cost of FIFO inventory sell through with increasing selling prices.

Supply chain pressures, including transportation and ocean freight costs port congestion and container availability are expected to remain elevated.

And we remain focused on maintaining and normalized gross margin profile by driving higher margin of sourcing channels.

Price capture and continued up and optimization of our carrier network.

Selling and distribution and administrative spending for the quarter was $73.3 million or 26, 9% of net sales and 20 basis point increase as a percentage of sales from last year.

SG&A, primarily reflects increased marketing investment to support customer and demand shift the core product lines and private label and away from PPE, partially offset by fixed cost leverage of sales volume grew.

Distribution center and labor availability remains tight and we're seeing wage pressures increase as a result.

We continue to make planned investments and growth initiatives, including and our E Commerce platform and distribution network, which was sort of to support future expansion and customer satisfaction levels.

Operating income from continuing operations was $24.7 million and operating margin improved 80 basis points from last year's second quarter to 9%.

Total depreciation and amortization expense from the quarter was zero point of $9 million capital expenditures for the second quarter were $1.2 million and we expect total of 2021 capital expenditures and the range of $5 million to $7 million, primarily comprised of maintenance related capital and the recent expansion of our New Jersey distribution Center.

Operating cash flow from continuing operations was $11.6 million and the quarter.

During the quarter, we reversed approximately $3.4 million or <unk> <unk> per diluted share and valuation allowances against the net operating losses and deferred tax assets of our Canadian subsidiary the.

The tax benefit of the reversal is recorded in continuing operations.

Let me now turn to our balance sheet.

We are of very strong and liquid balance sheet with the current ratio of 1.5 to 1.

As of June 30, we had over $41 million of cash zero debt and availability of $72 million of our $75 million credit facility.

We maintain significant flexibility to fully execute on our strategic plan and continued to fund our quarterly dividend.

As a result, our board of directors declared a quarterly dividend of <unk> 16 per share of common stock and we anticipate continuing a regular quarterly dividend and the future.

This concludes our prepared remarks today operator, please open the call for questions.

We will now begin the question and answer session to ask the question you May Press Star then 1 on your Touchtone phone and people are using a speakerphone. Please pick up your handset before pressing the key.

To withdraw your question. Please press Star then 2.

Our first question today comes from Ryan Merkel with William Blair.

Hey, everyone. Thanks for taking the questions.

And how are you.

Alright.

So my first question is on gross margin I guess the 2 part question first how are you managing rising freight and product cost and then secondly is the gross margin rate that you just put up to 36% is that sustainable into <unk>, because typically I think seasonally and you'd be pretty consistent there.

Just wondering if theres any change this year.

Yeah couple of a couple of things Ryan of Great Great question given the.

Given the times we're in.

We believe we've got good visibility to our gross margin through.

Moving through the end of the year I think on a couple of aspects. We worked very hard on the freight cost side.

So I think we understand kind of the fundamentals around ocean freight and other areas that.

I have a rising and increasing costs in the market. So we feel that we've adjusted appropriately I think given the supply constraints and the market as well that had a impact on obviously rising prices.

<unk> are aware of that.

And they're willing to pay for availability and that's also helped and we don't see that necessarily lessening through the through the end of this year when that happens.

I think given the market dynamics and how we've leveraged a lot of pricing intelligence data and the market.

We're not in a position where our pricing is out of line, we kind of know where we need to be and the market and that is helping us drive some of some increase and we.

We're pretty pretty confident in terms of.

Continuing to maintain that through the year.

Okay, and it's great to hear.

And then my second question is on sales.

And you obviously have some tough comps coming up and the second half and just how should we think about the second half should we should we kind of think about it 3 Q typically it's pretty consistent in dollars for sales force <unk> and then you have the typical dip and <unk> or is there any reason it would be different this year.

And we gave a little bit of of flash obviously through our through June in terms of you know, where we have had and you're right. It's techs had mentioned we have a really strong comp because we had a terrific Q3 last year and I'll tell you, we still see really really strong demand from the customer side and managing of that.

And we mentioned on the call. We've we've definitely seen kind of our our demand outstrip some of our net sales delivery, but that's going to that's going to smooth out going forward. So.

So it's definitely a.

Tougher comp quarter for us and.

And like you guys know, we don't really give a ton of guidance relative to sales going forward, but I.

And I think we're seeing some of the dynamics in Q2 relative to top line demand and net sales delivery given the supply chain and supply chain constraints continue.

And for most of the year, so hopefully that answers some of it.

That's helpful. All right. Thanks, I'll pass it on.

Yes.

Our next question comes from Anthony <unk> with Sidoti and company.

And yes, good afternoon, yes, hi.

Barry and text.

Thank you for taking the question. So I'm just wondering if you know as far as.

You know here of a.

We're hearing more of stuff about the the delta of areas and so all of that it's just just wondering if you guys have seen any changes and your customer buying patterns here lately because of that.

Yeah.

I would tell you that.

I think certainly across the country as you see some of the.

Indoor requirements of the state level, certainly with the schools and other areas starting to require.

Some of the math back.

We would expect to see some light elevation and that area I don't think necessarily near where the.

And the country saw last year at this time.

But certainly we've seen a little bit recently, but I don't think.

Like I said and I told not the last year's levels by any means.

Yeah and they've been.

And I'll just supplement that alright, and then I think it was 1 more and I think if 1 thing they would think about maybe not related to the delta variant, but and things like outdoor furniture, and those areas, where where we do see our clients and our customer is looking to continue to build out of the outside of their facilities to be able to give their and their workers and their other associated bad debt ability to tap and non indoor gathering.

Area. So that's continued to be elevated, but that's really been related to 2 and overall shift we've seen and the lives last year, maybe not related directly to this to this recent surge that we've seen.

Got it Okay, and then and if.

And you do see a further increase and sales for those types of products do you have adequate inventory you think of for whether it's masks or other things.

I think we have enough given the probably the level of the lower level of demand at this point, but we are perfectly positioned to be able to go into the market and procure more if needed.

And we track all of our inventory levels based on the run rates of all the different commodities, we sell and.

We're definitely prepared to go in and make buys of if we see volume coming coming up to those levels beyond our safety stocks.

Got it Okay, and then you mentioned that.

You increased your private label penetration can you give us a sense as to where you were and the second quarter.

Barrels of and I'll jump and can be jumping on that line.

And we don't that's of a number that does fluctuate quarter.

Quarter to quarter based on seasonality. So we've not disclosed that number on a quarter by quarter basis, we exited last year, approximately 40% and we've seen continued sequential increases from that point on to bolt and Q1, and then into Q2 and then again based upon our seasonal product mix. We do typically expect that debt remain kind of at its peak into the kind of that third.

Quarter again, primarily comprised of HVA C and other outdoor furniture as debt and that really helped drive that debt like that ratio up but again, we don't give that specific quarter to quarter guidance, but it was elevated both sequentially and year over year.

Got it Okay and then the last question from me. So your SG&A expenses debt did increase you know us at a slightly faster pace than your revenue growth here in the quarter.

Just wondering as to how we should think about the <unk>.

Modeling of expense growth here going forward the for the back half of the year.

Yes, I think I think to a couple of areas and I think when you think about some of the SG&A certainly the market for.

For our core products is very healthy right now so we're continuing to lean more into advertising marketing and sales expense as we go forward, but it's managed against our targets. So I think we saw a little bit of impact there.

And a little bit of wage creep relative to our Dcs. So.

Those are all the we expected in today's market and we continue to keep ourselves with in line within our SG&A budget targets through the end of this year.

Got it alright, well, thank you and best of luck.

Thanks Anthony.

Thank you.

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