Q3 2021 Global Industrial Co Earnings Call

Good afternoon, everyone and welcome to global Industrials third quarter 2021 earnings conference call.

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At this time I would like to turn the conference call over to Mike Smartly Yassi Investor Relations Sir.

Please go ahead.

Thank you and welcome to the global industrial third quarter, 2021 earnings call leading.

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 in a form 8-K. This call is the property of and is copyrighted by global Industrial Company I will now I'll turn the call over to Barry Litwin.

Thanks, Mike Good afternoon, everyone and thank you for joining US we delivered a solid third quarter performance and are very pleased with our execution across the business. Despite a modest decline in net sales customer demand was strong and accelerated in the quarter with continued growth in core product lines led by private label.

Continued constraints within the supply chain contributed to a significant increase in open orders, which negatively impacted top line results in two ways.

Due to delays in order fulfillment times, our conversion of customer demand and net sales was much slower than our typical conversion cycle.

We believe that the combination of both extended lead times as well as the volatility of in stock positions key products caused customers to defer buying decisions and limited our ability to maximize sales.

Most margin set a new quarterly record of 36, 8% and we delivered over $30 million of operating income in the quarter with operating margin of 11% matching our quarterly margin record.

This was a significant achievement in a difficult environment.

Our operating performance reflects the efforts of our associates as they continue to execute on our <unk> strategy and manage through supply chain challenges. This.

This includes strong execution, a number of key areas, including.

Price intelligence and analytics, our enhanced pricing capabilities are essential to our top line and margin performance in the quarter investments in this area are providing timely insights that allow us to capture price in line with the market, while continuing to deliver value to our customers.

Also private brand we have seen continued growth in our global industrial and other private branded products, which deliver a high quality and attractively priced offering to customers as well as driving a higher composite gross margin.

It also allows us to leverage more than 40 years of private brand experience to deliver product innovation, while providing greater insight to our procurement process and control of our supply chain.

Also digital initiatives, a new branding our continued investments in digital capabilities is generating a better online customer experience through our new search engine taxonomy and personalization.

And our name change to global industrial companies New logo accompany awareness campaigns are helping drive brand recognition and casting a wider net to attract customers.

Finally, our one to one man who's selling organization under the leadership of quality issues is driving increased demand and advancing our selling strategy.

As we move board and look to 2022 and beyond we are making further investments in the business to position us for sustainable growth profitability and success.

We are continuing to invest in talent and in September we welcomed Alex told me to the newly created position of Chief merchandising Officer.

Where he will be responsible for developing and driving merchandising strategy and operations.

On the heels of this appointment we introduced our Trash-talk E connected trashcans and a floor care equipment line.

We also recently launched a new GPO relationship and look forward to developing this new business development opportunity.

Finally next week, we will host our national trade show in Nashville, Tennessee.

And look forward to showcasing our global product offering and extensive vendor relationships.

In conclusion, there is a level of excitement across the company because the challenges of last year and a half have made us stronger more creative and more resilient, while elevating the value we bring to market.

We are executing on our strategy and enhancing our ability to deliver an exceptional customer experience.

There are signs that the general business environment remains healthy as indicated by our demand for core product categories.

While supply chain labor and freight disruptions continue we are proactively managing these challenges and utilizing our operational flexibility and onto new entrepreneurial approach to address them.

And we have been very pleased with our ability to deliver strong margins in the current operating environment.

We are investing strategically in the business remain disciplined in our cost management and believe we are well positioned for the future.

I will now turn the call over to Tex.

Thank you Barry I will now address our performance in more detail in the third quarter revenue was $277 $4 million a decline of approximately 3% over Q3 of last year.

U S average daily sales declined three 5%, while Canada average daily sales increased one 3% in local currency.

Sales improved each month during the quarter in effort to normalized results against the surge benefit of PPE sales in 2020.

We know our two year CAGR was six 6%.

We saw continued growth in core product lines, and our private label offering once again increased as a percentage of total sales are.

Our performance was highlighted by growth in our managed sales channel as well as ecommerce orders, which continued to increase as a percentage of total transactions.

Customer demand expanded in the quarter and the rate of growth improved each month, however, due to the supply chain environment, we experienced extended fulfillment times and continued to see an elevated number of open orders for both stocked and drop ship products.

We are cautiously optimistic that the supply chain will normalize over the next six months.

Consumable products within the pandemic assortment, including PPE Sanitizing spies made up approximately 3% of sales in the third quarter, which is in line with the second quarter of this year and our pre pandemic levels in the low single digits.

This compares to approximately 11% of sales in the third quarter of last year.

Customer demand for non PPE products was healthy in the quarter, reflecting the continued mix shift to core product lines.

I would like to remind everyone that the fourth quarter of 2021 will have 61 selling days in the fourth quarter of last year contained 66 billing days. In addition, fourth quarter of 2020, eds improved approximately 16% and PPE and sanitizing supplies made up roughly 9% of sales.

Gross profit for the quarter was $102 million roughly flat from last year.

Gross margin was a quarterly record of 36, 8% up 100 basis points from the prior year and up 80 basis points on a consecutive quarter basis.

Gross margin performance reflects the impact of price rationalization favorable product margins as the private label offering capture a larger share of our sales mix and the benefit of lower cost FIFO inventory sell through with increasing selling prices.

While supply chain pressures, including Ocean freight remain elevated.

We have been able to largely mitigate their impact we anticipate that our ongoing initiatives to drive higher margins sourcing channels pricing analytics and freight optimization should help us maintain our margin profile in the current environment subject to the normal variations arising from product and customer mix, which do vary by season.

Selling distribution and administrative spending for the quarter was $71 $4 million or 25, 7% of net sales up 90 basis points as a percentage of sales from last year and down 120 basis points on a sequential quarter basis.

S. DNA, primarily reflects increased marketing investments to support customer demand shift to core product lines and private label head away from PPE as well as increased distribution center compensation.

We continue to maintain strong cost controls, but if the labor market remains tight we do expect to see additional wage pressure.

Operating income from continuing operations was $30 6 million and operating margin was 11%.

Equal to a record high margin quarter realized in the third quarter of 2020.

Total depreciation and amortization expense in the quarter was <unk> 9 million.

Capital expenditures for the third quarter were $1 $3 million can we expect total 2021 capex expenditures in the range of $4 million to $5 million.

Primarily comprised of maintenance related capital opt.

Operating cash flow from continuing operations was $18 $8 million in the quarter.

Let me now turn to our balance sheet.

We have a very strong liquid balance sheet with the current ratio of one six to one <unk>.

As of September 30th we had over $54 million in cash zero debt and availability of $72 $5 million of our $75 million credit facility, which was recently extended through October 2026 on largely the same terms.

We maintain significant flexibility to fully execute on our strategic plan and continue to fund our quarterly dividend as a result, our board of directors declared a quarterly dividend of <unk> 16 cents per share of common stock and we anticipate continuing a regular quarterly dividend in the future.

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

Ladies and gentlemen at this time, we'll begin the question and answer session.

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Once again that is star and then one to ask a question. Our first question today comes from Ryan Merkel from William Blair. Please go ahead with your question.

Thanks, and good afternoon.

Hi, Ryan.

Brian.

So I wanted to start with your comments on limited product availability and the increase in open orders or the product shortages broad based or was it isolated to several items and then are you going to book the open orders next quarter and if so how big is the impact.

Yes, it's a great question, Ryan and I would tell you that I think there was a fairly even balance between the type or let's say the mix of products that we saw flow through I mean certainly are.

Our private label balance of sale has been very strong given the core growth, but certainly in terms of open percentages, we definitely saw a.

A fair mix between both the stock and drop ship.

And the extended lead times that are occurring in the supply channels that support each of those each of those markets.

We definitely have seen as we said in the prepared remarks.

Elevated.

Open during the period as our revenue continued to grow at least book demand and we've seen.

Fairly smooth percentage of <unk>.

Backwater reductions we've been very.

Creative relative to how we're trying to drive the flow through.

The supply given the challenges in the channel right now.

We continue to see some fairly healthy customer demand come through and I think the organization has been fairly resilient in how we're trying to pull through products both from drop shippers.

As well as overseas manufacturers, so we will see a fairly smooth and consistent.

Flow through of that product as far as we can see right now.

Okay. That's helpful and just a follow up is there a way to quantify the impact in the quarter or was it a couple of points of sales growth that you lost or was it bigger.

Yes.

Yeah go ahead Barry.

But the way that we're necessarily.

Kind of quantify or disclose really in the marketplace, but certainly.

If you're if you're out of certain key products, it's definitely going to impact some of your some of your top line growth and we definitely have had that impact in the period.

But I think our our book to bill rates relative to how we looked at the business.

Was challenged due to that so we certainly have plenty of demand.

And I think we're going to continue to try to quantify and look at what.

Got that.

The impact is longer term, but.

I think from the actual numerical usually don't go through that and disclose it.

Brian I can supplement that a little bit. So if you think about right. If we reported net sales down 3%, but our customer demand was up actually year over year. So we saw growth. So when you think about that that delta is going to be again, a little more than more than three points clearly, but in that kind of a single digit range of.

Impact. So it was it was not de Minimis, and obviously, where despite challenges do continue to exist, but we are fairly fairly cautiously optimistic that we will continue to get a normal normal fair share of our flow through.

Into into Q4, and then into the new year.

Got it Okay. That's helpful and then.

For my follow up I was impressed with your gross margins. This quarter, obviously improves at a lot since the first quarter what was the growth rate of private label and if you have it as a percent of sales in the quarter and then I'm curious if higher inflation boosted your gross margins tax I think you might have mentioned that your remarks, how big if so how big was the <unk>.

<unk>.

Yeah, and I'll I'll take that Barry and then you can supplement so Ryan obviously private label products, while again, well, we tend to update that on an annual basis, rather than quarter to quarter. It was our fastest growing sourcing channel in the period, which obviously does contribute to a increase in gross margin rate and also provides that sustainability that we see.

Yes.

It's really part of the core strategy of moving moving product and moving our customers to that high value.

Product that we reproduce that near our private brands. So that's it's an ongoing opportunity and absolutely. There is a there is a benefit from price increases in the market and being able to time, those really monitoring the market using our analytics and intelligence capabilities. The software we used to really monitor pricing, where you're able to capture some price on the front end as costs are going.

Up and again, you get that FIFO benefit to be able to sell through so that if pricing definitely played a part in it both.

Both strategically and timing.

Help support that growth, but continuing to improve and again you mentioned, obviously Q1 is as a reference point as you remember Q1, we had some pretty significant impact of ocean freight and some other freight challenges in that period, which have which kind of highlighted those are all good.

The domestic freight challenges and costs are already behind us that was a transitory impact in the first quarter and we're really working through that because there was the ocean freight costs, which are continuing to be elevated but we've got a pretty good job at this point of being able to pass those through to our customers.

Yeah.

Great. Thanks, Alright, I'll pass it on.

And ladies and gentlemen, with that we'll be we'll end today's question and answer session as well as today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.

Yeah.