Q1 2022 Global Industrial Co Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the global Industrials first quarter 2022 earnings call.
At this time I'd like to turn the call over to Mike, It's Mike Hussey Punctate Baird. Please go ahead.
Thank you and welcome to the global Industrial first quarter 2022 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.
Yeah.
The press release is available on the company's website and its 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. Thanks.
Thanks, Mike Good afternoon, everyone and thank you for joining US we delivered an exceptional first quarter performance with record revenue and profitability driven by strong demand and excellent execution across the business.
Revenue of $288 million was a quarterly record and improved nearly 15% over the prior year for.
For the third consecutive quarter, we delivered record gross margin, which reached 37, 4% in the quarter.
And we generated over $29 million in operating income as operating margin surpassed 10%.
Looking at our results on a 12 month basis, we achieved double digit operating margin for the first time.
I am very pleased with how we have started 2022 it was truly a terrific quarter for global industrial and reflects the continued implementation of the strategy and most importantly, the commitment and efforts of our associates, who made it happen.
Focus on the customer continues to guide everything we do we are making further investments that will position us to expand market share and capitalize on our growth opportunities from.
From sales and marketing to digital technology procurement and distribution, we are enhancing the service, we provide and elevating the customer experience.
In the second quarter, we expect to launch a new digital ecommerce platform on both desktop and mobile that will redefine how we engage and interact with customers across all digital channels. We remain committed to digital leadership and this is a ground up undertaking designed to provide a completely new user interface and customer experience.
Our extended one to one managed sales organization continues to lead our growth. The team is making continued progress in the development of larger accounts as we look to grow share of wallet and build new customer relationships.
Our NASCAR sponsorship and partnership with Richard Childress Racing and Austin Hill is helping to drive brand awareness and increased customer and associate engagement.
It has been exciting to be a part of the 2022 NASCAR season and to capitalize on the benefits of this national platform brings to global industrial.
In Canada, we have seen tremendous growth, which has caused us to exceed the capacity of the current distribution network.
In order to support our continued expansion I'm pleased to announce we have entered into a long term lease for a new state of the art distribution center in the greater Toronto area.
Operations in Canada have historically been serviced through a cross dock fulfillment model rely on our U S distribution network.
And this new facility, which is expected to begin operating this fall will allow us to better service customers by significantly shortening delivery times.
Finally, we will be hosting our annual global industrial National Trade show on June 17th in New Orleans. This is an exciting event with more than 100 vendors that will showcase our industrial solutions Knowhow and leadership team.
In closing, we had a terrific start to the year with record revenue and profitability customer demand remains strong and we believe we are well positioned for long term growth. We continue to focus on operational excellence.
Embracing digital transformation and investing in our people private brand and operations execution of our strategy is strengthening our customer focus culture.
Living topline growth and delivering sustainable improvements in profitability, we continue to elevate our position as a trusted partner to our customers and remain excited about what the rest of 2022 hasnt stored.
I will turn the call over to tax thank.
Thank you Barry in the first quarter revenue was $288 6 million a quarterly record and increased 14, 9% on a GAAP basis over Q1 of last year U.
U S revenue increased over 14%, while Canada revenue improved nearly 22% in local currency.
Overall sales trends were strong throughout the quarter well open orders increased modestly due to growth in customer demand.
We continue to make progress in fulfilling back order positions and are making inventory investments in key product categories to support our growth.
Gross profit for the quarter was $107 $8 million up 39, 5% from last year gross margin was a quarterly record of 37, 4% an improvement of 660 basis points from the prior year and up 40 basis points on a consecutive quarter basis.
This was our third consecutive quarter of record gross margins gross margin improvement in the quarter reflects the impact of a normalized freight margins as compared to the cost incurred in Q1 2021 related to the transition of our new LPL Frank partner last year.
A continued increase in our balance of sale of our higher margin private brands.
The beneficial impact of price rationalization in an inflationary environment.
And a reduction in inventory adjustments as compared to a large PPE write down incurred last year.
In the face of ongoing supply chain and inflationary challenges, we continue to implement mitigation strategies, which have proven effective.
This includes driving higher margin sourcing channels pricing analytics and freight optimization.
While we do experience seasonal revenue and margin variations due to product and customer mix. We continue to believe that annual margin gains are sustainable given the ongoing benefit we recognized from an increasing balance of private brand sales.
Selling distribution and administrative spending for the quarter was $78 $3 million or 27, 1% of net sales an improvement of 110 basis points as a percentage of sales from last year.
SG&A, primarily reflects targeted expense management and fixed cost leverage on sales growth.
We continued to maintain strong cost controls, but expect to see higher levels of SG&A is 2022 progresses as we make growth related investments in key focus areas, including the new distribution center in Canada.
We will also see the impact of a company wide distribution center wage adjustment that was implemented early in the second quarter.
Operating income from continuing operations was $29 $5 million in the first quarter and more than four X improvement from the year ago period operating.
Operating margin expanded 760 basis points to 10, 2%.
Third consecutive double digit operating margin performance.
Total depreciation and amortization expense in the quarter or was there a point $9 million, while capital expenditures were $1 $1 million. We continue to expect 2022 capital expenditures in the range of $7 million to $9 million, which includes the new candidate D C.
Let me now turn to our balance sheet.
We have a strong and liquid balance sheet with a current ratio of one seven to one.
As of March 31, we had over $14 million in cash approximately $25 million of debt and availability of approximately $46 million under our $75 million credit facility.
Our debt position reflects the increased borrowings to meet working capital needs related to inventory investments to support longer lead times and our supply chain as long as the value of inflationary costs within our inventory.
We maintained 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> 18 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.
We will now begin the question answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time.
Pause momentarily to assemble our roster.
Yeah.
Yeah.
Thank you.
First question comes from Pullbacks from William Blair. Please go ahead.
Hey, good afternoon, guys and congrats on a strong start to the year.
Thank you.
So two questions from me first of all on the top line.
Is there a way to frame if any of the first quarter sales growth was at all a catch up from some of the constrained periods. We saw in the third quarter and the fourth quarter of last year.
Hi.
I'll kind of take real quick my view on that.
I will tell you I think I believe that what we're seeing is.
Current sales demand flowing both from.
Just overall business demand, we're seeing in the market right now and expansion of our sales organization.
We're definitely starting to see that revenue flow through.
The open orders for us has been fairly fairly consistent flat.
Flat over the last several periods. So our volume right now is still speaking to some fairly robust demand that we're seeing in the market.
And it's fair to say it is that alright.
Alright, yes.
Yeah, I'll just add to that yes, as Barry mentioned you had the open order value I'm really kind of kind of orders that were taken last period.
Actually what was modestly but very small we actually had a pretty good job of reducing some back orders, but new customer demand to fill that up and so we didn't see a large catch up on that open order, which disproportionately benefited Q1. It has been fairly stable for the last six months not eroding, but we have not seen a big catch up in that yet so.
That yes, just as Barry mentioned.
No. That's helpful is it fair to say that the robust demand and the velocity of orders has continued here at least so far into April and perhaps into early may.
Obviously, we don't give a lot of guidance in terms of current performance, but we've continued to see very robust demand market for ourselves right now.
And.
I've got definitely a good confidence going forward in terms of just the general market conditions for us so.
That would be my view on it.
Okay. No that's helpful. I appreciate that.
Switching to the inventory balance I couldn't help but notice on the balance were up about 50% year over year, and then I also noticed a little bit more of a short term debt to help float that so I guess my question is can you parse out maybe this is a question for tax how much of that is price versus volume increase in our U shortened.
Any key product lines or categories at this point.
I'll jump on that absolutely. So yeah, absolutely inventories up and I think the two to two primary reasons, absolutely the the price and the capitalization capitalization of Ocean freight that really goes into our inventory value absolutely has increased the value of inventory in our Dcs. The other piece that we really took a tick.
A significant look at in Q4, as we listen to our customers and still realize that availability has been.
The leading cause for or what are the leading reasons to win sales right now, making sure you have the product readily available for your customer and in order to make sure that we had that product in stock. We did have to increase safety stock levels. Because you have longer lead times, which will then overall increase that inventory in transit inventory on the water as well as the inventory you're holding in your distribution center ready to fulfill so.
So there definitely is a bit of a bubble that we purposely invested in to be ready when we look at kind of a what do we think about fill rates. We've definitely seen continued improvements in fill rates looking at it from last year into the early part of 2022.
Not that they're not at the levels back to where we were pre pandemic, but they are sequentially improving every period and we see some benefit there.
But overall again, while we haven't directly shape that it's.
It's both both a more more product because of that lead time as well as the higher value use of use of debt to fund that is I mean, we have a working capital revolver and we thought that was prudent use of.
Really having that inventory on hand, it is a key reason that we maintain that revolver. So while we were drawn more than we had been in the past we're not we're not overly concerned or it doesn't impact the liquidity of the business.
That's helpful. Two more for me.
Regarding the gross margin performance in the quarter, obviously very impressive.
Excluding the inventory charge in the prior year quarter, you guys were up 550 basis points is there a way to bucket.
Either in terms of magnitude or with.
With numbers.
How much of that expansion was driven by the freight carrier performance, how much is driven by inventory profits and how much was driven by other factors such as price optimization tools and private label expansion.
Yeah, Barry I'll try to take that if you want to add any color. Please. Please do so Paul yes, so let's just take out that inventory adjustment that we had called out last year for the for the PPE product.
The biggest the biggest factor year over year is obviously, a full year ramps of our transition.
From that LDL transition that we did last year on a new three PL partner that was a significant impact in the first quarter of last year normalized probably by the end of the second quarter and it stayed strong through Q3, and Q4 and really our freight margins have been fairly consistent in the first quarter this year and at a normalized level.
That's the biggest bucket.
The next biggest bucket will be that private label balance out and that's where we really see some some staying power in and as we've invested in our private label. It's obviously, we focus on high quality products for our customers. But then also deliver high high margin and high margin differential when you look at the sales of those products. So that would be that second kind of leading bucket of margin improvement and then the third will be going back.
That pricing analytics and the things that we really do tend.
It will be very very cognizant of when we're making decisions on how we price product for the customers how we're discounting.
In our managed organization and just overall, how we are managing the overall portfolio of products to make sure that we balance both revenue as well as that gross margin rate. So that would really be that third bucket. When we look at the magnitude of impact.
One last one.
I'd also add as it relates to the second piece around private label balance of sale and I think.
Given price inflation, that's in the market when I look across the peer side I do think that.
We've been looking at private label balance of sales shift as part of a strategy for the last couple of years. So I think it is really starting to come into its own and I would suspect that there we have a good good outlook in terms of where we think private label balance of sale can go for us and I think thats always going to be a positive gain for us.
Even as pricing starts to adjust in the long term I think that's going to be one of the keys for us and while we feel good about sustainment around gross profit levels.
No absolutely certainly encouraging to hear last one for me.
In the first quarter of course, the higher volume and price helped and you guys performed well in the SG&A line.
At the same time too with the incremental investments coming into the Canada DC facility does.
It your expectation that youll be able to continue to lever SG&A expenses in the second quarter and over the balance of the year.
I think that will be I think that we will be able to do that I think SG&A across the board I mean, we're definitely looking for gaining higher efficiency across the sales organization and the marketing organization relative to SG&A investment.
From a Canada facility and those numbers are put into our Capex and we're definitely looking at acceleration of our of our Canadian business to help offset and drive some of those costs.
No.
Do you think we have a pretty good feel for continuing SG&A leverage in the business and.
As the market grows and continues to expand we also want to be able to invest incrementally into the market, where we see opportunity, but right now we've been we've been pretty pleased with the overall efficiency, particularly in sales.
Marketing.
And what we think the DC can help drive in terms of increases in our Canadian business.
Okay.
Very good I appreciate the color guys. Thank you.
Sure. Thank you Paul.
Okay.
Thank you. Your next question comes from Anthony Lipinski from Sidoti <unk> Company. Please go ahead.
Thank you and good afternoon.
Thanks for taking the questions and certainly a very strong start to the year for sure.
So first question as far as the gross margins.
Seasonally speaking.
It looks like your Q2 and Q3 have been the highest gross margins.
Okay.
For the year do you expect that same type of seasonality that happened this year as well.
Yes, I think I'll jump in there. So when we think about why why that margin variation tends to happen in the summer is really going be more on the product mix.
As we sell more and more and more cooling and some of those outdoor products that are core to our category sales in the summer months, those typically have a higher private label balance and an overall better margin profile for the organization so that will be.
That macro factor within our business will be we do expect that to continue as we really move into that seasonal.
Summer selling cycle and at the same time, there is a lot of fluctuation in the market.
Obviously, I'm, probably a little bit more cautious, but we know that the fuel surcharges are quite high when we think about what's going on in the transportation sector.
Not unique to us, but it's everyone's dealing with that right now. So so we are going to be cautious and make sure that we're staying competitive with our pricing.
But again if that natural cycle holds true then, yes, there's a little bit of upside, but I think.
It's still a bit of a time of uncertainty with with some of the external factors that are impact gross margin.
For sure.
So.
You guys do a fair amount of imports from China have you been impacted by the Lockdowns there.
Obviously your inventory is much higher versus last year, but just wanted to get a better sense of what.
What youre, saying.
The health of your inventory, especially for your top performing products. Yeah. We've been we've been I'll tell you I think we've been.
Really very very close to the supply chain.
<unk> over the last over the last year since we started this back.
Back in 2021, so I.
I would say that we've definitely seen some improvement. This was mentioned earlier some of our in stock rates continue to climb.
Back, which I think is certainly going to help us relative to conversion and sales growth going forward.
From some of the impact in China is shut down we're staying very close to it.
We haven't seen material impact at this point, but we're definitely staying on top of it and it's something we're managing day to day business.
Yes sure.
And then.
Just overall as far as your longer term outlook.
Those acquisitions is that something you guys are still looking at.
I know you have a little bit of debt on your balance sheet, but it doesn't seem like that should impact your ability to look at M&A is that fair to say.
Yes, I mean, I think right now I think we talked a little bit about it last quarter, we're definitely keeping our eyes open relative to strategic acquisitions that can.
Can help drive further category growth for us can help drive further customer growth.
Along the way that we are driving very hard on our organic growth strategy. So that's kind of our primary goal in the company is to continue to drive Ace and drive great market performance.
But absolutely Anthony we are continuing to keep our eyes open for four acquisitions that makes sense for us.
And that's definitely part of our part of our approach and we feel we've got adequate.
Cash resources.
Abilities to go ahead and make those deals if they were they would have.
Lent themselves.
Got it okay. Thank you very much and best of luck.
Okay.
Thank you.
Okay.
That does conclude our conference for today. Thank you for attending today's presentation you may now disconnect.
Yeah.
Okay.
Okay.
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