Q2 2022 Global Industrial Co Earnings Call
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Good afternoon, ladies and gentlemen, and welcome to the Global Industrial's second quarter, 2022 earnings call. At this time, I would like to turn the conference over to Mike Smarjasi.
of the plunket group. Please go ahead sir.
Thank you and welcome to the Global Industrial Second Quarter 2022 earnings call. Leaving today's call will be Barry Littwin, Chief Executive Officer and Tex Clark, Senior Vice President and Chief Financial Officer. 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 for looking statements caption and under risk factors in the company's interreport on form 10K and quarterly reports on form 10K. The press releases available on the company's website and has been filed with the SEC on a form 8K. This calls the property of global industrial company. I will now turn the call over to Barry Littwin.
Thanks, Mike. Good afternoon, everyone, and thank you for joining us. Second quarter performance reflects the continued implementation of our A strategy and strong execution by the global industrial team. Revenue reached a quarterly record of over 318 million, growing nearly 17% with solid demand throughout the quarter. Gross margins remain healthy, but pulled back from the record performance in the first quarter of this year, reflecting the impact of freight fuel surcharges.
Certain promotional activities on excess and seasonal stock, as well as the flow through of some higher cost inventory. In terms of our bottom line performance, we delivered solar operating leverage and generated over $30 million in operating income, a 23% increase from the year ago quarter. An operating margin improved 50 basis points to 9.6% from Q2 of 2021. Overall, we were very pleased with our second quarter performance. Overall, we were very pleased with our second quarter performance.
as we made further progress on key digital, sales, marketing, customer, and distribution initiatives. We believe these investments will strengthen our competitive position and help us drive growth and capture additional market share from a highly fragmented industrial distribution marketplace. We are in the highly fragmented industrial distribution marketplace.
We remain focused on new business development, which is reflected by our expansion into additional end markets and sales channels. This includes our entry into larger government and private sector accounts and recent entry into the healthcare vertical. These efforts allow us to establish new customer relationships while leveraging global industrial's core product offering and sales organization.
Our one-to-one managed sales team continues to drive our growth and we are making investments in tools and technology to empower our team, putting the right data in their hands to improve efficiencies and enhance their value as a resource and partner to our customers. In the word, NARROX stands, adding value, deciding for a few decades to? your trust Auntie our customers.
Recently, we commenced the launch of a new digitally commerce platform, which we are rolling out to customers in a phased approach. This new user interface and customer experience highlights our digital leadership and puts the spotlight on the solutions and resources we provide. It's been a tremendous undertaking, drawing on talent from across the company to deliver a better experience for our customers.
It includes easier mobile navigation, personalized recommendations, auto reorder functionality, faster checkout, and the addition of pertinent Mallet Center content to product category pages to name just a few of the new features.
In June , we held Global Industrial's National Trade Show in New Orleans. It was a tremendous success and provided an important opportunity to interact face-to-face with customers and our vendor partners. One of the key takeaways for me personally was direct customer feedback around the value, our subject matter experts provide and praise for our sales team's ability to address questions and help solve problems. Does this highlight the direct impact of the customer-focused state's initiative?
the investments we're making, and the value our associates deliver every day.
As we enter the second half of the year, we remain focused on driving operational excellence, furthering our digital transformation and investing in private brand, logistics, and our people. We believe we are well positioned to continue to deepen relationships with our customers and capitalize on our growth initiatives.
While there remains a good deal of uncertainty around the economy, we have tremendous flexibility in our operations and have proven our ability to react quickly and proactively manage the business. and proactively manage the business.
during the past several years.
From tariffs to the pandemic and supply chain issues, we have addressed each one of these challenges head on, and as a result, we've become a stronger company.
I'm pleased with the progress we have made this year, excited for the numerous opportunities we have in front of us, and believe we remain well positioned to drive strong bottom line performance and value for our stakeholders over the long term.
I'll now turn the call over to Tex.
Thank you, Barry. In the second quarter, revenue is $318.5 million, a quarterly record, and increased 16.8% over Q2 of last year. US revenue increased 18.2% while revenue in Canada improved 2.4% in local currency.
Open orders reduced moderately in the quarter and are flat from the beginning of the year. We expect to make further progress fulfilling backorder positions in the second half of the year as lead times continue to normalize. Gross profit for the quarter was $113 million dollars up 15.3% from last year. Gross margin was 35.5% off 50 basis points from the prior year.
As highlighted in previous quarters, we chose to prioritize product availability for our customers during a time of substantial supply chain disruption. These strategic investments have enhanced our ability to serve the customer this year, but have resulted in higher levels of inventory. In addition, this inventory was acquired at a higher cost due to ocean freight inflation.
As supply chain reliability has stabilized, ocean costs moderated, and inventory availability has improved, we are actively working to lower inventory to more historical levels.
We continue to believe that long-term margin gains are achievable as we drive higher margin sourcing channels, continue to invest in high pricing analytics, and working to optimize our freight profile.
selling distribution and administrative spending in the quarter was $82.5 million, or 25.9% of net sales, an improvement of 100 base points from last year.
S-DNA primarily reflects targeted expense management and fixed cost leverage on sales growth.
We continue to maintain strong cost controls, but expect to see higher levels of SDNA in the second half of 2022, primarily due to the expansion of our Canadian distribution network, as well as continued investments in e-commerce and other technology enhancements.
We recognized initial costs from this new Canadian facility late in the quarter, and we'll see an increase in these costs as we continue to build out and transition operations from the current DC throughout the second half of the year.
Operating income from continuing operations was $30.5 million dollars in the second quarter, a 23.5% improvement from the year ago period. Operating margin expanded 50 basis points to 9.6%.
Total depreciation and amortization expense in the quarter was 0.9M dollars, while capital expenditures were 1M dollars. We continue to expect 2022 capital expenditures in the range of 7 to 9M dollars, inclusive of the new distribution center in Canada.
Let me now turn to our balance sheet.
We have a strong and liquid balance sheet with a current ratio of 1.7 to 1. As of June 30th, we had over $23 million in cash, $30 million of debt, and over $41 million of availability under our $75 million credit facility.
Our debt position reflects increased borrowings to meet working capital needs related to inventory investments to support longer lead times in our supply chain, as well as the value of inflationary costs within that inventory.
We currently expect inventory levels to reduce in the second half of the year.
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 accordingly dividend of 18 cents per share of common stock, and we anticipate continuing a regular quarterly dividend in the future. The Board of Directors declared accordingly dividend of 18 cents per share of common stock, and we anticipate continuing a regular quarterly dividend in the future. The Board of Directors declared accordingly
This concludes our prepared remarks today. Operator, please open the call for questions.
Thank you, and we will now begin the question and answer session.
To ask a question, you may press the star then one and then you touch the tone phone. If you're using a speaker phone, please pick up your headset before pressing the keys.
To withdraw your question, please press star then 2.
Our first question today will come from Anthony LeBazinski with Siddodeon Company. Please go ahead.
Yes, good afternoon and thank you for taking the questions. So certainly very strong. Top line performance and you're just wondering.
As far as pricing versus volume in the quarter, you just wanted to get a better handle on that, you can.
Yeah, hey Anthony, how you doing? Nice to have you on the call. Yeah, we definitely saw pricing and volume moving both in a positive direction during the period, which was nice to see. And I think certainly as we continue to drive more and more item availability, which is improving sequentially quarter over quarter, we'll continue to see both those moving in a strong direction, particularly the volume side.
Got it, okay. All right, so, so obviously, so you have been able to, I'll perform the market, you're just looking at the MRO market, that seems like you've continued to certainly outpaste that. So as far as the main reasons, is it the East strategy that's working, or is it something else, and kind of like, how do you think about the sustainability of that? And then kind of like, how do you think about the sustainability of that?
Yeah, great question. I mean, we're certainly pleased with the performance in Q2 and actually first half, you know, overall revenue. We definitely saw a good customer demand environment. You know, we continue to see that that really held consistent through the second quarter and continue to bid into July . We saw good strong growth on the category side both in core and private brand. As you mentioned, you know, our goal is to drive above market growth in the long term.
I think some of the growth that we definitely saw came from a few places, traditional, small, mid-sized customer base. We also saw continued growth from our larger enterprise accounts, which is really starting to do a nice job for us in helping our top line. And we're starting to see some new growth coming from our new healthcare channel, which actually launched in May. We're in early stages of that, but it's doing nicely.
The end of the day, our managed sales team has been really strong in leading our growth. We definitely see this team as essential to our growth. Certainly over the next several quarters, I think as I mentioned in some of the early comments, they provide a really strong personalized high touch customer experience. And as we continue to expand our customer base, we like the solutions that they deliver and generate results in great revenue growth for us. So great thanks for the thanks to the question.
During the problem. So, you know, Barry, as you mentioned, there's a lot of...
uncertainty about the economy where we go from here. So just wondering when you look at your different end markets, are you seeing any pockets of perhaps some slowdown or those are just curious if you are seeing it, if you are, then if you could just comment on what it was my thing. What it was my thing. What it was my thing. What it was my thing.
Yeah, great question. Certainly that's on everybody's mind this day, you know, these days. I mean, we still see a fairly robust market environment, you know, for us. There's certainly, you know, the economists and prognosticators talking about, you know, recessionary market conditions. You know, we're, you know, certainly not extending ourselves. I think we're being prudent in overall financial management of the company and how we're looking at our cost structure going forward.
and share growth, if there's some pending downturn in the market right now. But at the same time, I've not seen any necessarily differential in any of the end markets. Officials will not have to be the culprit.
We have a fairly, fairly good outlook, going forward over the next couple of quarters. So, but we're constantly asking our sales organization, customer sentiment. You know, it's one of the questions that I see each week. You know, how are customers feeling? Are we seeing budgets tighten? Those types of questions and we stay pretty close to it. So the minute we start to see anything, we'll react appropriately, but definitely, definitely a great question.
Alright, well, thanks a lot, that's all I have, best of luck.
Take that thing.
Next question will come from Ryan Merkel with William Blair. Please go ahead.
Thanks, good afternoon, everyone. Hey, Ryan.
All right.
So I wanted to start off with the inflation question. Are you still seeing price increases from your suppliers or is that starting to peak out at this point?
That's a great question. A lot of very timely.
We're definitely seeing some raw materials and price increases.
impacting us. I mean, we are starting to see on the freight side, particularly on ocean, starting to come down. There's silver record levels. They're not where we saw in 2019, but they are starting to succeed a little bit. And we think that's gonna help us with some price flexibility in the outer quarters through the end of the year.
Supplier side is kind of mixed. We are seeing improvement in the supply chain side, both on the domestic and international side. Like I said, it's not to, let's say, 2019 levels. But I think that that's reflected in some of the improvements in item availability for us, particularly items coming from overseas. And as we start to see item availability improve and some of the costs come down that like.
Is that something that you give back to your customers in pricing or is that something you keep? How do we think about that? How do we think about that?
Well, yeah, very, very good. Go ahead. Yeah, hey, Ryan, right. Thank you. So with the container rates, obviously, they have come down from the peaks that we saw in the late winter or late fall early winter into the first quarter. And as we think about that, that's the component of our cost of good sold. So as we think about our inventory levels, managed through the inventory, through our five-fold layers is that inventory starts to flow through lower cost. We do have the ability to be more flexible in our pricing. And obviously, competitive pricing is always that leading north star with how we want to price our products.
I want to ask a couple on gross margin. You explain why gross margins decline sequentially. How should we think about the second half? Can you see a lift? And into 3Q, if somebody's items you mentioned, press release, you know.
change or return to normal?
You know, I mean, I could take, we could take a kind of a couple different ways. Yeah, go ahead, Barry. Yeah, I mean, we certainly, yeah, we certainly came back, you know, a little bit on that. I mean, I think as I mentioned to you, you know, we're kind of at the apex on inflation. And certainly we're pushing through a lot of our high cost inventory to get that flow through so we can access some of those lower cost, lower cost, Fipo layers, you know, into the outer period. So we feel good about...
kind of the progression of where inventory is going for us. I think we've got kind of an extra chip in our effort to be able to go at that piece and it's moving nicely. Fuel costs have been another driver. I think we've definitely seen, it feels like we've seen the height. Hopefully some of the carriers start to come off of some of the incremental fuel costs that they've applied during the period. That could be helpful. We are taking, we have taken some surgical clearance pricing actions.
a solid margin story for the year. And the one ace in our sleeve is really our private brand shift. And we talked to you guys a lot about that. We've got almost half our volume sitting there and that's a great margin story for us despite whether we're a Costco. We have a defined strategy to really help drive more value through our private brand. And that's a nice multiple change in margin when we shift to private brands. So.
We continue to move that way, we continue our product development in that area. And I think that will help us offset any additional margin pressures we're gonna get. But it's not necessarily gonna be an easy ride. We gotta work every day to be able to maximize margins, but we spend quite a bit of effort doing it. And I would suspect that we'll still deliver strong margin results for the year.
Perfect, thanks for the color.
And this will conclude our question and answer session, also concluding today's call. The conference is now concluded. Thank you for attending today's presentation, and at this time you may now disconnect your lines.
So.
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