Q3 2022 Global Industrial Co Earnings Call

Good afternoon, ladies and gentlemen, and welcome to global Industrials third quarter 2022 earnings call.

At this time I would like to turn the call over to Mike Smart Jossey of the Plunkett Group. Please go ahead. Thank you and welcome to the global Industrial third 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 Detroit number of factors, including those described under the forward looking statements caption.

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 FCC on our form 8-K.

This call is the property of Copel Industrial company I will now turn the call over to Barry let one.

Thanks, Mike Good afternoon, everyone and thank you for joining US third quarter revenue reached nearly 300 million growing seven 6% over the third quarter last year gross margin remained healthy and increased modestly on a sequential basis to 35, 7% was down from a record third quarter performance.

Last year, which included the initial benefits of strong price rationalization and lower cost FIFO inventory sell through.

During the quarter, our one to one managed sales channel led our growth and we generated strong cash flow from operations. We further reduced our inventory position and continue to maintain a very strong balance sheet.

While the current outlook remains one of caution we are investing in growth and productivity initiatives and are proactively managing the business to rapidly adapt to changing market conditions.

Investment in sales marketing private brand digital transformation pricing analytics and distribution are strengthening our long term competitive position and allowing us to better focus on the needs and experience of the customer.

One of our key growth initiatives is the expansion of customer relationships. Both in terms of new customer acquisition expanding share of wallet within existing accounts for example, hospitality and health care are large markets with tremendous potential but ones in which we had historically garnered low penetration we're targeting these opportunities.

Staying true to who we are meeting with our core offering of furniture, and decor storage and shelving and cartoon trucks, while augmenting these solutions with additional products.

We appeared this offering with a very deliberate marketing and sales approach and highlights our understanding of the unique needs of these end markets.

Further the same can be said of our large customer acquisition efforts, where the market is substantial and we're being very focused in our approach as we build out our team and target specific verticals with both our new end market and large customer efforts remain in their early phases. We are pleased with the initial success and committed to building. These <unk>.

Overtime.

Our managed sales team continues to lead our performance and demonstrate the value we provide customers through direct one to one relationships with sales organization is capturing share by driving greater penetration, which in turn builds larger accounts and creates longer lasting relationships pricing.

Pricing intelligence and analytics is another critical area of investment that is enhancing our ability to continue navigating the dynamic price cost environment.

By incorporating real time market data, we are positioning to make timely decisions that allow us to maintain price competitiveness and preserve our margin profile.

In the quarter, we completed the launch of our new digitally commerce sites. It includes enhanced functionality aimed at driving personalization of sales marketing and merchandising offerings, which is an important pillar of our customer centric strategy.

Finally, we recently commenced full operations at our new distribution Center in Toronto, Canada. This facility will allow us to establish independent distribution pathways to our Canadian customer base, and consequently significantly increased service levels improve efficiencies and provide additional capacity to support long term growth in the market.

In closing I believe we are a stronger company today than any time in our history from the diversity of our customers and product offering to the talent of our associates and management team to the data analytics and digital capabilities. We continue to differentiate ourselves as leaders in what remains a highly fragmented distribution industry where.

We're not immune to the macroeconomic environment, but the investments we have and continue to make in our strategy should position us well to capture opportunities for the long term market share growth and emerge from the current cycle in a stronger position.

We are a nimble organization that utilize the flexibility of our strategy and ability to adjust to market conditions to navigate the challenges of the past few years and we continue to do so today, we are focused on operational excellence and putting the customer at the center of everything we do we believe we have the right strategy in place to drive long term performance.

And value for our stakeholders I will now turn the call over to tax.

Thank you Barry.

Third quarter revenue was $298 $5 million, an increase of seven 6% over the third quarter of last year U S revenue increased over 8% while revenue in Canada improved approximately 4% in local currency.

The private brand offering once again increased as a percentage of total sales and we had a further reduction in open orders as we benefited from the normalization of the supply chain.

As we moved through the quarter the demand environment has softened a trend that has continued as customers have generally taken a more guarded approach to buying decision decisions given the broader uncertainty in the market.

Gross profit for the quarter was $106 $6 million up four 5% from last year gross margin was 35, 7% an increase of 20 basis points on a sequential quarter basis, but off the 110 basis points from the prior year.

Margin performance reflected the continued impact of promotional pricing on excess seasonal stock as well as the fluid. There is some higher cost inventory, which we noted on our second quarter call.

In addition, we had a very strong comp to the third quarter of 2021, which benefited from price rationalization and the benefit of lower cost playful inventory sell through with increasing selling prices.

We strive to provide exceptional value to our customers, which includes the competitive approach to pricing in the short term. This may impact our ability to attain the margin rates generate in the first half of this year.

The benefit from price appreciation is waning as we begin to compare against the initial increases applied in the third quarter of last year.

In addition, well ocean freight costs have moderated they remain elevated over historical levels and higher total landed cost remain a component of our current inventory value.

We continue to believe that long term margin gains are achievable as we drive a higher balance of private brand sales continued to invest in pricing analytics optimize our fulfillment and freight profile and drive the leverage of costs across our fixed cost base.

Selling distribution and administrative spending in the quarter was $79 $1 million or 26, 5% of net sales an increase of 80 basis points from last year.

S. DNA, primarily reflects investments in the expansion of our candidate D. C network, including approximately zero point $8 million in ramp up costs incurred in the third quarter as well as investment in ecommerce and other technology enhancements and increased marketing efforts we.

We continue to maintain strong cost controls, but expect to see higher SG&A leverage ratios in the fourth quarter of 2022, as we transition to the new candidate D C and optimize operations along with the impact of historically lower fourth quarter sales on our fixed cost base.

Operating income from continuing operations was $27 $5 million in the third quarter and operating margin was nine 2%.

Total depreciation and amortization expense in the quarter was $1 million, while capital expenditures were $2 $8 million.

We expect 2022 capital expenditures in the range of $6 million to $7 million, which includes the new Canada D C.

Now turn to our balance sheet strong.

Strong and liquid balance sheet with current ratio of one nine to one.

As of September 30th we had $20 million in cash $10 million of debt and $61 million of availability under our $75 million credit facility.

The improvement in our debt position over the second quarter of 2022 reflects decreased working capital needs as inventory levels normalized.

We currently expect inventory levels to further reduce in the fourth quarter.

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 <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.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

If you are using a speakerphone, please pick up the 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, we will pause momentarily to assemble our rock.

Yeah.

Yeah.

Yeah.

Our first question will come from Anthony Limited and ski with Sidoti and company. Please go ahead.

Good afternoon, and thank you for taking the question so.

I know you guys talked about is softening.

Environment from a macro perspective as the quarter progressed, just wondering if you guys could provide any additional color.

On the monthly cadence and maybe just also talk about which product categories, you saw some outperformance versus others.

That'd be great.

Yeah, Hey, Anthony.

Thanks for joining this is Barry.

Yes, as we as we kind of noted on the on the call. We definitely saw some demand environment, you know kind of softened a bit through Q3, I think we saw you know a little bit of a customer is taking a little bit more of a guarded approach.

Certainly we saw a little bit of a price appreciation benefit waning through the period, but we did continue to see strong growth in our core lines and private brand assortment, which I think is very helpful for us.

Certainly category specific.

For us we saw fairly fairly good growth across categories in the period.

From a from a sales perspective or our one to one sales organization, which is a really strong group definitely saw a leading growth for us through the period.

And I think that is our primary goal, obviously deliver kind of above market growth over the over the long term and continue to leverage other resources, we have to continue our growth base.

Got it yeah. Thanks for that and then in terms of the year over year gross margin decline.

Can you just go over some of the puts and takes as to what drove that decline I know you had private label. You mentioned went up which is a higher margin categories, but that obviously some other things impacted so if you could just go over again.

You know the puts and takes for gross client that'd be great yeah.

Yeah sure I mean, we were we were happy that we were able to gain.

Sequential growth performance Q3 over Q2, which we were we were pleased with I think the biggest differential as we've talked about in the in the call was really around <unk>.

Some of the.

Differential in FIFO inventory levels last year, which we benefited from certainly.

Which I think helped us certainly on the margin side.

Which was one of the big Big drivers for US this year over over last year.

Got you and then lastly, so Barry you talked about.

Taking steps to.

Adapt to changing market conditions.

You mentioned pricing analytics investments, yes marketing tool so.

Out of those.

The initiatives that you have in place, which ones do you think will be the most impactful in terms of just adopted there what's going on now in the external environment.

Yeah. Good question I mean, I think you certainly hit on one and we talked about that around price analytics, and our ability to kind of dive.

<unk> deep to understand competitive pricing in this current market.

Coming off a high inflationary market last year and seeing continued evidence of that this year in certain pockets. So we've been spending quite a bit of time.

Digging into that and trying to always maintain a competitive position for us in the market.

The other aspect is.

More of the sales effectiveness side, so I think with the one to one sales group, we're able to stay very close to our customers hearing from them in terms of how they are seeing the demand environment.

At the same time trying to make sure that.

Our pricing scenario is matched up with their expectations at this point. So I think the sales team is always a great.

Tool for us to kind of hear what's happening on the ground and then currently we also deploy some fairly significant voice of customer survey data that gives us some intelligence about how the broader customer market is feeling for us and where they are seeing trends in the future in terms of how they're looking at their spend et cetera going into next year. So those are.

Some areas that we some tools, we leveraged right now to kind of to kind of help us.

Gotcha, and then just just a follow up on that in terms of the customer survey data. So what are your just curious as to what are the some of the findings from that customer survey data that you've seen here.

Well you know.

We kind of called out in our in our release and certainly in our call I think.

There is obviously.

There is a little bit of global caution around around overall market conditions, certainly heading into next year and the way we play that is.

We're very much kind of looking at the near term, but we're also keeping our long term growth prospects in mind relative to our investments that we called out so we get.

Different data coming through from our customers and I think we've certainly seen.

So that guidance of supply chain, improving a bit and I think that is helping.

Customers relative to their overall view of satisfaction in terms of getting better data around when their products are going to arrive and things like that so I think we've definitely seen some improvement.

On the supply chain side that I think is helping you now in terms of their over the overall outlook.

But certainly on the on the buy side, we were looking at that constantly and helping to guy.

Guidance going forward.

Got it well, thank you very much and best of luck.

Sure. Thank you.

Our next question will come from Paul Dircks with William Blair. Please go ahead.

Hi, good afternoon, and thank you for taking the questions.

Alright.

So first question for me.

I can certainly appreciate Barre V C.

Softening of demand.

Demand from customers throughout the quarter, but on the last quarterly call. If I recall correctly there was good.

<unk> even through July So I guess my first question is was there a precipitous drop.

In August and September that that came about or how would you characterize the change in in those customer conversations later in the quarter and to the extent you're comfortable has there been any further change through October .

Yes, no I think Thats a good question, Paul and as you know, we generally don't provide kind of a specific month to month guidance as we kind of noticed we definitely saw.

Some softness as we move through.

Q3.

Which is where we really thought and I think the feedback we got was really the customers who have taken a little bit more guarded approach relative to spend I think they're kind of looking a little bit more focused on spending certainly through the year and certainly with us.

Kind of our overall cautious tone into into 'twenty three I, just think they're taking a more more guarded approach. So I think that is what we're seeing I think you know what.

And I think the other aspect that we've certainly seen and we kind of expected youre seeing a little bit of price appreciation benefit kind of wane, a little bit through that through the period and I think customers are getting a little bit more focused on.

What they're paying for items.

Yeah.

Very good.

Digging into the sales aspect can you quantify by chance.

The difference in growth rates between your private label sales and other products.

Yes, I mean, we typically we typically don't call that out directly but what I will tell you Paul is that the <unk>.

<unk> brand for US is a very strong growth driver in the business and as we've talked in.

Previous calls, we that's been a area for us to be able to engineer more margin and create a better value proposition for our customer so.

We definitely like to see our private brand growing generally at the fastest rate relative to the category and obviously, it's an important part for us and it's a big focus of the business.

Okay, and if I can just jump in there as well Paul So yeah, I mean, we as we as we put.

Private brand was our fastest growing segment in our sourcing channel in the quarter as compared to the National brand, which really did help maintain that margin as there was other price pressure on as you talk about the FIFO inventory layers still continue to work through with that high cost of afraid of acquired products as well as some of those promotional pricing that we need to work through to get through some of that seasonal labor.

Tori that we had acquired.

A little bit of a continuation of some of that from Q2, but again as Barry mentioned, we have been able to maintain actually modestly improve our gross margin rates sequentially.

Albeit coming off of last year, a pretty pretty significant.

And in Q3 of last year.

Got it I appreciate that extra color.

Switching gears to the new E Commerce site could you maybe quickly elaborate on what your expectations are for the site now that it's rolled out how are the early returns how is the feedback and the customer.

Response been and how do you anticipate this new E Commerce site, helping you.

Over the medium term here as we go through what may be a down economic period.

Yes.

Great question and from an E Commerce perspective.

It's kind of a business, where there is always continual updates and enhancements to the overall experience based on what our customers tell us in the analytics, we get so the big changes, we made relative to the UX and navigation experience.

Operating certainly is as we had expected we.

We feel the site experience itself and the look and feel of it is really really strong.

And we continue you know it's not just the big launches, we do we're continuing to make adjustments to the navigational flow of the site to ensure that we get customers finding the right products.

That they're looking for on the site or internal search.

Certainly has improved significantly.

With the latest enhancements that we made and we continue to groom the experience each day based on data, we see based on product selection and.

Flow through in terms of conversion rate. So we've been we've been pretty pleased with the with the performance so far and we're going to continue to make enhancements along the way, but it's a.

It's a daily activity in the organization to groom it and to continue to.

Fine tune it based on what our customers are telling us.

Very good and then lastly for me.

Given the fact that we've seen the macro economy step down.

Some of the discussions you guys have had with potential acquisition targets have those discussion you did up at all or valuations coming in how would you characterize your pursuit of inorganic growth here.

Yeah, that's a great question too.

Like I said, we've said before we're constantly scanning the market for.

For opportunities I think.

It's hard for us to comment relative to valuations at this point I think each situation that we've looked at is very different.

What's driving the valuation.

At the types of size that we're looking for in terms of an acquisition. So it's hard to comment on the valuations right now, but all I can tell you is that we continue to look at opportunities on a regular basis.

And when we do identify that company that creates the right synergies with our business. We will we will pursue that.

Very good I appreciate the time thank you.

Thanks, Paul.

Yeah.

This concludes our question and answer session, which also concludes today's conference. Thank you for attending today's presentation. You may now disconnect.