Q2 2023 Global Industrial Company Earnings Call

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Good day and welcome to the global Industrial Company second quarter, 'twenty 'twenty earnings Conference call.

All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the snarky followed by zero.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on the Touchtone phone to withdraw your question. Please press Star then two.

No I'd now like to turn the conference over to Mike Smart Jesse Investor Relations. Please go ahead.

Thank you and welcome to the global Industrial second quarter 2023 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.

Thank you.

The press release is available on the company's website and has 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, Mike Good afternoon, everyone and thank you for joining US overall, we had a very productive second quarter as we continued to execute on our strategy and made further investments in growth initiatives.

The Big news in the second quarter was the addition of <unk> to global industrial family in place May endorse is an exceptional strategic and cultural fit with our business. It diversifies our operations broadens our reach to new customers and markets strengthens our want to watch selling approach and provides core product.

Alignment, specifically within material handling indoor and outdoor furniture and storage and Shelly <unk>.

In addition, it delivers new capabilities in project management, and engineering that strengthen our value proposition.

I've been very impressed with the handoff team the level of expertise they bring to the table really expands our skill set and the depth of tenure of their customer relationships is impressive.

We have made good progress on operational enhancements and sales customer service and logistics as well as general coordination and support between the two businesses. We are excited by the addition to vendor and are on track to drive our combined success.

Turning to our financial performance total revenue improved to 3% in the quarter, which includes approximately six weeks of <unk> results.

Organic global industrial revenue was off five 2%, reflecting price deflation and a continuation of the cautious purchasing behavior within our SMB customer bases manufacturing sector.

Given improvements in our online shopping experience web growth expanded throughout the quarter.

Customer acquisition and retention are healthy and we ended the quarter with modest volume trended Brooklyn.

We continue to be very pleased with our margin performance gross margin remains solid at 34, 7% as we delivered modest improvement organically offset by end of lower margin profile.

In the quarter, we made further progress against our key pillars of our strategy, we remain committed to making investments that strengthen our competitive position and enhance the value we bring to customers, which we believe will drive long term growth.

Within our ecommerce channel digital transformation continues as we enhance the product shopping experience and optimize our digital marketing. This resulted in improved web sales performance as the quarter progressed with ecommerce growing to more than 60% of total sales transactions.

Our direct sales channel remains soft year over year, primarily I'm cautious purchase behavior within certain segments of our customer base and lower average order value.

As we look to further accelerate customer acquisition and growth, we expect increased sales and marketing investment in the second half of the year.

We implement targeted campaigns and engagement efforts.

We also continue to optimize our value proposition, taking a strategic approach to pricing.

Our goal is to ensure competitiveness in the market.

Pass along savings to customers, where we can we are making investments and pricing initiatives with a focus on maximizing total value, including freight and price product components.

And while we are investing in our growth. We are also proactively managing our cost structure and driving efficiencies across our operations. For example, within our distribution network. We are seeing productivity improvements, resulting in lower total cost per order and increased product delivery speeds to the customer.

These successes are great wins for both customers and global industrial.

As you can see our efforts center around the customer one way we measure the impact of these initiatives is to our voice of customer survey.

They reflect the customer's experience and then turn the health of our business and progress against our strategy.

I'm pleased to report that recent surveys highlight improvements in customer satisfaction.

As a direct reflection of the efforts of our associates and the value we provide to customers.

Finally in October we will be hosting our annual trade show in Memphis, Tennessee. This is always a terrific about that showcases our broad product assortment.

Our national vendor relationships and is a great time to connect and listen to our customers.

In closing, we remain focused on strengthening our business driving operational excellence and delivering an exceptional experience and value for our customers.

Making investments across our web and direct sales channels to enhance our competitive position and long term growth profile.

While the macro market environment remains uncertain.

We believe we are well positioned to drive our performance as customer sentiment improves with strong cash flows and a strong balance sheet. We are confident in the resources, we have to navigate current market conditions and execute on our organic and strategic growth opportunities.

I will now turn the call over to tax.

Thank you Barry.

I will reference both GAAP and organic metrics in my remarks organic reflects the performance of our global industrial business and is exclusive of the May 2023 and half acquisition.

In addition, since the second quarter included 64 selling days in both 2023 and 2022 average daily sales will align with reported sales results.

Second quarter revenue was $325 $8 million up 2.3% over Q2 of last year organic revenue was $301 $9 million down, 5.2%, However, absolute volume improved throughout the quarter and year over year declines narrowed as we exited the second quarter.

Organic U S revenue was down five 2% organic revenue in Canada was approximately flat in local currency a significant improvement from Q1 of this year.

Price was negative in the quarter in a range of low to mid single digits. In contrast to neutral pricing in <unk> and a benefit in the year ago period.

While uncertainty remains in the demand environment volume trends have improved in the early parts of the third quarter.

Overall, we believe customers remain guarded in their buying decisions and the pricing environment remains competitive.

With regards to end off given their large project based business is often variability in their quarterly revenue performance as a result of when projects are completed.

Gross profit for the quarter was $112 $9 million flat from last year gross margin was solid at 34.7% down 80 basis points from the year ago period. The period benefited benefited from an organic gross margin rate of 35.7%, a 20 basis point year over year improvement well into off gross margins were 21 seven.

And in line with their historical performance.

Management of our margin profile remains a key area of focus. However, we expect continued variability throughout 2023 as we navigate the seasonality worked through select categories of inventory that maintain a higher cost profile and look to continue to drive value for our customers through competitive price initiatives.

On a historic pro forma basis. The addition of Indaba would have resulted in approximately 200 basis points of lower gross margin rates due to the margin profile of their business.

Given this impact to our composite margin profile and the other factors I noted, we expect our consolidated gross margin decline in the third quarter.

Selling distribution and administrative spending for the quarter was $83 $8 million or 25, 7% of net sales an improvement of 20 basis points from last year S. D. N. A primarily reflects the fixed cost nature of the business along with the inclusion of approximately zero point $7 million in transaction related expenses in the corner.

Offsetting these nonrecurring charges was a reduction of approximately $2 $2 million in variable compensation related to performance against internal plans.

We continued to maintain strong cost controls and evaluate additional opportunities to optimize our structure.

Operating income from continuing operations was $29 $1 million in the second quarter and operating margin was eight 9%.

Organic operating margin was nine 3%.

With a strong commitment to invest in our long term growth initiatives as long as the addition of endorse our composite operating margin is likely to be lower than historical periods.

The company is actively working to introduce cross selling and private brand opportunities for indoor sales partners to enhance the margin profile of the <unk> business.

During the quarter, we generated strong cash flow from continuing operations of $37 million totaled.

Total depreciation and amortization expense in the quarter was $1 $5 million, while capital expenditures were zero point $7 million.

As a result of the <unk> acquisition the company incurred approximately zero point $4 million in amortization expense and expect the amortization. After this year will be $3 million annually.

We expect 2023 capital expenditures in the range of $6 million to $8 million, which includes maintenance related investments in equipment as well as facility upgrades within our distribution network.

Let me now turn to our balance sheet.

We have a strong and liquid balance sheet with a current ratio of one six to one.

As of June 30th, we had $44 $9 million in cash and $43 million of debt.

We utilized our $125 million credit facility to fund $50 million of the purchase price $10 million of which was paid down in the quarter and ended the quarter with over $79 million of availability under the facility.

We anticipate continuing to pay down the loan balance using free cash flow generated from the consolidated businesses.

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> 20 per share of common stock.

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

We will now begin the question and answer session to ask a question you May Press Star then one on your question for.

Using a speakerphone please pick up.

Vicki.

Anytime you have a question has been addressed and you would like to withdraw your question. Please press Star then two.

Finally roadblock momentarily.

Gotcha.

Our first question comes from Ryan Merkel with William Blair. Please go ahead.

Hey, Barry I hate to ask after you Ryan afternoon Ryan.

My first question is on the price deflation comment that you made can you just quantify for us how much was price deflation in the quarter of 5% organic sales decline and then what's the source of the deflation is it competitive price pressure or is it just container costs coming down.

And you're you're passing on lower cost to customers.

Yeah.

Yeah, I would say from a standpoint of the the rationale around it I think theres two elements Ryan I think one certainly customers are looking for value right. So we're looking at competitive price positions each day and moderating.

Selling prices in that manner. So I think that the state of where we see the customer base right now.

<unk> really prices are a big deal. So I think right now we've been we've been adjusting.

But at this point I think much of our pricing to the market is fairly fairly stabilized.

Certainly we benefited from a lower cost containers.

Helping the business certainly we're continuing to try to drive out higher cost inventory and attaching to lower cost inventory rates as we drive more turns and revise which is certainly going to help us throughout the balance of the year.

Certainly the beginning.

But that's the that's the primary driver of what we're seeing right now from a market perspective.

And Ryan I'll expand on that just just a bed as well as you've noticed our organic gross margin was 35, 7% as we highlighted so we did see some improvement and that's a lot of that was that pricing was passing through those lower costs as Barry mentioned.

We're taking advantage of that is mixing into our FIFO layers and we're able to push that through but obviously, we're we're obviously constantly monitoring what the pricing is in the market out of many of our product line. So again low single digits was the impact of the pricing kind of the price pullback in the period and we expect that to be stable going forward.

Okay. That's helpful and then I understand a small and medium customers get cautious here I'm hearing that from others, what about the enterprise customer are you still seeing growth there.

Yeah, I think when you look at the end use markets Ryan I would I would say that.

We've seen the manufacturing segment challenged a little bit more than some of the other segments we're participating in.

I would say, that's primarily coming up our managed sales organization, which deals with the larger customer segment, we've seen even the ASM indexes produced I think for July came out.

Today, as well fairly flat to slight contraction as well so I think it's a good signal in terms of where we've seen manufacturing.

That's where we've kind of seen most of the softness but.

I think from.

From an organizational perspective, we are continuing to invest in sales and marketing to help drive.

Penetration into those key customers look for new opportunities and continue to fight against some of the downward pressure there.

Okay.

And then last one and I'll pass it on you mentioned trends improved through the quarter and at the end of the quarter anything to call out there that you've heard from customers or is it company specific some of the things that you've been working on that you think are showing up in helping sales.

Yes. It's good question I think certainly we've seen a nice improvement on the ecommerce side of the business certainly as we've made significant enhancements into.

The web site and we continue to do that we've seen.

It's a nice nice growth there as well, which we highlighted in the call I think from a customer.

Customer perspective.

I think when you think back to Q1.

Kind of early Q2 that was certainly customers had been a little bit more cautious.

We've seen some volume that had started to materialize that may have been negotiated and quoted early very early in the period, even dating back to the early part of Q2 and Q end of Q1. So I think we're seeing possibly some of those customers starting to starting to come to the table.

Look to transact.

Got it I'll pass it on thanks, so much.

Your next question comes from Anthony.

It already and company. Please go ahead.

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

So first just a follow up about the price deflation.

Is that kind of across the board in terms of the merchandize categories or is that kind of concentrated into some.

Some certain parts of your business.

Yeah, I think when we when we tend to look at pricing and we talked quite a bit about pricing intelligence. We use a lot of tools to help us understand where the market is at.

Anthony I would tell you that it's I would say that you would you would see it really across the board across much of our core products as well.

As we.

Leverage kind of some of the cost benefit we're starting to see come down in the market relating to the ocean freight container costs and as we negotiate negotiate out of Cogs in the business.

Our goal has always been the kind of path on that value to customers and keeping ourselves close to the competitive.

Nature of our business on pricing, we've seen most of our major category segments.

We've gotten a little bit sharper there.

Understood, Okay, and then switching gears to the <unk> acquisition.

Can you talk about the synergy opportunities that you may have there I know you mentioned the private label expanding your own products to endorse. So maybe you can maybe talk about that as far as timing when should we expect that to happen.

Yes.

Great question look we've been we've been really happy with the process. So far we've made the acquisition in May.

We think it's going very well, primarily because we believe it's a really strong strategic and cultural fit with the broader global industrial.

Diversify our operations it does give us the reach into new customers and markets and I think strengthens the direct sales approach and provides a lot of core product alignment for us.

When we went into it.

Certainly their margin profile is a little bit lower given the nature of what they sell in our private brand assortment creates a good opportunity for them to sell a higher value product into the market and.

Do.

To do so at a little bit higher margin rates. So.

It's been progressing really well you know I think <unk> mentioned in his comments.

We have put a focus around educating that organization on our private brand assortment has been it's come across very very well, we've incorporated a ton of training up until this point with their sales force and it's hard to train everybody very quickly, it's an ongoing process, but the sentiment of the organization to participate.

With our team and working together as a collective group to try to drive our volume has been very very well received we've been we've been really happy with this with this act.

Acquisition at this point.

That's great to hear.

So they're in the office primarily project based business. So you know how much visibility do you guys have into that business and how those projects are more or less kind of whatever or whatever was happening or those kind of set in stone or are those cancel a bowl.

I know you mentioned that there could be variability quarter to quarter because of this so just wanted to get a better handle on how to think about that.

Well I think the I think the project based business by by its.

<unk> it.

Comes a little bit more lumpy throughout the year, where the global industrial business is a little bit more on kind of an everyday business, we've been transitioning more to that.

So we do have their organization is.

And leadership there on the sales side has been together for a very long time.

Have a good perspective.

That they have in the pipeline and we share that information and discuss it.

And as we start to connect.

Some of the.

Data between the new business, particularly as it relates to sales.

Product performance, we're getting very good visibility and I think utilizing some of our tools here at the global industrial I think the <unk> team has been enjoying some of the capabilities that we have that it's making visibility to their business even better. So like I said, it's very early days Anthony.

You know being we just consummated the deal in May.

But I think we'll get a lot better visibility with the business as we as we go along.

Alright, well, thank you and best of luck.

Thank you.

<unk>.

Yeah.

This concludes our question and answer the question.

Uh huh.

We're getting today.

Okay.

Yeah.

Yeah.