Global Industrial Co

NYSE:GIC

Earnings Call Transcript 2022-Q4

[Operator]

Good day and welcome to Global Industrial Company Fourth Quarter 2022 Earnings Call. [Operator Instructions] I would like to turn the call over to Mike Smargiassi of The Investor Relations. Please go ahead.

[Mike Smargiassi, Investor Relations]

Thank you, and welcome to the Global Industrial Fourth 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-Q.

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.

[Barry Litwin, CEO]

Thanks, Mike. Good afternoon, everyone, and thank you for joining us. Overall, 2022 was an outstanding year for Global Industrial as we executed on our strategy and delivered a record financial performance for total revenue, as well as gross and operating margin. For the full year, organic growth contributed over $100 million in additional revenue, resulting in 9.7% growth and bringing total revenue to $1.17 billion. Gross margin improved 90 basis points to 36.1%.

We generated over $105 million of operating income, an increase of 19.5% and delivered a 9% operating margin a 70 point basis improvement from 2021. With the strong financial performance in 2022 today we announced an increase in the quarterly recurring dividend for the seventh consecutive year.

2022 started off with strong double digit revenue gains while the second half of the year reflected the impact of increased economic headwinds and a diminishing price benefit as we left price increases taken in mid to late 2021. As a result, fourth quarter revenue was off modestly with flat price to volume comparisons from the year ago period. Demand was muted across categories and sales channels. And we have seen this trend continue into 2023.

We were very pleased with the proactive management of gross margin in the quarter as we recorded a 30 basis point improvement on a sequential basis and remain confident in our ability to manage our margin profile in the current cycle. Looking back on the last year, we successfully executed on a number of initiatives that we believe set us up well for 2023 and beyond.

First, we strengthened our managed sales organization as we expanded the team made investments in tools and technology to enhance productivity and performance. We added a new customer acquisition engine focused on enterprise accounts and launched market verticals in hospitality and healthcare. These efforts are off to a great start and we're excited about what we see.

Moving forward. We're focused on capturing share through customer acquisition and retention, deepening our existing relationships, and expanding our lineup of exclusive branded items. Second, marketing leadership. We executed against our fully integrated brand marketing campaign, which has allowed us to activate our weakened supply that branding across everything we do from our website, emails, trade show and copywriting to our NASCAR sponsorship. I think we have one of most exciting brands in the market today and one that truly speaks to our customers and the products and solutions we provide.

During the year, we also repositioned the private brand offering as global industrial exclusive brands with the tagline Made to Exceed. As the market continues to shift from winning with product availability to a price and value focus we believe we're well-positioned with our exclusive brand offering.

Recently, we launched a new marketing campaign focused on operational efficiency, a message that is timely given the current economic environment and one that aligns with the efforts we see from our customers and within our company to drive efficiencies and enhance operational performance. Third, we continue to elevate the customer experience with the launch of a new website designed to drive personalization. We are now optimizing this new platform with enhancements to further improve the digital shopping experience.

On the service side, we have initiatives across the company to optimize satisfaction and loyalty at every customer touchpoint. From the training of customer service reps to expanding self service options, we are committed to delivering five star customer service experience.

Fourth, distribution and supply chain. Our operations and merchandising teams delivered exceptional availability, reduced back orders and improved lead times during the year. In addition, we opened a new distribution center in Toronto that allows us to receive direct imports into Canada, provide for the shipment of more products stuck directly to our customers and foster our continued growth.

Overall, we're off to a much better stocking position this year, which will help us enhance service levels and deliver value to customers. We have a number of initiatives planned for 2023, including a focus on shipping quality that will minimize damages, as well as efforts to increase same day shipping volume and fully capture ocean and domestic freight saving, and will help us pass more savings to our customers.

Finally, I'm proud of the release of our inaugural ESG report last fall, which reflects the universal commitment of the board, executive team and our associates to the mission of responsible stewardship. We look forward to updating you on our progress later this year.

In closing, we believe we have a strong game plan for 2023 and a clear vision for our team to execute on. While uncertainty remains in the economic outlook, we are optimistic and excited about the opportunities we see for growth. We'll continue to invest in core strategic areas of the business that support our customer centric strategy and help drive operational leverage. This includes pricing intelligence and analytics, productivity and cost management and a company-wide focus on margin optimization.

I have been impressed by the nimbleness we have demonstrated and continued to show our ability to drive operational excellence.

With strong cash flow from operations and an exceptional balance sheet we remain well-positioned to execute on our strategy, invest in our growth drivers, evaluate strategic M&A opportunities and build long term value for our stakeholders.

I will now turn the call over to Tex.

[Tex Clark, SVP & CFO]

Thank you Barry. Fourth quarter revenue was $260.5 million, down 0.6% over Q4 of last year. Average daily sales were off 2.2%. The quarter included one extra day however I would note the day fell on the Friday before the New Year's holiday and a historically low volume sales day and had limited impact on our results. U.S. revenue was down to 0.2% while revenue in Canada improved approximately 2.5% in local currency.

Price volume was neutral in the quarter in contrast to pricing benefit recognized throughout late 2021 and most of 2022. The private brand offering has been an area of focus and opportunity during 2022. For the full year, it represented approximately 50% of total sales. Public sector volume was robust in the quarter and nice rebound from Q3 which was the close of the federal fiscal year.

The heating and winter seasonal category was soft, reflecting a relatively mild winter for much of the U.S. Demand was consistent throughout the quarter. And we have seen a continuation of 4Q sales trends into the start of 2023.

Overall, we perceive customers to be guarded in their buying decisions and the pricing environment remaining competitive. Gross profit for the quarter was $93.8 million down 3.3% from last year. Gross margin was 36%, an increase of 30 basis points on a sequential quarter basis, but off 100 basis points from the prior year. In the year ago quarter, we delivered record gross margin as we benefited early in the business cycle from strong price realization and lower cost FIFO inventory sell through, both of which have fully waned.

We will also face strong margin comparisons in the first quarter of 2023. But believe we have shown an ability to manage through the challenges of the current environment. Maintaining our margin profile remains the key focus of our team. We have seen some early benefits from lower ocean supply chain costs. However, we expect variability throughout the year as we work through select inventory with higher total landed costs and manage a dynamic pricing environment. We continue to believe that long term margin gains are achievable as we drive a higher balance of private brands sales, optimizer fulfillment and free profile and drive leverage of our fixed cost base.

Selling, distribution and administrative spending in the quarter was $76.1 million or 29.2% of net sales, an increase of 210 basis points from last year. SD&A primarily reflects the fixed cost nature of the business, investments in the expansion of our Canada DC network, including approximately $1.1 million in incremental costs as well as planned marketing investment to support new verticals, and to remain top of mind when our customers search for our products.

We also recorded increased compensation expense primarily related to $1.1 million of incremental variable compensation, which reflects the strong full year results as compared to 2021. We continue to maintain strong cost controls and in January took steps to right size our cost structure, including a reduction in force, which will reduce annualized costs by approximately $6 million. We expect to record a onetime severance expense of approximately $1.1 million in the first quarter.

Operating income from continuing operations was $17.7 million in the fourth quarter and operating margin was 6.8%. During the quarter, we generated cash flow from continuing operations of $26.3 million. Total depreciation and amortization expense in the quarter was $1.1 million, while capital expenditures were $2.5 million. We expect 2023 capital expenditures in the range of $6 million to $8 million, which includes primarily maintenance related investments and equipment 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 2.1 to 1. As of December 31, we had over $28 million in cash and minimal debt. During the quarter we expanded our credit facility by $50 million to $125 million and currently have $111.7 million of excess availability under the facility. The continued improvement in our debt position reflects decrease working capital needs, as inventory levels normalized and total inventory landed costs moderate.

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 $0.20 per share of common stock. This reflects an increase of 11.1% from our previous quarterly dividend.

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

[Operator]

We will now begin the question and answer session. [Operator Instructions] Our first question comes from Ryan Merkel with William Blair. Please go ahead.

[Ryan Merkel, William Blair]

Hey, good afternoon and thanks for taking the questions.

[Barry Litwin, CEO]

Hey Ryan.

[Ryan Merkel, William Blair]

I wanted to ask a question on sales in the fourth quarter. Any chance you can provide a little more details, either by products or end market? And for the managed and non-managed accounts that would be helpful. Thanks.

[Barry Litwin, CEO]

Yes, Ryan, I'll give you a little bit of insight there relative to Q4 revenue. So we certainly saw price benefit wane in the period. And I think if you look back, we probably captured price benefit really early on in the cycle. I think to your question on kind of customer mix, there's a couple of things we found one, I think the SMB basis for us appeared to be a little bit more cautious during the period versus some of the large national accounts that we've seen.

So that was one trend we saw. And as you know, we've talked, we're continuing to kind of diversify our overall customer base as it pertains to some of the enterprise business, but we still are a fairly heavy, SMB based business. The other factor was really around some of the winter seasonal softness that we mentioned in the opening. That tends to be a fairly strong private brand category for us particularly around heating. And as we know whether it's been really mild throughout the U.S. and that had some pressure as well.

[Ryan Merkel, William Blair]

Got it. Okay. I think you said demand is down low single digits into the start at '23. I just want to confirm if I've heard that right and just confirm sales aren't getting a whole lot worse here.

[Barry Litwin, CEO]

Yes, I mean, I think our --

[Tex Clark, SVP & CFO]

Go ahead Barry.

[Barry Litwin, CEO]

Quick cover, I think our demand trend right now certainly continues into Q1. We've certainly seen still some muted sales across categories and sales channels. And I think we've seen the same type of approach around customers being a little bit more guarded right now as the pricing environment remains fairly competitive.

[Ryan Merkel, William Blair]

Got it. Okay. Last one for me. I know you're not giving guidance here. But just curious what your outlook is for the MRO market '23. I think some of the larger players are thinking down low single digits, but curious how you're thinking about '23?

[Barry Litwin, CEO]

Yes, I mean, I think we kind of look at the same indicators. I mean, we look at industry stats around MDM, and obviously the economy in terms of what we're looking at. I mean, I think we went in certainly with an optimistic approach around some of the sales initiatives and investments that we put in place. But certainly, we're taking a fairly cautious tone relative to the MRO market. Right now, I'm hopeful that we start to see some better performance in the industry itself towards the back half of the year. I mean, we tend to follow the PMI index as well. So you could see a fairly change in the ISM between this year and last year at the same time. But we still are confident that we have a significant amount of initiatives in place to help drive overall long term growth, particularly around our category and private brand expansion.

And certainly the benefit that our one to one sales organization has in terms of driving good, solid relationships and insight to our customers. And certainly, we're going to continue to invest into some new sales channels mentioned last year, certainly continuing on through this year, to help us and exploit some newer some new markets.

[Ryan Merkel, William Blair]

Thanks. [That’s all].

[Operator]

[Operator Instructions] The next question comes from Anthony Lebiedzinski with Sidoti & Company. Please go ahead.

[Anthony Lebiedzinski, Sidoti & Company]

Good afternoon. And thank you for taking the questions. So first, for Q4 gross margin, can you go over the various puts and takes in regards to the gross margin? And Barry, you talked about the focusing on margin optimization. Can you give us a sense as to like how should we think about gross margins kind of for the balance of the year? That'd be great.

[Tex Clark, SVP & CFO]

Yes, Barry, just me to just jump in real quickly to reconcile that absolutely hey, Anthony. Good afternoon. So again, when we think about the overall margin gross margin profile of 36% this year absolutely they are 36% in Q4 36.1% for the full year. We saw some again, like we mentioned, we saw sequential improvement from Q3 and Q4 which isn't always a normalized seasonal trend for us. But we thought we did a little bit better in Q4 than Q3 but when we look at a year-over-year basis, last year in Q4 was really we were fully entrenched in some early price moves that we had made, were primarily related to inflation in the ocean transportation rates, that drove higher selling prices, but also allowed higher gross margins, because we were able to capture that, as we were still working through inventory that had landed prior to the some of those pretty significant increases in costs we saw.

So that really benefited both Q4 and Q1, 2022 where we saw 37 plus percent margins in each Q4 and Q1. So while we did see that year-over-year decline that sequential increase give us some strong confidence that we're able to manage through some of the again, the continued pricing dynamics in the market and along with some higher both domestic and that ocean freight that we had mentioned. And while the ocean freight costs are coming down, I mean, we've seen that in all the different public settings that will be a benefit to the organization, but does take time to work through because obviously we're working through inventory turns to get to that lower cost inventory that will we'll be able to take advantage of and obviously also pass through back to our customers as we move throughout the course of the year. I'm not sure if that answers your question from our end. Barry if you want to jump and then join anything more.

[Barry Litwin, CEO]

No. I think those were definitely well covered.

[Tex Clark, SVP & CFO]

Okay.

[Anthony Lebiedzinski, Sidoti & Company]

All right. Terrific. And then as far as inventories they're down from the second quarter peak. How should we think about inventories for as we looked, I know you're looking to certainly work those down. I assume as the year progresses, but is there a goal in mind as far as dollar amount you want to get to by the end of the year? Or maybe inventory turns? I mean, how should we just think about inventory management?

[Tex Clark, SVP & CFO]

Yes, I'll take that again Barry as well. So overall inventory. Well, we don't have a specific goal on target inventory numbers. We set goals internally based on things such as bill rates and what overall stocking levels we need to have for our customers to deliver our product on time for what they need. Given that while the supply chain costs have come down, overall as the disruption in the supply chain is out of the market in terms of lead times, both from kind of our overseas suppliers as well as domestic movements here in the States. That's allowed us to improve that they are to lower their safety stock requirements and have allowed us to normalize inventory as we move throughout 2022 we would expect that to continue into 2023. And while we may have some seasonal buys that happen from time to time we do not anticipate that our inventory levels will expense any material way in 2023.

[Anthony Lebiedzinski, Sidoti & Company]

Got it, thanks. And the last question for me is just overall, what is your appetite for acquisitions? It's been a few years since you've done anything as far as M&A. Just wondering if you could comment on that, that would be great.

[Barry Litwin, CEO]

Yes, great question, Anthony and I know that we've been fairly consistent in kind of our policy around M&A and certainly we continue to keep ourselves open to opportunities. Looking at businesses that can either add category strength to us, selling channels, strengthen customers, all make sense for us. As I mentioned, we certainly have been looking in the market for some time. We're looking to try to obviously as most businesses trying to find the right valuation and the right fit, most importantly for the company. So it is certainly in our strategy to continue to address that and we'll continue to do so going forward. So appreciate you asking the question.

[Anthony Lebiedzinski, Sidoti & Company]

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

[Tex Clark, SVP & CFO]

Thank you Anthony.

[Operator]

This concludes our question and answer session. The conference has also now concluded. Thank you for attending today's presentation. You may all now disconnect.