Q1 2024 Global Industrial Co Earnings Call

Participants

Mike Smargiassi; Investor Relations; The Plunkett Group

Barry Litwin; Chief Executive Officer, Director; Global Industrial Co

Thomas Clark; Chief Financial Officer, Senior Vice President; Global Industrial Co

Bob Napoli; Analyst; William Blair

Anthony Lebiedzinski; Analyst; Sidoti & Company

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to Global Industries' (sic - "Global Industrial") first-quarter 2024 earnings call.
At this time, I would like to turn the call over to Mike Smargiassi of Plunkett Group. Please go ahead.

Mike Smargiassi

Thank you, and welcome to the Global Industrial first-quarter 2024 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.
During the call, we will reference both GAAP and organic metrics. Organic reflects the performance of the Global Industrial business exclusive of the May 2023 and off acquisition.
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.

Barry Litwin

Thanks, Mike. Good afternoon, everyone, and thank you for joining us. First-quarter revenue improved to more than $323 million. And on an organic basis, we posted our third consecutive quarter of growth with revenue up 4.2%. These results reflect the continuation of the cautious customer purchasing behavior we have seen for the past several quarters.
Overall, our performance was consistent through the period. E-commerce was once again our leading channel, and we are seeing strong growth in our enterprise business as it benefits from new account generation and healthy retention rates. Order and volume trends were solid and partially offset by continued price headwinds. We remain pleased with gross margin performance, which was 34.3% in the quarter. On an organic basis, gross margin of 35.8% was essentially flat on both the prior year and sequential quarter basis.
As I outlined on our last conference call in 2024, we are focused on championing the customer experience across every facet of the business. This includes enhancing the quality and value we provide to elevating our position as a solutions provider and problem solver for our customers. Across the organization, we are executing against multiple initiatives to help us continuously improve and deliver an exceptional end-to-end shopping experience.
One of the key performance indicators we utilize to measure the impact of these efforts is our customer satisfaction scores. Our Voice of the Customer process evaluates everything, from product fulfillment and quality to overall experience. Satisfaction scores run greater than 90% each week. And this tells us that the customer service, same-day shipping percentage, order fill rates, and post-sales support are working well as evidenced by our high customer retention rates.
Customer retention drives the total lifetime value of our customers, and ultimately, enables us to capture market share. The gains we are seeing are direct reflection of the efforts of our associates and recognition across the company that everything we do impacts the customer.
Overall, we have been pleased with our execution against the key pillars of our customer-centric strategy. We continue to differentiate our position in the market through an exceptional experience, a leading assortment of national brands and global industrial exclusive branded products, and a one-to-one managed sales approach that delivers significant value to customers.
We are making continued investments in sales, marketing, merchandising, and customer service that will help us drive operating efficiencies, accelerate customer engagement, and strengthen our competitive position and capture market share. While the current demand environment is not as robust as we would like, we believe Global Industrial is improving its position as an indispensable business partner, and in turn, strengthening its ability to drive its long-term performance.
The industrial distribution market remains highly fragmented, and we have numerous opportunities for growth as we drive sales enablement across our channels, expand current relationships, and acquire new customers. With an exceptional balance sheet and strong cash flow from operations, we are well positioned to execute on our strategy, invest in our growth drivers, and evaluate strategic opportunities while we build long-term value for our stakeholders.
I will now turn the call over to Tex.

Thomas Clark

Thank you, Barry. First-quarter revenue was $323.4 million, up 18.1% over Q1 of last year. Organic revenue was $285.3 million, up 4.2% year over year. Organic US revenue was up 4.3%, and Canada revenue was up 1.8% in local currency.
Revenue benefited from volume improvement while order growth rates were impacted by continued pricing headwinds. The pricing environment remains competitive. However, we are optimistic that the negative impact of pricing trends will improve near term.
We've seen the first quarter's modest organic revenue growth continue into April. Gross profit for the quarter was $110.9 million, up 12.7% from last year. Gross margin was 34.3%, down 160 basis points from the year-ago period due to the contribution mix of Indoff and its relatively lower gross margin profile. Indoff gross margin was 23%, which represents an improvement to their historical performance.
Organic gross margin rate was 35.8%, up 10 basis points from both a year ago and sequential periods. Management of our margin profile remains a key area of focus. Performance will continue to reflect the impact of proactive promotion and freight actions as part of our competitive pricing initiative.
As a reminder, we are nearing the first anniversary of our Indoff acquisition in May of this year. Composite margin impacts related to the business combination will be more muted in the second quarter as compared to last year given this timing. In addition, ocean freight costs, while off recent highs, remain elevated. Higher-cost inventory is starting to flow into our cost of sales, and this is something we are proactively managing.
Selling, distribution and administrative spending for the quarter was $93.5 million or 28.9% of net sales, an improvement of 50 basis points from last year. SG&A primarily reflects the benefit of Indoff's lower cost structure. This was partially offset by approximately $0.9 million of audit and remediation costs related to certain IT general controls incurred in the period. Given planned investments in key sales and marketing growth initiatives, as well as [sacs] implementation costs associated with the Indoff acquisition and ongoing IT control remediation, we currently expect SD&A to be elevated in 2024 when compared to the year-ago period.
Operating income from continuing operations was $17.4 million in the first quarter and operating margin was 5.4%. Organic operating margin was 5.6%. Operating cash flow from continuing operations was $6.3 million in the quarter as we built inventory in advance of the spring and summer season. The second and third quarters are historically the largest sales periods for our private brand products. Total depreciation and amortization expense in the quarter was $1.9 million, including approximately $0.7 million associated with the amortization of intangible assets with the in-depth acquisition, while capital expenditures were $1.3 million. We expect 2024 capital expenditures in the range of $3 million to $5 million, which primarily includes maintenance related investments of 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 1.9 to one. As of March 31st, we had $29.9 million in cash, no debt and approximately $120.7 million of excess availability under the credit facility. 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 $0.25 per share of common stock. This concludes our prepared remarks today. Operator, please open the call for questions.

Question and Answer Session

Operator

We will now begin the question and answer session. (Operator Instructions)
Bob Napoli, William Blair.

Bob Napoli

Good afternoon, everyone learned value from William Blair on for Ryan or going or how are you doing well, thank you. I just wanted to ask about the cadence of sales in the first quarter specifically how each month performance and how results may be different from expectations. I know your peers have talked about how March was impacted by the timing of Good Friday. Any color is really helpful.

Barry Litwin

Thank you. Yes, I would say that from a from a timing perspective, we did see a fair amount of consistency through the period of overall for us and I think we as we see for Q1, certainly as we exited Q1, certainly into the early part of the year, you know, modest organic revenue growth has continued. So I don't think we saw I did read something about some weather challenges holiday. I don't think that had as big an effect on us as maybe some others have.

Thomas Clark

Yes, Laura, just to add to that. I mean, there's Bhatia with very consistent growth throughout the quarter, January, February, March. And while the Good Friday holiday did fall at the end of Q1, right, at the beginning of Q2 this year, we didn't seem to see a material impact from that holiday shift.

Bob Napoli

Appreciate it. Thank you so much.

Operator

Anthony Lebiedzinski, Sidoti & Company.

Anthony Lebiedzinski

Good afternoon, and thank you for taking the questions. So you guys talked about cautious customer behavior yet your organic sales growth of 4.2% was better than what we had expected. So I guess maybe you could just give us more details as to which of your and maybe vertical markets or are there any sort of customer groups that you are seeing more pronounced weakness than others? Just wanted to get more color on that, if you could.

Barry Litwin

Yes. I think that's a good question on. I think from the standpoint of from a cautious customer market. We definitely see that in. I think it stems from the SMB market, the small to mid-sized customer market. I think certainly with some of the economic numbers that have come out recently, where I think that's going to be I'm going to be persistent for a little while on our end use markets and when you think about some of the big ones were in manufacturing and retail and transportation warehousing on it was fairly consistent across those segments. We'll kind of see what kind of changes are ahead as we kind of get a little further into Q2 on, but certainly any type of industry that has impact into fixed asset purchases on CapEx implications, things like that you know on we'll probably have some of the first impacts on us. But through the period in Q1, it was fairly consistent. It was more relating to the size of the customer smaller customers where I found we're a little bit more challenged on the larger kind of enterprise national customers seem to be able to withstand the period a lot better.

Anthony Lebiedzinski

That's helpful color and then have those trends continued so far into the second quarter? I think the shape of that similar, yes, every year tell a similar result as we got into about four weeks in the second quarter.
And as we highlighted, similar consistent results into the period so far, it is fair to say in terms of your e-commerce sales channel, roughly what percent of your transactions is out? Is that a two month total? And then can you give maybe more color on the new account generation that you highlighted in your press release and yes, sure.

Barry Litwin

So when you think about for us and really looking at the full E channels, which are generally north of 60% in terms of E. transactions, for our business and that includes e-commerce. It includes GDI. Equant's e-procurement, all the ways in which many of our B2B customers buy from us on. We usually don't call out the e-commerce channel separately, but it has been a solid channel for us. As you know, we've made some improvements over the last couple of years. Some changes in the navigation experience. And I think that's having a positive effect relative to overall conversion rates and the overall customer experience and people have moving through the site. So embedded that has certainly helped us going forward.
We did mention as you as you discussed, you know, some opportunities within the larger enterprise accounts. You guys know that that's been something that has been fairly fairly new for us over the last couple of years. It's a channel that's been growing in terms of larger accounts to global industrial. We don't call that out separately. However, it's a channel that has been we've been pleased with the performance, and we think over the next couple of years, it's going to be very significant for us. So we've been we've been really happy with that market and some of the work that our strategic account managers are having in that area.

Anthony Lebiedzinski

It's got a couple of other questions, if I could. So I think, Alex, you mentioned that in the US gross margin was better than historical. What drove that? And do you see any other opportunities to further improve gross margins?

Thomas Clark

Yes, absolutely, Anthony. Those margins were came in at about 23% in the quarter, which was again a little bit higher than our mid 20 ones that they had previously unreported historically, both after our ownership after we acquired them and really pre pre acquisition, I mean, the quarter, they had closed a couple of large deals that happened to be very favorable margins. We're continuing to push efforts and initiatives to drive higher balance of private brand sales and introduce them e-commerce capabilities to their business, which should continue to help that margin over time.
While this first quarter where it was beneficial benefited by a single large order that drove that margin rate up. But we are seeing continued, um, um, action positive action of those initiatives to improve margin in the long run.

Anthony Lebiedzinski

Got it. Okay. And then in terms of SG&A expense growth, I mean it was up 16% versus last year and up 8% sequentially from the fourth quarter. I know you're doing some investments in different initiatives on what you saw as far as you had been going forward here. How should we expect as far as the run rate for expenses here from here?

Thomas Clark

I'll guess I'll let me give a little color on that. I'm Anthony. So when we think about the year-over-year numbers, 16%. You got to remember that actually we acquired a business from data, made up nearly 10 more over 10% of revenue. So that alone contributed about half of the SSG. and A. growth rate, just by having an additional business in the portfolio in Q1 this year as compared to last year, when we think about sequential changes is obviously we had highlighted in past quarters that that we were going to be investing in sales and marketing initiatives that we think that's prudent in a market that's somewhat challenged to be able to take share where we can and make sure we're investing in those key growth elements, even if it's at the expense of the bottom line to drive that top line up right now. And that's one area that we're going to continue to focus on. But I think we highlighted on the date of today's call, we did have about 900 K. of a cause a one-time related charge in the period, which which should contribute some of that incremental year-over-year growth.

Anthony Lebiedzinski

Got you. Okay. That's very helpful. Okay. And then last question for me. So now that you're almost a one year after the end of deal, are you looking for any other additional acquisitions?

Barry Litwin

Yes, yes, good question. So we've been pretty consistent in that. I mean, I think as much as we focus on organic strategy, we absolutely consider acquisition as a component of our business going forward. So we definitely are looking at new types of opportunities that can bring us into new categories that can add to our business model at customers, our new channel to sell our private brand. Those are all really important to us. And when we when we come across those deals, we would we would take advantage of that on. We've been pleased so far with what's happened with and off up until this point. And we think there's a lot more value to go there. But certainly we're constant keeping our eyes out for opportunities on the acquisition front.

Anthony Lebiedzinski

Sounds good. And well, thank you very much and best of luck.

Operator

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