Good afternoon, ladies and gentlemen, and welcome to Global Industrial's Second Quarter 2021 Earnings Call. At this time, I would like to turn the conference over to Mike Smargiassi of the Plunkett Group. Please go ahead.

Thank you, and welcome to the Global Industrial Second Quarter 2021 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 other risk factors in the company's annual report on Form 10-K and quarterly reports on Form 10-Q. This press release is available on the company's website and has been filed with the SEC in a Form 8-K. This call is the property of and is copyrighted by Global Industrial Company. I will now turn the call over to Barry Litwin.

Thanks, Mike. Good afternoon, everyone, and thank you for joining us. Today marks our first call as Global Industrial Company. In January, we launched our new brand identity. And in June, we changed our name and ticker to reflect our long-term strategic vision and position as a leading pure-play industrial distributor. The business that is today Global Industrial was founded in 1949 and has always been at the core of who we are as a company. This was an exciting change, and we're now fully aligned with all stakeholders under the Global Industrial brand. Turning to our results. We delivered a strong second quarter performance on both the top and bottom line. Revenue increased double digits for the fourth consecutive quarter, growing over 12% to $272 million. Customer demand was healthy throughout the quarter with solid performance across core categories and within Global Industrial branded products. We were very pleased with profitability as we delivered gross margin gains on both a year-over-year and sequential basis, reflecting continued execution on our ACE strategy and completion of the transition to a new third-party logistics partner. The elevated costs associated with the transition are now fully behind us, ahead of the timeline we shared on the first-quarter call. Our success continues to be grounded in our ACE strategy and the execution of our playbook across the organization. Our associates have fully embraced our customer-centric mission, and we are accelerating our ability to deliver an exceptional and frictionless customer experience. The reopening of businesses and a growing economy has helped fuel the recovery in core product lines. We are seeing strong demand for Global Industrial branded products in both traditional and new product categories. Private branded products remain our fastest-growing offering, which is a direct result of efforts to increase its share of total sales and continued life line expansion. Investments in pricing intelligence are helping us navigate the challenging inflationary and supply chain environment and providing timely insights into movements in the market. We are watching price dynamics closely to maintain both margin rate and price competitiveness. We have and will continue to capture price in line with the market while ensuring we are delivering value to our customers. Supply chain, labor availability, and freight disruptions continue to be widely reported across all segments of the economy. Similar to how we responded to the need for PPE products last year, we are utilizing our operational flexibility and entrepreneurial spirit to proactively manage these challenges, and our teams are doing a terrific job. While we have seen temporary stock shortages in select pockets of our offering, overall product supply has remained healthy. Importantly, we have good visibility into our supply chain with many of the constrained products currently in transit. We believe supply of these products will continue to improve as we move through the second half of the year. On the sales and marketing front, we are seeing improving sales efficiency and a significant enhancement of our digital presence. We have modernized and improved the online checkout process and launched the Global Industrial Knowledge Center, a digital content-rich resource designed to empower customers with expert advice and know-how on the topics they need to succeed and grow. It includes original articles, entertainment and informational short- and long-form videos, infographics, and webinars. Our annual National trade show will be back as a live event in the week of November 8 in Nashville, Tennessee. The trade show provides a unique opportunity to once again engage customers face-to-face and allows us to highlight our leadership, vendor relationships, and breadth of offering. The show provides an excellent opportunity to generate new digital content that will be featured on our website. In conclusion, with our ACE strategy in place, we are strengthening our position as a trusted business partner to our customers. We are making strategic investments that allow us to better execute operationally, enhance digital capabilities, and deliver an exceptional customer experience. And as we execute on these efforts, we're building a scalable infrastructure that will support future growth and positions us for long-term success. With a powerful customer growth model, we remain well positioned to further capitalize on the shift to B2B e-commerce. Global Industrial is bringing additional value, driving satisfaction levels, increasing loyalty, and building deeper relationships with customers. I'm proud of the progress we've made in the first half of the year and look forward to a successful 2021. I'll now turn the call over to Tex.

Thank you, Barry. I will now address our performance in more detail. In the second quarter, revenue grew 12.6% over Q2 of last year. Revenue was $272.6 million. U.S. average daily sales growth was 12.3%, while Canada average daily sales growth grew 4.9% in local currency. We saw weekly sales volume grow each month during the quarter compared to last year and exited the quarter with low single-digit growth in June against increasingly strong growth comps last year. I would like to remind everyone that we had a record performance in the third quarter of 2020, with revenue growing 17% and record profitability with PPE incentivizing supplies making up roughly 11% of sales. Customer demand was strong throughout the second quarter and outpaced our invoiced net sales growth. Open orders increased as we moved through the period due to supply chain constraints, which delayed our ability to fulfill select drop ship and stocked products. Many of these products are currently in transit, and we expect to maintain a more normalized inventory position moving forward. We recorded growth across all sales channels, led by e-commerce, which accounted for approximately 57% of our transaction count, up 100 basis points from the prior year. Sales benefited from the continued rebound of core product lines and our private label offering once again increased as a percentage of total sales. Consumable products within the pandemic assortment, including PPE and sanitizing supplies, made up approximately 3% of sales in the second quarter, which is in line with prepandemic levels in the low single digits. This compares to approximately 20% of sales in the second quarter of last year, which was our pandemic peak for PPE as a percentage of total customer demand. Gross profit for the quarter was $98 million, an increase of 15.6% from last year. Gross margin was 36%, up 100 basis points from the prior year and up 520 basis points on a consecutive quarter basis. We were very pleased with the rebound in margin from the first quarter of the year. Gross margin performance reflects freight cost normalization as we address the impacts of our transition to the new carrier network, favorable product margins as private label offering capture a larger share of the sales mix, price rationalization, and the benefit of lower cost FIFO inventory sell-through with increasing selling prices. Supply chain pressures, including transportation and ocean freight costs, port congestion, and container availability are expected to remain elevated. We remain focused on maintaining a normalized gross margin profile by driving higher-margin sourcing channels, price capture, and continued optimization of our carrier network. Selling, distribution, and administrative spending for the quarter was $73.3 million or 26.9% of net sales, a 20 basis point increase as a percentage of sales from last year. Selling, distribution, and administrative expenses primarily reflect increased marketing investment to support customer demand shift to core product lines and private label and away from PPE, partially offset by fixed cost leverage as sales volume grew. Distribution center labor availability remains tight, and we are seeing wage pressures increase as a result. We continue to make planned investments in growth initiatives, including in our e-commerce platform and distribution network, which will support future expansion and customer satisfaction levels. Operating income from continuing operations was $24.7 million, and operating margin improved 80 basis points from last year's second quarter to 9%. Total depreciation and amortization expense in the quarter was $0.9 million. Capital expenditures for the second quarter were $1.2 million, and we expect total 2021 capital expenditures in the range of $5 million to $7 million, primarily comprised of maintenance-related capital and the recent expansion of our New Jersey distribution center. Operating cash flow from continuing operations was $11.6 million in the quarter. During the quarter, we reversed approximately $3.4 million or $0.09 per diluted share in valuation allowances against the net operating losses and deferred tax assets of our Canadian subsidiary. The tax benefit of the reversal is recorded in continuing operations. Let me now turn to our balance sheet. We have a very strong and liquid balance sheet with a current ratio of 1.5:1. As of June 30, we had over $41 million in cash, 0 debt, and availability of $72 million of our $75 million credit facility. 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 a quarterly dividend of $0.16 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.

Our first question today comes from Ryan Merkel with William Blair.

So my first question is on gross margin. I guess a 2-part question. First, how are you managing rising freight and product costs? And then secondly, is the gross margin rate that you just put up to 36%, is that sustainable into Q3, specifically, typically, I think, seasonally, you'd be pretty consistent there? Just wondering if there's any change this year.

Yes. A couple of things, Ryan. It's a great question given the times we're in. We believe we've got good visibility to gross margin moving through the end of the year. I think on a couple of aspects, we work very hard on the freight cost side. So I think we understand kind of the fundamentals around ocean freight and other areas that have a rising increase in costs in the market. So we feel that we've adjusted appropriately. I think given the supply constraints in the market as well, that's had an impact on, obviously, rising prices. Customers are aware of that. They're willing to pay for availability, and that's also helped, and we don't see that necessarily lessening through the end of this year when that happens. So I think given the market dynamics and how we've leveraged a lot of pricing intelligence data in the market, we're not in a position where our pricing is out of line. We kind of know where we need to be in the market, and that is helping us drive some increase. And we're pretty confident in terms of continuing to maintain that through the year.

Okay. That's great to hear. And then my second question is on sales. You obviously have some tough comps coming up in the second half. And just how should we think about the second half? Should we kind of think about it Q3 typically is pretty consistent in dollars for sales versus Q2, and then you have the typical dip in Q4? Or is there any reason it would be different this year?

We provided a brief overview in June regarding where we are making progress. As Tex pointed out, we have a challenging comparison due to our strong performance in Q3 last year. I can confirm that we are still experiencing very high demand from customers, and as we've mentioned during the call, our demand is currently exceeding our net sales delivery. However, we expect this situation to stabilize moving forward. This will present a tougher comparison for us in this quarter. As you know, we typically do not provide extensive sales guidance for the future. Nonetheless, we are observing some trends in Q2 concerning top-line demand and net sales delivery due to ongoing supply chain challenges that are likely to persist throughout most of the year. I hope that clarifies things.

Our next question comes from Anthony Lebiedzinski with Sidoti & Company.

So just wondering, as far as we hear more stuff about the Delta variant and so on. And just wondering if you guys have seen any changes in your customer buying patterns here lately because of that.

Yes. I believe that across the country, with some states reinstating indoor mask requirements, particularly in schools and other venues, we anticipate a slight increase in that area. However, I don't expect it to reach the levels we saw last year at this time. Recently, we have noticed a modest uptick, but it is not comparable to last year's figures.

Yes, Barry, I’d like to add to that. One thing to consider, which may not be directly related to the Delta variant, is the demand for outdoor furniture. We are observing that our clients and customers are looking to enhance the outdoor spaces of their facilities to provide their workers and associates with options for gatherings outside of indoor spaces. This trend has remained strong, reflecting an overall shift we've witnessed over the past year, and is not specifically tied to the recent surge we have experienced.

Got it. Okay. And if you do see a further increase in sales for those types of products, do you think you have enough inventory for masks or other items?

I think we have enough given the probably the level of the lower level of demand at this point, but we're perfectly positioned to be able to go into the market and procure more if needed. So we track all of our inventory levels based on the run rates of all the different commodities we'd sell. And we're definitely prepared to go in and make buys if we see volume coming up to those levels beyond our safety stocks.

Got it. Okay. And then you mentioned that you increased your private label penetration. Can you give us a sense as to where you were in the second quarter?

Barry, I'll take that question. Yes, Anthony, that figure does vary seasonally, so we don't disclose it on a quarter-by-quarter basis. We finished last year at around 40%, and we've experienced continued increases since then, both in the first quarter and into the second. Based on our seasonal product mix, we generally expect it to peak in the third quarter, mainly due to HVAC products and outdoor furniture, which contribute significantly to that ratio. While we don't provide specific guidance on a quarterly basis, we have seen an increase both sequentially and year-over-year.

Got it. Okay. And then last question for me. So your SD&A expenses did increase at a slightly faster pace than your revenue growth here in the quarter. Just wondering as to how we should think about the modeling expense growth here going forward for the back half of the year?

Yes, I think a couple of areas. I mean I think when you think about some of the selling, distribution, and administrative spending, certainly, the market for our core products is very healthy right now. So we're continuing to lean more into advertising, marketing, and sales expense as we go forward. But it's managed against our targets. So I think we saw a little bit of impact there, a little bit of wage creep relative to our distribution center. So those are all to be expected in today's market, and we continue to keep ourselves within line within our selling, distribution, and administrative budget targets through the end of this year.

This concludes our question-and-answer session as well as today's conference call. Thank you for attending today's presentation. You may now disconnect.