Good afternoon, ladies and gentlemen, and welcome to Global Industrial's Fourth Quarter 2021 Earnings Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Mike Smargiassi of The Plunkett Group. Please go ahead.

Thank you. And welcome to the Global Industrial Fourth 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 that should be understood as 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.

Thanks, Mike. Good afternoon, everyone. And thank you for joining us. We ended 2021 with another solid financial performance on both the top and bottom line. Revenue in the quarter increased 3.5% on an average daily sales basis, led by our managed sales channel, which continues to drive growth from core customers. For the full year revenue grew to $1.06 billion, average daily sales improved 5%, and our two-year compounded annual growth rate was 6%. Customer demand was strong during the quarter, and we continue to be pleased with the performance of our core product lines. Open orders have doubled since the beginning of 2021 as a result of ongoing constraints within the supply chain, but we're flat the last three months of the year. This elevation in open orders has restricted 2021 top-line results and had a modest impact on operating leverage as the company incurred variable selling expenses to generate these orders, which have been delayed in their fulfillment. We are currently optimistic that supply chain challenges may normalize as we move through 2022. However, if they continue, we have shown and remain confident in our ability to manage through these challenges. Profitability remains strong as we mitigated significant product and transportation cost inflation and leveraged pricing intelligence to deliver another quarterly gross margin record of 37%. For the second consecutive quarter, we achieved double-digit operating margins, the first time the company has achieved this level of profitability in back-to-back periods. We generated over $26 million of operating income in the fourth quarter, an increase of approximately 24% from the prior year, and for the full year, generated $88 million of operating income. In December, we paid a special $1 per share dividend, and today, increased the quarterly recurring dividend for the sixth consecutive year. I'm really proud of how our organization has responded and risen to the challenges of the last two years. From the onset of the pandemic to unprecedented supply chain constraints, our entire team has continued to execute on the ACE strategy, delivered for our customers, and allowed us to grow and strengthen the business for the future. We even embraced a can-do attitude and enhanced our customer-focused culture during a difficult operating environment. In the past year, we further built out the team as we on-boarded senior leaders in sales, merchandising, operations, and legal. We promoted key talent to new roles and drove higher associate engagement, which is reflected in continued improvements in our annual employee engagement survey. We also launched an entirely new brand identity and changed the company name and ticker symbol, which formerly aligned our business to our key stakeholders, including our shareholders. From the customer and digital experience through our distribution network, we made improvements in essentially every aspect of the business. Now as we move into 2022, our ACE focus is one of continued investment and execution that we believe will allow us to expand market share and capitalize on our growth opportunities. In our sales organization, we will be expanding our sales team with a key focus on public sector sales as well as launching a strategic account management team that's focused on larger, more complex accounts. In new business development, we aim to drive important growth as we ramp up public sector and private market relationships and expand field support through our territory sales management program. Execution of these initiatives is targeted at broadening and deepening existing relationships while purposefully driving entry into new customer end markets. Private brand remains a key focus that brings a strong margin profile and a point of difference in the market for our sales organization. As we look to expand the product verticals we serve, we will continue to leverage our private brand capabilities as well as vendor relationships. On the digital front, Global Industrial is committed to remaining a leader in digital transformation. It's our mission to offer our customers a modern, informative, and friction-free user experience across all digital channels. We are currently developing a new website platform with a completely updated user experience across desktop, tablet, and mobile, with additional features, personalization, a new look and feel, and navigation. We continue to roll out new and innovative programs and content that highlight Global's position as a trusted partner for our customers. In the first quarter, we launched the 'We Got This' campaign focused on the partnership we formed with customers and our ability to support them in the current business environment. These campaigns helped us drive engagement by directly relating to current challenges and opportunities our customers face and creating a rallying point for our internal teams. Across the organization, we are taking steps to deliver efficiency improvements. For example, we'll be launching a new CRM that brings all customer service tools into a single platform. This will help us deliver a better customer experience and drive efficiencies within the customer service team. In our distribution centers, we recently started implementing advanced slotting techniques, which will improve order processing speeds and enhance productivity. We continue to explore various technology and automation opportunities that could improve the customer experience and efficiency of our operations. In conclusion, we had a great 2021, growing the top line and delivering strong improvements in profitability as we navigated the ongoing impact of COVID, supply chain, and inflationary pressures. While we expect these challenges will remain elevated, we are proactively managing these external factors and aggressively addressing issues within our control. We are continuing to innovate and strengthen our competitive position. We are investing in our ACE strategy, specifically in areas such as sales, marketing, private brand, digital transformation, and distribution, all of which are targeted to help us drive better execution, enhance our ability to deliver an exceptional customer service experience, and support our growth for years to come. I'm excited by the momentum I see in the company as we continue to drive operational excellence in everything we do. We are building a world-class organization, developing a culture of innovation, and creating a company where every member of our team is dedicated to the customer. I'll now turn the call over to Tex.

Thank you, Barry. I will now address our performance in more detail. In the fourth quarter, revenue was $262 million, a decline of 4.3% over Q4 of last year, which had benefited from five additional selling days. Normalizing for the impact of selling days, cumulative average daily sales increased 3.5%. U.S. ADS increased 3.8%, while Canada ADS declined 3.3% in local currency. Results in Canada reflect a difficult comparison with the year-ago period as we lapped exceptionally strong PPE sales in 2020. Overall sales trends improved as we moved through the quarter. Looking at our performance on a 2021 to 2019 basis, which normalizes results against the surge benefit in PPE sales in 2020, the two-year growth improved from 8% in Q1 to 18% in Q4. And on a two-year CAGR basis, it was 8.6% for the fourth quarter and 6% for the full year period. We continue to see growth in core product lines and our private brand offering once again increased as a percentage of total sales to over 45% for the full year. Our performance was led by growth in our managed sales channels; e-commerce orders made up 56% of total transactions in 2021, which is an 800 basis point increase since 2019. Customer demand remained strong in the quarter. However, due to the supply chain environment, we experienced extended fulfillment times and continued to see an elevated number of open orders for both stock and drop-ship products. Open order volume remained essentially unchanged from the third quarter. We are optimistic that we'll see a reduction in open orders as we move through the year and as the supply chain normalizes. Gross profit for the quarter was $97 million, up 4.2% from last year. Gross margin was a quarterly record of 37%, an improvement of 300 basis points from the prior year and up 20 basis points on a consecutive quarter basis. This was our second consecutive quarter of record gross margin performance. Gross margin in the quarter reflects the impact of price rationalization, favorable product margins as the private brand offering captured a larger share of our sales mix, and during the beginning of the quarter, the last remaining benefits of a lower FIFO inventory sell-through. In the face of continued supply chain challenges, we will continue to implement our mitigation strategies, which have proven effective. While we will no longer benefit from lower-cost inventory layers as current inventory now fully reflects the higher-cost environment, we do expect ongoing initiatives to support our margin profile. This includes efforts to drive higher margin sourcing channels, pricing analytics, and freight optimization. We believe we will be able to build upon our recent full-year margin results. This is in line with our long-term goal of enhancing annual margin performance, subject to the normal seasonal variations arising from product and customer mix. Selling, distribution, and administrative spending for the quarter was $70.9 million or 27.1% of net sales, up 80 basis points as a percentage of sales from last year. SD&A primarily reflects increased marketing investments, new product lines, and growth initiatives. We continue to maintain strong cost controls but expect to see higher levels of SD&A in 2022 as we make growth-related investments in the key ACE focus areas Barry outlined earlier, and face additional wage pressures given the tight labor market. Operating income from continuing operations was $26.1 million in the fourth quarter, a 23.7% improvement from the year-ago period. Operating margin expanded 230 basis points to 10%, our second consecutive quarter of double-digit operating margin performance and the first time we have reached double-digit operating margin in the fourth quarter. Net income from discontinued operations was $22.7 million and was primarily related to the resolution of certain liabilities of the former North American technology business. Total depreciation and amortization expense in the quarter was $0.9 million, while 2021 capital expenditures were $3.4 million. We continue to review our distribution network and evaluate opportunities that would position us closer to our customers and improve service levels. With the planned investments noted in the potential expansion of our distribution network later this year, we expect 2022 capital expenditures to be in the range of $7 million to $9 million. Operating cash flow from continued operations has generated approximately $5 million in the quarter and provided over $47 million for 2021. Let me now turn to our balance sheet. We have a very strong and liquid balance sheet with a current ratio of 1.7 to 1. As of December 31, we had over $15 million in cash, approximately $4.5 million of debt, and availability of over $66 million under our $75 million credit facility. As a reminder, approximately $38 million of cash was used in the final week of the quarter to fund our $1 special dividend that was paid on December 27. We maintained significant flexibility to fully execute on our strategic plan and continue to fund our quarterly dividend. As a result, our Board of Directors has increased our quarterly dividend for the sixth consecutive year since we established the quarterly dividend in 2016. This increase of approximately 13% will result in a quarterly dividend of $0.18 per share of common stock. We anticipate continuing a regular quarterly dividend in the future. This concludes our prepared remarks today. Operator, please open the call for questions.

We will now begin the question-and-answer session. At this time, we will pause momentarily to assemble our roster. Our first question will come from Anthony Lebiedzinski with Sidoti & Company, please go ahead.

Thank you, and good afternoon. Thanks for taking the questions. So definitely, solid quarter, all things considered. So just this first, I actually, as far as the open orders that you guys said that they were elevated that you weren't able to fulfill, do you guys have a ballpark estimate as to how much that impacted the top line?

Yeah. Anthony, how are you doing this? Barry? Thanks for joining.

How are you?

Great, good. Great question. As we had said, our open order book has really doubled from where it was in our prior year, but it has really flattened out relative to the last several months, which is actually a good sign as some of the in-stock positions get slightly better. We generally aren't very specific about the amount and the impact on sales, but it's certainly had some friction in our overall sales throughout the year. And we believe that as the supply chain scenario starts to smooth out, we're not quite certain when that will be, we hope we see some relief towards the back half of the year, but all indicators are saying we'll see a much smoother environment in '23. We would expect that topline performance to be able to get better given improvement in overall in-stock rates.

Got it. Okay. Thanks for that. So at this point, you guys are just about halfway through the first quarter. Can you just give us some color as to what you're seeing out there from a demand perspective? Just wondering if you guys could provide color on this thing so far from Q1?

Yes. I mean, I think from my standpoint, look, the demand environment remains really healthy for us right now. I think when you take a look, we're definitely seeing a market that is more robust for demand, particularly core products are continuing to do well. But I think there's always some hedge relative to the supply chain challenges that we tend to try to navigate each day. But I think the industry is forecasting a fairly strong market, and we're starting to see some good performance there.

And Anthony, I think the only thing I would add to that would be, as you know, we were down modestly in the third quarter. And then in the fourth quarter, we did improve our rate as we moved throughout the period with our overall 3.5% ADS for the quarter. But we definitely saw the demand environment strengthen as we moved through the fourth quarter. So again, like Barry said, we do believe there's a strong demand environment out there right now.

Got you. Your inventory was up 31% from last year, so it seems like you should have the ability to fulfill the orders you have. Considering the ongoing supply chain constraints, how should we view that inventory increase? Is this inventory availability a competitive advantage for you?

Sure, Barry, I'll take that. Anthony, as you pointed out, the inventory value has increased significantly, nearly $170 million by the end of the year. A part of this increase, which is not exclusive to Global, is due to substantial inflation. We are aware that costs are rising, both in transportation which is factored into the cost of goods, and overall product inflation. Therefore, inflation does affect that figure. Additionally, longer lead times in the supply chain for procurement have led to increased safety stock levels, resulting in more products being in transit at any given time, which in turn drives up the overall inventory value even though it's not necessarily due to having more physical product in stock. It represents more of a valuation increase. Nevertheless, I believe our inventory levels overall are beneficial for our business and provide us with a competitive edge, which is why we implement the stocking strategy that we do, particularly for our private brand products. I’m not sure if Barry would like to add anything to that?

No, I think it was pretty clear. I think your high-velocity items, I think throughout the year tended to have the most challenge. But I do think that, like Tex had said, the inflationary markets had a huge impact on overall cost, and I think that's what's been impacting it.

Got it. Okay, perfect. So as you look to get into additional verticals, you talked about the public sector that you're looking to get into more. I know you guys put out a press release about that in January, so any sort of idea as to what the total addressable market opportunity is as you go into some of these different verticals?

I mean, if you take a look at it, the public sector is massive in terms of the total overall size, and it's in a highly fragmented market as well. So, we've been in the government K-12 public sector general market for some time. But we've made incremental investments right now to be able to scale much faster into the market at this point. So, highly fragmented, good opportunity for us to expand sales, and we're investing accordingly to get into that segment.

Got you. Okay. And then if I could just squeeze in a couple more questions here. So as far as your margins, obviously, very impressive gross margin and operating margin. I know, Tex, you talked about some headwinds as far as from a cost perspective. Can you just talk about how should we think about broadly for your gross margins and operating margins looking forward to 2022?

Sure, I can provide some insights on that. Regarding the gross margin, we finished the year with a composite of 37%, marking a new record compared to 36.8% in Q3. Throughout the year, as we noted the rising costs beginning in December and into the fourth quarter, our pricing intelligence team effectively identified opportunities where our inventory management allowed us to raise prices strategically to achieve a price-cost neutral state. This FIFO inventory approach enabled us to benefit from selling lower-cost inventory at these adjusted prices, providing a significant margin boost. We believe the effects of this strategy have been fully realized as we closed out the year concerning inventory costs. Additionally, we've consistently emphasized our private label and private brand initiatives, which deliver substantial margin advantages while offering excellent value to customers regarding pricing and product quality. We see considerable potential to continue improving our margins through this strategy. So, as we exit the year at 37%, we anticipate further improvements in our margin rate moving forward, as I indicated earlier.

Got it. Okay. That's perfect for that. And then just to follow up on that, as far as private label. So I know it's 45% of your revenue last year, and do you have a goal that you guys have in mind as to how far you want to take the private label penetration as a percentage of sales?

You know what, I will tell you it's a good question. I think that there certainly is additional penetration growth that we can go after. It's not 100%, but I think that given our strategy right now as we expand into some incremental different verticals, we've got opportunity to increase the total pie of our volume. So as our percentage goes up, so does our margin and so does our competitive advantage. So I wouldn't say there's necessarily a top-end goal of where we think, but we definitely look to push incrementally each year in the subcategories where it matters. So we could be, for example, any way as high as 80% in some categories, we could be down as low as 20% in others. So we set targets based on category and the penetration.

Got it. Okay. And then, last question for me. It's been a while since you guys have done any acquisitions. Can you just talk about whether you are still evaluating acquisitions? How should we think about that?

Yeah. And we've certainly had that as part of the overall ACE strategy, Anthony. We're constantly monitoring the market where we can find a great strategic fit for us to expand in a category that makes sense for us when we can cross-pollinate our own assortment into a strategic acquisition that would make sense. We continue to monitor the market for that, and we're constantly looking. So it has been a part of our strategy even though we had not made one in some time. It's definitely on the radar for us.

Got it. Okay. All right. Well, thank you. And best of luck.

Thanks, Anthony.

Thank you, Anthony.

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