Good afternoon, ladies and gentlemen, and welcome to Global Industrial's Third Quarter 2022 Earnings Call. At this time, I would like to turn the call over to Mike Smargiassi of The Plunkett Group. Please go ahead.

Thank you, and welcome to the Global Industrial Third 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.

Thanks, Mike. Good afternoon, everyone, and thank you for joining us. Third quarter revenue reached nearly $300 million, growing 7.6% over the third quarter last year. Gross margin remained healthy and increased modestly on a sequential basis to 35.7%, but was down from a record third quarter performance last year, which included the initial benefits of strong price rationalization and lower cost FIFO inventory sell-through. During the quarter, our one-to-one managed sales channel led our growth and we generated strong cash flow from operations. We further reduced our inventory position and continue to maintain a very strong balance sheet. While the current outlook remains one of caution, we are investing in growth and productivity initiatives and are proactively managing the business to rapidly adapt to changing market conditions. Investment in sales, marketing, private brand, digital transformation, pricing analytics, and distribution are strengthening our long-term competitive position and allowing us to better focus on the needs and experience of the customer. One of our key growth initiatives is the expansion of customer relationships, both in terms of new customer acquisition and expanding share of wallet within existing accounts. For example, hospitality and healthcare are large markets with tremendous potential, the ones in which we have historically garnered low penetration. We are targeting these opportunities by staying true to who we are, meeting with our core offering of furniture and decor, storage and shelving, and carts and trucks while augmenting these solutions with additional products. We have paired this offering with a very deliberate marketing and sales approach that highlights our understanding of the unique needs of these end markets. Further, the same can be said of our large customer acquisition efforts, where the market is substantial, and we're being very focused in our approach as we build out our team and target-specific verticals. With both our new end market and large customer efforts remaining in their early phases, we are pleased with the initial success and committed to building these efforts over time. Our managed sales team continues to lead our performance and demonstrate the value we provide customers through direct one-to-one relationships. The sales organization is capturing share by driving greater penetration which in turn builds larger accounts and creates longer-lasting relationships. Pricing intelligence and analytics is another critical area of investment that is enhancing our ability to continue navigating the dynamic price/cost environment. By incorporating real-time market data, we are positioning to make timely decisions that allow us to maintain price competitiveness and preserve our margin profile. In the quarter, we completed the launch of our new digital e-commerce site. It includes enhanced functionality aimed at driving personalization of sales, marketing, and merchandising offerings, which is an important pillar of our customer-centric strategy. Finally, we recently commenced full operations at our new distribution center in Toronto, Canada. This facility will allow us to establish independent distribution pathways to our Canadian customer base and consequently significantly increase service levels, improve efficiencies, and provide additional capacity to support long-term growth in the market. In closing, I believe we are a stronger company today than at any time in our history from the diversity of our customers and product offering to the talent of our associates and management team, to the data analytics and digital capabilities. We continue to differentiate ourselves as a leader in what remains a highly fragmented distribution industry. We are not immune to the macroeconomic environment, but the investments we have and continue to make in our strategy should position us well to capture opportunities for long-term market share growth and emerge from the current cycle in a stronger position. We are a nimble organization that utilizes the flexibility of our strategy and ability to adjust to market conditions to navigate the challenges of the past two years, and we continue to do so today. We are focused on operational excellence and putting the customer at the center of everything we do. We believe we have the right strategy in place to drive long-term performance and value for our stakeholders. I will now turn the call over to Tex.

Thank you, Barry. Third quarter revenue was $298.5 million, an increase of 7.6% over the third quarter of last year. U.S. revenue increased over 8%, while revenue in Canada improved approximately 4% in local currency. The private brand offering once again increased as a percentage of total sales, and we had a further reduction in open orders as we benefited from the normalization of the supply chain. As we move through the quarter, the demand environment softened, a trend that has continued as customers have generally taken a more guarded approach to buying decisions, given the broader uncertainty in the market. Gross profit for the quarter was $106.6 million, up 4.5% from last year. Gross margin was 35.7%, an increase of 20 basis points on a sequential quarter basis but off 110 basis points from the prior year. Margin performance reflected the continued impact of promotional pricing on excess and seasonal stock as well as the flow-through of some higher cost inventory, which we noted on our second quarter call. In addition, we had a very strong comp to the third quarter of 2021, which benefited from price rationalization and the benefit of lower cost FIFO inventory sell-through with increasing selling prices. We strive to provide exceptional value to our customers, which includes a competitive approach to pricing. In the short term, this may impact our ability to attain the margin rates generated in the first half of this year. The benefit from price appreciation is waning as we begin to compare against initial increases applied in the third quarter of last year. In addition, while ocean freight costs have moderated, they remain elevated over historical levels and higher total landed costs remain a component of our current inventory value. We continue to believe that long-term margin gains are achievable as we drive a higher balance of private brand sales, continue to invest in pricing analytics, optimize our fulfillment and freight profile, and drive leverage across our fixed cost base. Selling, distribution, and administrative spending in the quarter was $79.1 million or 26.5% of net sales, an increase of 80 basis points from last year. SD&A primarily reflects investments in the expansion of our Canada DC network, including approximately $0.8 million in ramp-up costs incurred in the third quarter as well as investment in e-commerce and other technology enhancements and increased marketing efforts. We continue to maintain strong cost controls but expect to see higher SD&A leverage ratios in the fourth quarter of 2022 as we transition to the new Canada DC and optimize operations, along with the impact of historically lower fourth quarter sales on our fixed cost base. Operating income from continuing operations was $27.5 million in the third quarter and operating margin was 9.2%. Total depreciation and amortization expense in the quarter was $1 million, while capital expenditures were $2.8 million. We expect 2022 capital expenditures in the range of $6 million to $7 million, which includes the new Canada DC. Let me now turn to our balance sheet. We have a strong and liquid balance sheet with a current ratio of 1.9:1. As of September 30, we had $20 million in cash, $10 million of debt, and $61 million of availability under our $75 million credit facility. The improvement in our debt position over the second quarter of 2022 reflects decreased working capital needs as inventory levels normalized. We currently expect inventory levels to further reduce in the fourth quarter. 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 $0.18 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 will come from Anthony Lebiedzinski with Sidoti & Company.

So I know you guys talked about a softening environment from a macro perspective as the quarter progressed. Just wondering if you guys could provide any additional color on the monthly cadence. And maybe just also talk about which product categories you saw outperformance versus others. That would be great.

Yes, Anthony, thanks for joining. This is Barry. Yes, as we kind of noted on the call, we definitely saw some demand environment soften a bit through Q3. I think we saw a little bit of customers taking a more guarded approach. And certainly, we saw a little bit of the price appreciation benefit waning through the period. But we did continue to see strong growth in our core lines and private brand assortment, which I think is very helpful for us. Certainly, category specific. For us, we saw fairly good growth across those categories in the period. From a sales perspective, our one-to-one sales organization, which is a really strong group, definitely saw leading growth for us through the period. And I think that is our primary goal, obviously, to deliver above-market growth over the long term and continue to leverage other resources we have to continue our growth base.

Got it. Yes. And in terms of the year-over-year gross margin decline, can you just go over some of the puts and takes as to what drove that decline? I know you had private label, you mentioned it went up, which is a higher margin category, but then obviously some other things impacted. So if you could just go over, again, the puts and takes for the gross margin decline, that would be great.

Yes, sure. I mean we were happy that we were able to gain sequential growth performance Q3 over Q2, which we were pleased with. I think the biggest differential, as we talked about in the call, was really around some of the differential in FIFO inventory levels last year, which we benefited from, certainly, which I think helped us on the margin side, which was one of the big drivers for us this year over last year.

Got you. And then lastly, so Barry, you talked about taking steps to adapt to changing market conditions. I know you mentioned pricing and analytics, investments, and the marketing tools. So have those initiatives that you have in place, which ones do you think will be the most impactful in terms of just adapting to what's going on now in the external environment?

Yes, that's a great question. You really touched on an important point regarding price analytics and our efforts to understand competitive pricing in today's market, especially after last year's high inflation and the ongoing evidence of it in certain areas this year. We've devoted a lot of time to exploring this and ensuring we maintain a competitive stance in the market. Another crucial element is the effectiveness of our sales team. With our one-to-one sales approach, we’re able to closely engage with our customers to gauge their perception of demand and ensure our pricing aligns with their expectations. The sales team serves as an excellent resource for real-time insights. Additionally, we utilize significant voice of customer survey data to gather intelligence on how the broader market feels and to identify trends regarding their spending outlook for the upcoming year. These are some of the strategies we currently employ to assist us in navigating these changes.

Got you. So just to follow up on that regarding the customer survey data, I’m curious about the findings you’ve observed from it.

Well, as we kind of called out in our release and certainly in our call, I think there's a little bit of global caution around overall market conditions, certainly heading into next year. And the way we play that is we're very much looking at the near term, but we're also keeping our long-term growth prospects in mind relative to our investments that we called out. So we get different data coming through from our customers. And I think we've certainly seen some evidence of supply chain improving a bit. And I think that is helping customers relative to their overall view of satisfaction in terms of getting better data around when their products are going to arrive and things like that. So I think we've definitely seen some improvement on the supply chain side that I think is helping in terms of their overall outlook. But certainly, on the buy side, we're looking at that constantly and helping to guide us going forward.

Our next question will come from Paul Dircks with William Blair.

So first question for me. I can certainly appreciate, Barry, the softening of demand from customers throughout the quarter. But on the last quarterly call, if I recall correctly, there was good volume even through July. So I guess my first question is, was there a precipitous drop in August and September that came about? Or how would you characterize the change in those customer conversations later in the quarter? And to the extent you're comfortable, has there been any further change through October?

Yes, that's a good question, Paul. As you know, we typically don't provide specific month-to-month guidance. We did notice some softness as we progressed through Q3, which was quite apparent. The feedback indicated that customers have adopted a more cautious approach to spending. They seem to be focusing more on their expenditures for the remainder of the year and are certainly approaching 2023 with a level of caution. Additionally, we have observed and anticipated a slight decline in the benefits of price appreciation during this period, and customers are becoming more attentive to the prices they are paying for items.

Very good. Digging into the sales aspect, can you quantify by chance the difference in growth rates between your private label sales and other products?

Yes. I mean we typically don't call that out directly, but what I will tell you, Paul, is that the private brand for us is a very strong growth driver in the business. And as we've talked in previous calls, that's been an area for us to be able to engineer more margin and create a better value proposition for our customer. So we definitely like to see our private brand growing generally at the fastest rate relative to the category. And obviously, it's an important part for us, and it's a big focus of the business.

And if I can just jump in there as well, Paul. So as we pointed out, the private brand was our fastest-growing segment in our sourcing channel in the quarter as compared to the national brand, which really did help maintain that margin as there was some other price pressure on, as we're talking about the FIFO inventory layer still continue to work that high cost of freight of acquired products as well as some of those promotional pricing that we need to work through to get through some of that seasonal inventory that we had acquired. A little bit of a continuation of some of that from Q2. But again, as Barry mentioned, we had been able to maintain, actually, modestly improve our gross margin rate sequentially, albeit coming off of last year, a pretty significant rate in Q3 of last year.

Got it. No, I appreciate that extra color. Switching gears to the new e-commerce site. Could you maybe quickly elaborate on what your expectations are for the site now that's rolled out? How are the early returns? How is the feedback and the customer response been? And how do you anticipate this new e-commerce site helping you over the medium term here as we go through what may be a down economic period?

Yes, that’s a great question. From an e-commerce standpoint, it’s a business that constantly undergoes updates and improvements based on customer feedback and analytics. The significant changes we've made to the user experience and navigation are performing as we expected. We believe the site's overall experience and aesthetic are very strong. It's not just about major launches; we are continuously refining the navigational flow to help customers find the products they want. Our internal search functionality has greatly improved with the latest upgrades, and we are consistently enhancing the experience based on data related to product selection and conversion rates. We are pleased with the performance so far and will keep making adjustments moving forward. It’s an ongoing effort within the organization to refine the site based on customer insights.

Very good. And then lastly for me, given the fact that we've seen the macro economy step down, have some of the discussions you guys have had with potential acquisition targets, have those discussions heated up at all? Are valuations coming in? How would you characterize your pursuit of inorganic growth here?

That's a great question, too. I think, like I said, we've said before, we're constantly scanning the market for opportunities. I think it's hard for us to comment relative to valuations at this point. I think each situation that we've looked at is very different, what's driving the valuation at the types of size that we're looking for in terms of an acquisition? So it's hard to comment on the valuations right now, but all I can tell you is that we continue to look at opportunities on a regular basis. And when we do identify that company that creates the right synergies with our business, we'll pursue that.

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