Global Industrial Co
NYSE:GIC
Earnings Call Analysis
Q4-2023 Analysis
Global Industrial Co
Despite a challenging start in 2023, marked by uncertain economic forecasts and deflationary pricing, Global Industrial's strategy led to record revenues of $1.27 billion, bolstered by the Endos acquisition. As the year progressed, organic revenue saw a 4% growth, with the demand improving and pricing pressures easing. The fourth quarter stood out with the highest year-over-year growth of 22.9%, totaling $320 million, of which 5.1% was organic growth.
Global Industrial reported a gross margin of 33.8% for the year, a 100 basis point increase from the previous quarter. This financial strength, alongside prudent acquisitions like the $72 million Indoff buyout, allowed the company to raise its quarterly recurring dividend by 25% to $0.25 per share, marking the eighth consecutive year of dividend increases.
Looking at strategic achievements, Global Industrial took strides in operational excellence, web presence, marketing, sales, merchandising, and customer services, all designed to bolster the customer-centric strategy. There were significant enhancements in go-to-market channels, particularly with the Indoff addition, e-commerce improvements, and investments in sales resources to support the customer base.
For the upcoming period, Global Industrial aims to enhance its problem-solving capabilities for customers and expand service offerings leveraging its acquisition of Indoff. Additionally, there is a renewed focus on delivering value through improved quality of products and buying experience as well as fine-tuning product assortments to meet customer needs. Furthermore, efforts to simplify business dealings and improve the shopping experience will continue, paired with investments in sales, marketing, and tools to retain and grow customer relationships.
The fourth quarter of 2023 saw a revenue upswing to $320.1 million, reflecting an increase of 22.9% over the same quarter of the previous year, with organic growth contributing to 5.1% of this increase, indicating the largest growth rate of the year. Gross profit climbed to $108.2 million, up 15.4%, whereas gross margin saw a reduction to 33.8% compared to the previous year's period primarily due to the lower gross margin profile of the Indoff contribution.
The company is dedicated to managing its margin profile, cautiously handling proactive promotions and freight actions. With Indoff's influence, a decline in consolidated gross margin is anticipated in the subsequent quarter relative to last year, with additional concerns over increased ocean freight costs due to disruptions in the Red Sea possibly affecting future gross margins. Nonetheless, operating income was healthy at $21.4 million, and significant improvements in selling, distribution, and administrative expenses were noted, attributable to cost control measures and Indoff's efficient cost structure.
The operational cash flow generation remained robust at $8.2 million, supporting a solid balance sheet with $34.4 million in cash, no debt, and plenty of credit facility availability. This positions the company to sustain strategic executions and shareholder dividends, with the Board declaring a generous 25% higher quarterly dividend. Capital expenditures for 2024 are projected to be between $6 million to $8 million, focused on network equipment maintenance.
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Good afternoon, ladies and gentlemen, and welcome to Global Industrial's Fourth Quarter 2023 Earnings Call. [Operator Instructions]
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 Fourth Quarter 2023 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 and organic metrics. Organic reflects the performance of the Global Industrial business exclusive of the May 2023 Indoff 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 that the 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.
In 2023, we continue to execute against RA strategy. Revenue reached a record $1.27 billion as we benefited from the acquisition of Endos, while organic revenue performance reflects the soft start to the year.
We entered 2023 with an uncertain economic outlook, cautious customer purchasing behavior and deflationary pricing. As we move through the year, the demand environment improved. Pricing pressures eased and we delivered solid second half results, growing organic revenue 4%. In fact, Q4 produced our best top line growth for the year. Total revenue was $320 million, an increase of 22.9% year-over-year.
On an organic basis, we posted our second consecutive quarter of growth as revenue improved 5.1%. These gains reflect continued volume improvement and strength in our e-commerce channel.
Gross margin was 33.8%, a 100 basis point uptick on a sequential quarter basis.
We ended the year with a modest increase in our cash position, even after fully funding the $72 million Indoff acquisition. Given the strong cash flow generation of the business, today, we announced a 25% increase in the quarterly recurring dividend to $0.25 a share, the eighth consecutive annual increase.
Looking back at 2023, I'm really proud of how our entire team executed against the key pillars of our customer-centric strategy from distribution, web, marketing and sales to merchandising and customer service.
Across the company, we advanced operational excellence and strengthened our long-term competitive position. We expanded our go-to-market channels with the addition of Indoff, made enhancements to the user experience and our e-commerce platform which helped drive web performance and grew the enterprise offering while making investments in sales resources to support both new and existing customers.
We remain committed to making the investments that will drive our future performance. As we look to build upon the progress of last year, we have a number of customer-focused initiatives to ensure we further enhance the buying experience and take care of our customers at every part of their journey.
First, we'll continue to elevate Global Industrial's ability to solve problems for customers and bring a more comprehensive solutions-based approach to our offering. Internally, we look to be solutioneers for our customers, delivering product content, support and knowledge to help them make informed decisions and succeed. We are enhancing product training for our subject matter experts and leveraging Indoff's project management and installation capabilities to expand the service offering.
And to our voice and customer feedback process, we will drive alignment of these efforts with the needs and solutions customers are looking for.
Second, we'll prioritize a renewed focus on the value we provide. From the extra chip in the cookie we deliver through Global Industrial's exclusive brands through a new quality team to evaluate, improve and monitor our processes. We will emphasize quality of the buying experience every step of the way from product sourcing to delivery to the customer.
We will also fine-tune our product assortment to ensure we have the right selection of core products and complementary consumables for our customers. With these initiatives, we are improving the quality of our offering and highlighting the value we bring to market.
Third, it is our aim to make it even easier to do business with Global Industrial. You have heard us talk about providing an exceptional end-to-end shopping experience that delivers a frictionless transaction. We have several ongoing efforts to improve category merchandising and drive shop ability and a new customer service agent training program, all designed to deliver a 5-star experience.
Finally, we are making further investments in sales, marketing and profit performance there is to improve the tools and the team we have to grow, retain and deepen customer relationships. This includes technology investment to drive efficiencies in sales, optimize digital marketing and enhanced pricing intelligence and analytics.
As we enter 2024, I believe we have the right plan in place to build upon the progress of last year. Initiatives across the business are designed to elevate and highlight Global Industrial's position as an indispensable business partner and the value we bring every day to our customers.
Investment in key performance areas are designed to strengthen our competitive position, drive operational efficiencies and help us capture share. The market environment remains one of caution and we have seen modest organic growth to start the year. 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 opportunities and build long-term value for our stakeholders.
I'll now turn the call over to Tex.
Thank you, Barry.
Fourth quarter revenue was $320.1 million, up 22.9% over Q4 of last year. Organic revenue was $273.9 million, up 5.1% year-over-year, our largest growth rate of the year. Growth was consistent throughout the quarter with volume up and price headwinds in the low single digits. Organic U.S. revenue was up 5% and organic revenue in Canada was up 7% in local currency.
E-commerce and broader digital sales were once again our leading channel and ended the year representing more than 60% of total annual order volume. Private brand demand remains robust and represented approximately 50% of total sales in 2023.
Gross profit for the quarter was $108.2 million, up 15.4% from last year. Gross margin was 33.8%, down 220 basis points from the year ago period, primarily due to the contribution mix of Indoff and its relatively lower gross margin profile.
Indoff gross margin was 21.5% and in line with their historical performance. Organic gross margin rate was 35.9% in line with the year ago period and up 140 basis points sequentially. Organic margin performance benefited nearly 40 basis points from a onetime settlement with a former LTL freight carrier in the quarter.
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 initiatives. As a reminder, given Indoff's impact to our composite margin profile, we expect the consolidated gross margin decline in the first quarter as compared to last year.
In addition, as a result of shipping disruptions in the Red Sea, we have seen double-digit increases in ocean freight costs in the first quarter. This is something we are closely monitoring and may be a gross margin headwind in future quarters depending upon the duration of the disruption.
Selling, distribution and administrative spending for the quarter was $86.8 million or 27.1% of net sales and improved in approximately 210 basis points from last year. SG&A primarily reflects the benefit of Indoff's lower cost structure as well as general cost controls within the organic business.
Operating income from continuing operations was $21.4 million in the fourth quarter and operating margin was 6.7%. Organic operating margin was 7%. With the addition of Indoff and its comparatively lower operating margin rate, our composite operating margin may remain lower than historical periods.
During the quarter, we generated operating cash flow from continuing operations of $8.2 million. Total depreciation and amortization expense in the quarter was $1.9 million, including approximately $0.8 million associated with the amortization of intangible assets associated with the Indoff acquisition, while capital expenditures were $0.7 million.
2023 capital expenditures were $3.9 million and we expect 2024 capital expenditures in the range of $6 million to $8 million, which primarily includes maintenance-related investments to equipment within our network.
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 December 31, we had $34.4 million in cash, no debt and $101.2 million of availability under our 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 that reflects an increase of 25% from the previously declared quarterly dividend.
This concludes our prepared remarks today. Operator, please open the call for questions.
[Operator Instructions] Our first question will come from Anthony Lebiedzinski with Sidoti & Company.
So just wondering if you guys could comment on the cadence of your sales in the fourth quarter. Maybe give us some more details as well about the first quarter-to-date trends. I know a couple of your peers have talked about some severe winter weather in January disrupting sales. So if you could comment on that, that would be great.
Yes. I mean I think from a Q4 exit period for us at organic on 51 basis was -- we were pleased with that performance. As it relates relative to the winter season, winter season, I think, was kind of short and had a quick burst in the early phase. And certainly, we have a seasonal business for winter products that gets helped by that. We didn't see a tremendous amount of disruption to be frank, in that area. So we felt we fared pretty well with those products. So it was a relatively good season for us.
As we kind of go through exit Q4 and into Q1, we certainly see some modest organic growth flowing through. So I think, Anthony, in general, I still think we see a fairly cautious sentiment in the market relative to where customers are today, I think they're still prioritizing price. So I think there's always going to be some headwind there.
I also think that from a growth perspective, industry-wide, we certainly see kind of MRO being in low single-digit growth in general. But it's a fragmented market. So we think we have opportunity to continue to grow. But it's certainly a competitive market relative to price and freight. So right now, our prospects are very reasonable. We continue to -- only halfway through the quarter, and we'll continue to pursue our initiatives to get us to a good result.
Understood. Okay. And just wanted to follow up. So on your third quarter call, you guys talked about the caution, especially with large orders, some customers, I think, were spreading their orders through multiple shipments. Did you see less of that or kind of more of the same as far as just the large orders? Just curious to get your take on that.
Yes. I think it's been fairly consistent, Anthony, relative to large orders. We -- like we said in our remarks, I mean, e-commerce has been a very good channel for us. And typically, that drives a little bit lower order size. But I think we've seen fairly consistent performance on large orders even through the last reporting period.
Yes, that's absolutely right, Barry. This has been very consistent, Anthony, on that approach.
Got you. All right. And then, Barry, you talked about -- you and several initiatives that you guys are focused on. As far as out of the 3 or 4 that you outlined, I mean, which one out of those, you think will have the most immediate impact on the business and kind of which ones out of those initiatives kind of will take longer play out?
Yes. So great question. I think with our focus this year, we're really putting huge emphasis into quality across the organization, one that I'm really excited about. Being a company that typically ships big and bulky items you're always suspect to damages and damages have an impact on long-term retention. And although our acquisition and our retention rates right now are very good, been very pleased with them, we're investing in as an organization to make sure that the end-to-end experience from the time we source a product from the time it comes into our warehouse that we have a quality team that's inspecting those goods, and based on being able to reship those items back out to customers, making sure that we have the appropriate quality audits and programs in place to really drive a great experience to the end user.
So we've been focused on quality since ACE was created back in '19, and we continue to improve our processes and invest into that experience. And we believe that as that continues to get better, that will continue to increase our retention rates for the company and drive long-term customer value.
Got you. Okay. And then lastly, just a quick housekeeping, I guess, thing. So your tax rate was a little bit higher in Q4. Anything there to call out? And anything you can say as far as '24 tax rate?
Yes. I think I'll take that one. I think it should be a little bit more consistent in next year. This was related to some Canada income and for some foreign income and treatment of NOLs. But ultimately, we would expect a more consistent and normalized tax rate right under 25% for 2024 -- I'm sorry, for 2024.
Our next question will come from Michael Francis with William Blair.
This is Mike Francis on for Ryan Merkel. I think to start like the gross margins. I know you're lapping Indoff and you had a little bit of headwinds there organically. How should we think about the business overall with the full year of Indoff involved? Is there going to be any accretion with that acquisition or growth with that acquisition coming in the next year?
Yes, Barry, if you don't mind, I'll take that question. So in regards to gross margin, I mean, right now, we're breaking out gross margin and sharing it obviously with the market, both organically and then on a consolidated basis. Indoff for a long time, had a very stable margin profile, but there's definitely activity that we're working on with their sales reps and the sales partners to be able to move their gross margin up over time. But again, it's naturally a slightly different business model that will have a little bit lower gross margin rate.
In regards to the organic business, where we can think about, I mean, this quarter was the third quarter and the fourth quarter were fully consolidated businesses. If you look at our gross margin in the second half of 2023. We should expect to see that continue in as we're always focused maintaining that gross margin profile.
You said there's always some headwinds that we face in the marketplace. Right now, ocean freight as we called out, I mean, currently with some of the disruptions in shipping lanes around the world are driving some rates up. but we think that's going to be fairly short-lived, and we'll be able to work through that. And that's really why we invest so heavily in our pricing team and pricing analytics to make sure that we can capture price where appropriate, but maintaining gross margin is always a key priority of the company.
Okay. And then I also wanted to ask about private label a little bit. You mentioned 50% of sales. Is there a target that we should think of when we think of where you want to get with that happy with where you're at now? Or is there more room to grow there?
Couple of pieces. I'll take that, Mike. I think one is we're usually not providing like long-term guidance on private brand penetration, but I can tell you we do believe that there's upside. And I think it could come in 2 ways.
I think, one, relative to Global's organic business today, we really take a good, better, best approach in the assortment, and we continue to refine the assortment where we see private brand to be the best fit because private brand in our mind, really creates an added advantage in terms of the capabilities that we offer to the product.
And if we can continue to provide that at a best value price in the marketplace, we'll continue to emphasize those sales going forward. The other piece where there's upside, I think, is relative to kind of what Tex covered. I think the Indoff business model, which typically was really a drop-ship model. Part of our approach there is to be able to penetrate that assortment with private brand.
And so between all the efforts we have relative to training and educating on the product and our new product development, we think that will create some upside and additional expansion in private brands. So we absolutely think there's growth upside, where we are certainly beyond the 50% business today, and that's a core strategy of ours going forward.
And then one last one here. You talked a little bit about the Red Sea and shipping up. How much of your shipping is coming through there? Are your products coming through that channel?
Actually very little bit is actually coming through that channel. However, that's increased the overall rates across the industry as the overall container flow has been disrupted with people moving around the Game of Africa and other areas we've seen just an overall increase in rates. So we're not actually seeing delays due to our product coming through there, but the overall market has had rate increases. I think that's not unique to us. That's fairly I mean, readily available information in the market about the different -- the current increases that ocean carriers are passing through.
Again, we think that it's ideally transitory in terms of the cost increases and after Chinese New Year's, we hope that, that will also begin to settle out as demand normalizes as well. So -- it's an area we're monitoring, but it's something that we have a key focus on trying to mitigate that where we can.
This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.