Good afternoon, everyone and welcome to Global Industrial’s Third Quarter 2021 Earnings Conference Call. [Operator Instructions] We also note today’s event is being recorded. At this time, I would like to turn the call over to Mike Smargiassi, Investor Relations. Sir, please go ahead.

Thank you, and welcome to the Global Industrial third 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 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 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. We delivered a solid third quarter performance and are very pleased with our execution across the business. Despite a modest decline in net sales customer demand was strong and accelerated in the quarter with continued growth in core product lines led by private label. Continued constraints within the supply chain contributed to significant increase in open orders, which negatively impacted top line results in two ways. First, due to delays in order fulfillment times, our conversion of customer demand in net sales was much slower than our typical conversion cycle. Second, we believe that the combination of both extended lead times, as well as the volatility of in stock position’s key products cause customers to defer buying decisions and limited our ability to maximize sales. Gross margin set a new quarterly record of 36.8%. And we delivered over $30 million of operating income in the quarter with operating margin of 11% matching our quarterly margin record. This was a significant achievement in a difficult environment. Our operating performance reflects the efforts of our associates as they continue to execute on our ACE strategy and manage through supply chain challenges. This includes strong execution, a number of key areas, including price intelligence and analytics. Our enhanced pricing capabilities were essential to our topline and margin performance in the quarter. Investments in this area are providing timely insights that allow us to capture price in line with the market while continuing to deliver value to our customers. Also, private brand. We have seen continued growth in our global industrial and other private branded products, which deliver a high quality and at attractively priced offering to customers as well as driving a higher composite gross margin. It also allows us to leverage…

Thank you, Barry. I will now address our performance in more or detail. In the third quarter, revenue was $277.4 million, a decline of approximately 3% over Q3 of last year. U.S. average daily sales declined to 3.5%, while Canada average daily sales increased to 1.3% in local currency. Sales improved each month during the quarter, and in an effort to normalized results against the surge benefit of PPE sales in 2020, I would note our two-year CAGR was 6.6%. We saw a continued growth in core product lines. And our private label offering once again, increased as a percentage of total sales. Our performance was highlighted by growth in our managed sales channels, as well as e-commerce orders, which continue to increase as a percentage of total transactions. Customer demand expanded in the quarter and the rate of growth improved each month. 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. We are cautiously up to that the supply chain will normalize over the next six months. Consumable products within the pandemic assortment including PPE and sanitizing supplies made up approximately 3% of sales in the third quarter, which is in line with the second quarter of this year and our pre-pandemic levels in the low-single digits. This compares to approximately 11% of sales in the third quarter of last year. Customer demand for non-PPE products was healthy in the quarter, reflecting the continued mix shift to core product lines. I would like to remind everyone that the fourth quarter of 2021 will have 61 selling days. And the fourth quarter last year contained 66 selling days. In addition, fourth quarter of 2020, DDS improved approximately 16%. And PPE…

[Operator Instructions] Our first question today comes from Ryan Merkel from William Blair. Please go ahead with your question.

Thanks. And good afternoon.

Hi Ryan.

Hey Ryan.

So, I wanted to start with your comments on limited product availability and the increase in open orders or the product shortages brought based, or was it isolated to several items? And then are you going to book the open orders next quarter? And if so, how big is the impact?

Yes. It's a great question, Ryan and I would tell you that I think there was a fairly even balance between the type or I'd say the mix of products that we saw flow through. I mean, certainly our private label balance of sales been very strong given the core growth, but certainly in terms of open percentages, we definitely saw a fair mix between both the stock and drop ship. And the extended lead times that are occurring in the supply channels support each of those – each of those markets. We definitely have seen, as we've said in the prepared remarks, elevated, open during the period as our revenue continue to grow at least book demand. And we've seen a fairly smooth percentage of back-order reductions. We've been very creative relative to how we're trying to drive the flow through of the supply, given the challenges and the channel right now. We continue to see some fairly healthy customer demand come through. And I think the organization has been fairly resilient in how we're trying to pull through products, both from drop shippers as well as overseas manufacturers. So, we'll see a fairly smooth and, and consistent flow through of that product as far as we can see right now.

Okay. That's helpful. And just to follow up. Is there a way to quantify the impact in the quarter? Was it a couple points of sales growth that you lost or was it bigger?

Yes. It's not something we...

Yes. Go ahead, Barry.

It's not something we would necessarily kind of quantify or disclose really in the marketplace, but certainly if you – if you're out of certain key products, it's definitely going to impact some of your – some of your top-line growth. And we definitely had that impact in the period. But I think our book-to-bill rates relative to how we looked at the business was challenged due to that. So, we certainly had plenty of demand, and I think we're going to continue to try to quantify and look at what that impact is longer term. But I think from the actual numerics we usually don't go through that and disclose it.

Yes. Ryan, I can supplement that a little bit. So, if you think about, Ryan, if we reported net sales down or 3% but our customer demand what was up actually year-over-year? So, we saw growth. So, when you think about that that Delta, it's going to be again more than – more than 3 points clearly, but in that kind of single-digit range of impact. So, it was not ominous and obviously we're the supply chain challenges do continue to exist, but we are fairly cautiously optimistic that that will continue to get a normal fair share of our flow through into Q4 and then into the New Year.

Got it. Okay. That's helpful. And then from my follow up, I was impressed with your gross margins this quarter. Obviously, it improves you a lot since the first quarter. What was the growth rate of private label? And if you have it to percent a sales and quarter, and then I'm curious, is if higher inflation boosted your gross margins tax, I think you might have mentioned that in your remarks, how big if so, how big was the impact?

Yes. And I'll take that Barry, and then you can supplement. So, Ryan obviously private label products while again, we'll tend to update that on an annual basis rather than quarter-to-quarter. It was our fastest growing sourcing channel in the period, which obviously does contribute to an increase in gross margin rate and also provides that sustainability that we see as it's really part of the core strategy, moving product and moving customers with that high value product that we reproduce under our private brands. So that's an ongoing opportunity. And absolutely there is a – there is a benefit from price increases in the market and being able to time those really monitoring the market, using our analytics and intelligence capabilities, the software we use to really monitor pricing, where you're able to capture some price on the front end, as costs are going up. And again, you get that FIFO benefit to be able to sell through. So, there is definitely played a part in it, both strategically and timing to help support that growth, but continuing to improve. And again, you mentioned obviously Q1 as a reference point, as you remember Q1, we had some pretty significant impact of ocean freight and some other freight challenges in that period. Which kind of highlighted those are the domestic freight challenges and costs are really behind us. That was a transitory impact in the first quarter and we're really working through those. Those ocean freight costs, which are continued to be elevated but we've done a pretty good job at this point of being able to, to help pass those through to our customer.

Great. Thanks. All right. I'll pass it on.

And ladies and gentlemen with that we'll be – we will end today's question-and-answer session as well as today's conference call. We do thank you for attending today's presentation. You may now disconnect.