Good afternoon, ladies and gentlemen, and welcome to the Global Industrial's Fourth Quarter 2023 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 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 GAAP 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 in 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 our ACE strategy. Revenue reached a record $1.27 billion as we benefited from the acquisition of Indoff, 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 topline growth of 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…

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 a 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…

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Anthony Lebiedzinski with Sidoti & Company. You may now go ahead.

Good afternoon gentlemen.

Hey, Anthony.

Hey, good afternoon. Yes, thank you for taking the questions. 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 5.1% basis was – we were pleased with that performance. As it relates relative to the winter season, winter season, I think, was kind of short. It 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 run a 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. 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 outlined several initiatives that you guys are focused on. As far as – out of the three or four 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 to 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 2019, 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 2024 tax rate?

Yes. I think Anthony, 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 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 – yes, for 2024.

Perfect. All right, well thank you very much and best of luck. I'll pass it out to others.

Our next question will come from Michael Francis with William Blair. You may now go ahead.

Hey, guys. This is Mike Francis on for Ryan Merkel. Thanks for taking my questions.

Hi, Mike.

Yes. Thank you. I think to start I’d like to ask a little bit about gross margins in 2024. 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.

Sure.

So in regards to gross margin, I mean, again 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 their 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 – both 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. Like 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 it's 50% of the sales. Is there a target that we should think of when we think of where you want to get with that? Are you 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 two 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 products 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 or 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 Cape 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 rate 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.

All right, I'll pass it on. Thanks guys.

Thanks.

This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.