Global Industrial Co (GIC) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Q4 2003 Systemax earnings conference call. (OPERATOR INSTRUCTIONS). For replay purposes the number you would need to dial to listen to the replay is 888-286-8010 with a replay pass code of 45332799. I would now like to turn the presentation over to your host, Donna Genrich (ph).

Thank you, operator. Welcome to Systemax's fourth quarter conference call. I'm here today with Richard Leeds, Chairman and CEO, and Steve Goldschein, Senior Vice President and CFO. This 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 caption, Forward-looking Statements, in the Company's annual report on Form 10-K. This call is the property of and is copyrighted by Systemax Inc.

Now for the news. Fourth-quarter sales increased 8.5 percent to 437.5 million compared to 403.3 in the same period a year ago. Fully diluted earnings per share were 2 cents per share compared to 3 cents last year. For the full year sales increased 6.9 percent to 1.66 billion from 1.55 billion last year. Net income per fully diluted share for the year amounted to 16 cents compared to a loss of $1.73 per fully diluted share last year.

Richard will go over some of the highlights, then Steve will go into financial details. Now I'll turn the call over to Richard.

We have just completed a very challenging year for Systemax. Our recently announced decision to streamline our business and reduce costs will go a long way toward returning the Company to consistent profitability.

Basically we have a donor (ph) market in United States as three companies with nearly identical product offerings, Global Computer Supplies, TigerDirect and Dartek. While the customers are different, small and large businesses, as well as consumers, what they buy and how they buy it is not. We decided that because of the reduced margins in the marketplace we can no longer afford the luxury of having three sets of buyers, multiple advertising and marketing departments and three complete back office staffs.

With TigerDirect having the most efficient and profitable operation, we have applied their model to the other two businesses. All of the U.S. computer businesses have been placed under the direction of TigerDirect's management. Global computer and Dartek salespeople will continue to service their individual customers.

Key to this streamlining is having a single inventory available to all three companies. In addition, marketing advertising and many of the back office functions will be centralized and made available across the customer base. We began a similar process in Europe during the year and have eliminated duplicate positions and functions wherever possible.

I am pleased to note that during the fourth quarter our consumer e-commerce business continued to grow. TigerDirect had another record sales quarter. I would like now turn the call over to Steve for a review of the financials.

Geographically, North American sales increased 5.6 percent to 265.1 million to the year ago quarter, and European sales increased 13.2 percent to 172.4 million. In local currencies, European sales were flat during the quarter. Gross profit ratio for the quarter was 14.9 percent compared to 16.6 percent last year in the fourth quarter. This decrease resulted primarily from competitive pricing pressures in Europe and a change in product mix in the United States.

In addition for 2003 the Company adopted the Emerging Issues Task Force Issue 2-16, which deals with the income state classifications of vendor support for advertising and promotion. Without this change in accounting, gross profit for the quarter would have been 14.1 percent, highlighting the effects of price cutting in Europe. Indications are that this price cutting has diminished in the early months of 2004.

Selling, general administrative, of course, were adversely impacted by the strong European currencies. This increased SG&A by approximately $3 million in the quarter and almost 13 million for 2003 compared to the same period last year. Restructuring and cost-cutting efforts have resulted in more than $25 million in savings in North America for 2003. Further savings will be realized by the recently announced streamlining in our domestic computer businesses.

Our effective tax rate for the year was higher at 48.5 percent, principally as a result of a nondeductible write-off of $2.6 million of goodwill recorded in the second quarter of 2003 in connection with our purchase of the minority interest of our Netherlands subsidiary. We expect our tax rate going forward to be approximately 40 percent.

We have included in our press release a reconciliation of GAAP income loss to net income, excluding certain charges. Management of the Company believes that the presentation of this financial information provides a useful method to compare current results with prior periods. Basically we have removed the restructuring and other charges and goodwill write-off incurred during last two years in the financial statements for each of the periods presented.

As a result, fully diluted earnings per share would have been 7 cents for the fourth quarter of 2003 compared to 6 cents last year. For the year ended December 31st, 2003 fully diluted earnings per share would have been 26 percent compared to 9 cents -- 26 cents compared to 9 cents for 2002. We believe that these numbers give a clearer picture of the progress the Company has made in achieving improved profitability. In addition, our recently announced streamlining of our U.S. computer businesses should result in an additional 8 million per year in pretax savings.

As Richard mentioned, our Internet sales continued to grow. In 2003 we had over 384 million in Internet related sales or 23 percent of our total revenue. Our Internet sales increased 49 percent from last year's 258 million. The increasing importance of the Internet for low-cost advertising has allowed us to leverage our total advertising spending. As a result, during 2003 we distributed approximately 15 million fewer catalogs than last year. We mailed 91 million catalogs in 2003, 62 million in North America, 29 million in Europe. Last year the total was 106 million, of which 71 million were mailed in North America and 35 million in Europe.

Turning now to the balance sheet. First accounts receivable. Our days sales outstanding decreased by 5.7 percent compared to last year. This reflects an increase in credit card sales as a percentage of total sales with its two to three day sales to cash cycle. Inventory increased approximately 35 million principally to service the higher velocity of the e-commerce and consumer business. Sales levels are closely monitored with real-time price changes implemented where necessary to react to changes in demand and market conditions.

There had been no domestic short-term borrowings now for more than two years. European borrowings finance local working capital needs. The Company's U.S. revolving credit agreement is up for renewal in June of this year. We presently intend to extend the agreement through the end of year while we negotiate a worldwide multicurrency agreement with a group of lenders. We believe our available lines are adequate for our present needs.

As to 2004 we're encouraged by the recovery in the United States economy, but are waiting to see the full effects on information technology spending. Early 2004 sales results in Europe present a mixed picture. Our consolidated first quarter results will be adversely impacted by the severance and other costs resulting from the recently announced streamlining.

To wrap up 2003 we're encouraged by the growth of our e-commerce and consumer business. Sales have grown steadily throughout the year. We also successfully opened two additional TigerDirect retail stores, allowing us to build upon our catalog and Internet advertising.

The streamlining that we've undertaken should yield positive results in both customer service levels, as well as increased sales and profits. We will be able to offer quicker service at lower cost on a wide variety of products for our diverse customer base. Our newly implemented information system applications to buy better, more up-to-the-minute data with which we're able to provide more efficient service to our salespeople and our customers. Centralized warehousing will improve delivery, reduce stocking levels and reduce carrying costs.

Thank you for listening. This concludes our formal discussion. And we will be glad to take some questions at this time.

(OPERATOR INSTRUCTIONS). Michael Prever (ph).

We have come a long way from 2000, and I want to congratulate you. I see sales are practically at an all-time high. And if we ignore the the extraordinary items, the earnings are coming back real fast. And I see you are taking some positive steps in the first quarter, which I hope will do us even more good.

I do have one question though. I remember reading an article about the good job that Bob Rose had done. And I hear he's not with the Company. I was wondering if you wanted to share anything on that?

I really don't know if this is the proper forum to be discussing an individual employee. But the manufacturing facility in Ohio continues to be an asset that we have that I think makes us different than most of our competitors. And today strategically it is an asset that we want to keep. And we think it is going to be an asset for us going forward. The factory was really something that just makes us unique and want to stay with it.

Seth Hammit (ph).

Just looking at the increase in inventory, where should we be expecting inventory to go over the next couple of quarters in terms of the restructuring just announced and the commitment to the Internet -- continued growth in Internet sales channel?

Clearly one of the benefits that we have of combining the three businesses is that we will now have one inventory that we're shipping out of. And we should see some fairly significant reductions in the inventory over the next few months, as we work that inventory down. Our goal is to get a fair amount of significant savings just from that. I don't really want to give the number out here, but we have very high aspirations of what we can gain from reducing the inventory.

Toward that end, that would imply a change in the working capital structure. Any ideas what you would do the greater availability of cash?

Right now no. I think I would like to some cash in the bank at all times. You never know when you're going to need it. And right now we have no plans of what we would do with that cash.

How would we -- I guess actually how would you -- evaluate the success of this restructuring? If not three months, three quarters down the road what kind of metrics should we look at? Name three things that I guess that I should be happy to see.

I will tell what, I'm going to measure them all. And it is going to be three things. It is going to be profits, profits and profits. We really need to drive cost out of the business so that we're making a lot more money than we're making today. And that is our goal in doing this.

I kind of noticed in the press release that our margins are getting squeezed. Are we expecting to see this in the gross margin improving, or is a lot of this going to hit the SG&A line?

You've got to realize when we talked about having three separate businesses, we're creating issues for us not only dealing with our processing of orders and dealing with our customers, it also gave us issues of dealing with our suppliers, because we were going to our suppliers for three different businesses. Now that we have combined than into one business, it gives us greater leverage of dealing with a supplier. We're going there with a much bigger wallet. And so we should be able to see some benefit from dealing with them with one voice.

At this point I can't quantify what those benefits will be. But I expect that we would see some -- a fairly significant amount of dollars coming back to us either from better pricing or from increased vendor co-op or just even in giving us deals on products.

You won't quantify that which I understand. Nonetheless, have you seen of that yet? Is any of that going to be evidence in the second quarter kind of thing like that or --?

Seth, this is -- that process of dealing with the vendors is an evolution not a revolution. So it will be taking place over the next few months.

Finally, in terms of just looking at the gross metrics in the business compared to some of your competitors, system X is valued at a much less enterprise value to revenues, much less enterprise value to cash flow than many other competitors. In essence it would make -- the competitors would have a great opportunity to buy the business of Systemax and be accretive. Have you looked at that as an opportunity to create shareholder value for yourselves? We're talking about a lot of hard work here to get to where you want to go. And I would imagine with a couple of phone calls you would be able to achieve a great deal.

We're concentrating on running the business and making us profitable as we can. And we would be open to any opportunity that come our way.

(OPERATOR INSTRUCTIONS). Andre Gardner.

A quick question. In terms of the restructuring, when do you see it being completed in terms of having everything under the TigerDirect roof? And then also are there going to be any gains from real estate sales or warehouse sales or anything like that?

We're endeavoring to have this finished by the end of April. We have some leases which we have to deal with that we have been dealing with as we go through them. Whether there is going to be a loss or gain from them at this point, we haven't determined.

We think we provided for the lease costs. And we are not anticipating any gains. If something arises because of a piece of property we have, we will certainly recognize that when we know about it.

Michael Prever.

Richard, I didn't want to monopolize the call before about as long as you have a little time. Could you share any thoughts on whether we have many more charges ahead for your restructuring? And your feelings on when Europe will start to kick in, because I see you did a pretty good job on turning America around. And if Europe would kick in you would have a highly profitable Company.

This is Steve Goldschein. We're not anticipating any more restructuring charges. I can't predict the future 100 percent, but we think we have provided for and taken care of everything that we have anticipated in this streamlining and reorganization. So there isn't anything that you should expect that is outside of what we have previously announced. There will be that charge in the first quarter of approximately 3 million that we spoke about.

As to Europe, the story in Europe is that the various countries that we -- the nine countries that we operate in each economy seems to be doing its own thing. There is more strength in some of the economies than others. We're doing everything we can to watch the advertising costs and the things that we can control in the short term in Europe. And we will take whatever steps are necessary to return it to profitability. We need a little help from the economies over there.

Keep up the good work. I like that direction you're moving in.

Mitch Paulson.

You said your sales on the e-commerce increased 23 percent, is that internationally, or just --?

They are 23 percent of total sales. They increased over the same period last year by 49 percent.

And that is at total sales. I have a follow-up to that. How much of your business is going to be -- what are you looking forward towards e-commerce and catalog or direct sales? What is your percentage? I guess where are you leading with this, or which are you heading? It seems like you're heading, I don't know, sometimes bricks and mortar, sometimes e-commerce. I would like to see the SG&A come down along with everybody else, and that is one way is through e-commerce.

That is true, but everything ties together. The Internet ties with catalog, and the catalog and the Internet tie with the stores, and they all tie with having salespeople calling on business customers. Actually it all ties together. It is all leveraging off of our ability to advertise to the customer effectively, and we drive them into a store or whether they go to our website, or whether they found out about us from a catalog, or from one of our salespeople calling them up. So it all ties together very effectively. Would I like everything to be on the Internet, because that is our lowest cost of processing, yes. Is that realistic? No. You need to have all the things working together. It is all actual very logical how it works together and leverages off of each other.

Another question I have here and a follow-up to this same area is that what percentage -- I guess what I'm looking for is how much of e-commerce business compared to the overall business are we doing right now?

In the most current quarter it was 23 percent of our business.

Total business. And what are your future projections on any as far as increasing in that in the future? Are you leaning more towards e-commerce? Is that the direction you're heading in?

As Rich said, we would like to capitalize on that because that is our lowest cost of providing product to our customers. So we're doing everything we can to capitalize on growing that business. But as Rich said, it is a combination. We can't really predict what it is. In the short term I would say it is going to increase a few percent each quarter, but I can't predict in the long-term.

One other follow-up on this. Is there anything further out that you can tell us as far as institutional -- any institutional followings that we can get as far as trying to --?

We do what we can to develop a following. And if anybody is interested in talking to us and meetings with us, we are all ears. We're doing what we can and anybody who wants to speak, I am available.

I guess that answers that question.

Okay. We're not shunning anybody, believe me.

I understand that. I just wondered why that was this Sky Capital (ph), I think the Company's name was that following you at one point. And we took a large position at one point in your Company as well. We would like to see it grow. And it seems that every once in awhile we get to a stumbling block. I thought after three years everything would come up, and it seems like you're on the right track now. Except the only surprise was now another restructuring. But it is not really a restructuring. I see where you guys are heading as far as trying to get everything under one roof, which makes sense.

There is a clear path here and we're going to --.

This is the path that I think should been done, but I mean -- Do you have any idea at all how Europe is going to pick up as far as the dollar translations, as far as currencies? Which way would it affect us, stronger dollar, weaker dollar, which way benefits the Company more?

I would say -- my own personal view is the euro is going to weaken at some point. The pound is at like a five or six-year high, I believe hitting closer $1.90. We source a lot of the product locally. Some of it is dollar -- to the extent it is dollar sourced then it should be getting cheaper in Europe. Sometimes that happens and sometimes it doesn't. The world market is reacting as a world market now, not just a localized market.

Is there any way we can hedge our position that way? You know what I'm saying --?

We hedge locally by borrowing locally. That is the best natural and organic hedge that we make. We also source locally too. I said that. We source locally so our cash flows are local. Those countries act pretty independently.

I have been following you since GlobalDirect days, so I'm just wondering why -- I think the potential is astronomical for you gentlemen and for the company and for every shareholder out here. I think it is. I think it is just getting the right mix and getting the right people in there to push in the direction that we need to go.

We appreciate your support. And we're doing everything we can to streamline the business and return to a level of acceptable consistent profitability.

Okay, I'd like to thank everybody for listening to our conference call today. Everybody have a good day.

Thank you for your participation in today's conference. This concludes the presentation. Good day.