Global Industrial Co (GIC) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Q1 2004 Systemax earnings conference call. At this time all participants are in a listen-only mode. My name is Mike and I will be your conference coordinator today. If at any time during the call you require assistance please press star followed by 0 and a conference coordinator will be happy to assist you. As a reminder this conference is being recorded. I would now like to turn the program over to the coordinator for today's conference, Donna Genrich. Please proceed, ma'am.

Thank you, operator. Welcome to the Systemax first quarter conference call. I'm here today with Richard Leeds, Chairman and Chief Executive Officer, and Steve Goldschein, Senior Vice President and Chief Financial Officer. 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 10K. This call is the property of and is copywrited by Systemax, Inc. Now, for the news.

First quarter sales increased 13.9% to a record 485.7 million compared to 426.5 million in the same period a year-ago, and 11% compared to the fourth quarter of 2003 which is typically the company's strongest quarter. This marks the third consecutive quarterly sales increase. Fully diluted earnings per share were 7 cents per share compared to 15 cents last year. Excluding restructuring charges diluted earnings would have been 15 cents per share. Richard will now go over some of the highlights and then Steve will go into the financial details.

Now, I will turn the call over to Richard.

Thank you, Donna. It is now almost three months since we started the consolidation of our three U.S. computer businesses. We've eliminated more than 250 positions saving approximately $10 million on an annual basis. The streamlining was done without any negative impact on our customers. We are now shipping from a single inventory location with improved efficiency. When the consolidation is finally completed and the costs of it are behind us we should begin to see the results of our effort in improved profitability. We have streamlined our back office and warehouse operations providing improved service levels to our customers and improving inventory management.

I would now like to turn the call over to Steve for a review of the financials.

Thank you, Richard. Geographically, North American sales increased 13.9% to 295.9 million compared to the year-ago quarter and European sales increased 13.9% to 189.8 million. In local currencies European sales were marginally ahead of last year's levels in almost all the markets we serve. TigerDirect had strong sales growth especially its internet sales. The gross profit ratio for the quarter was 15.4% compared to 17.0% last year in the first quarter. This decrease resulted primarily from competitive pricing pressures in Europe and a change in product mix in the United States.

More importantly, sequentially gross profit in the United States improved to 15.5% from 15.0% in the fourth quarter of 2003. Prices in Europe stabilized during the first quarter when compared to the fourth quarter of 2003 with gross profit improving sequentially to 15.3% from 14.7%. Selling, general and administrative costs as a percentage of sales decreased to 13.5% from 15.0% last year. Savings resulted from the streamlining of the U.S. computer business, begun during the first quarter of 2004, did not benefit the first quarter because of severance and other costs incurred in the restructuring process. In order to give a clearer picture of our results, we have included in our press release a reconciliation of GAAP income to net income excluding these restructuring 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 incurred during the two quarters presented from the financial statements for each of the periods. Turning to the balance sheet. First accounts receivable days outstanding decreased by 4% compared to the fourth quarter of last year. This reflects an increase in credit card sales as a percentage of total sales with its 2-3 day sales to cash cycle. Inventory increased approximately $21 million from the end of the fourth quarter of last year, principally at TigerDirect to support their high inventory turn business where the vast majority of shipments are made from on hand inventory rather than drop shipped from distribution.

TigerDirect often makes bulk spot purchases at very favorable prices with the intention of turning the inventory very quickly. Real time selling price changes are implemented where necessary to react to changes in demand and market conditions. There have been no domestic short-term borrowings now for more than two year. European short-term borrowings financed local working capital needs. The company's U.S. revolving credit agreement with be extended through March 31, 2005. We are finalizing the paperwork and will shortly be announcing this extension. We believe our available credit lines are adequate for our present needs.

This is Richard again. Thank you, Steve. A highlight of the first quarter of 2004 was the continued growth of our eCommerce sales especially at TigerDirect. In 2004 we had $120.6 million of consolidated internet related sales or 25.1% of our total revenue. This represents a 35.5% increase over last year. The increasing importance of the internet for low cost advertising allows us to leverage our total advertising spending as well as lowering our order processing costs. As to the remainder of 2004, we are encouraged by the recovery in the United States economy and are waiting to see the full effects on information technology spending. Early 2004 sales results in Europe are encouraging with most of our markets showing signs of increased activity. The streamlining that we have undertaken should yield positive results in both customer service levels as well as increased sales and profit.

We will be able to offer quicker service at lower cost on a wide variety of products to our diverse customer base. Our newly implemented information system applications provide better, more up to the minute data with which we are able to provide more efficient services to our sales people and our customers. Centralized warehousing will improve delivery, reduce stock a little and reduce carrying costs. To wrap up, we are encouraged by the growth of our eCommerce and consumer businesses. Sales continue to grow steady. Our TigerDirect stores continue to operate successfully and we plan to add two new locations in the coming months. Their presence allows to us build upon our internet and catalog advertising.

Thank you for listening. This concludes our formal discussion. We'd be glad to take some questions. Thank you.

Ladies and gentlemen if you wish to ask a question, please press star 1 on your telephone. If your question has veen answered or you wish to withdraw your question please press star 2. Once again, please press star 1 to ask a question. And the first question comes from Mitchell Paulson with Paulson Financial. Please proceed.

Just wanted to get a quick one before I'll let someone else get in. On the software division was anything generated in the first quarter from that?

Not yet. We are still finalizing our plans with those customers and we have our first signed contract, but no revenue has been recorded from that.

Okay, that's great because I think that's a great asset, I think that will go a long way. When do you anticipate getting online with that? In other words, basically, when do you think that is going to kick in? Also your outlook towards that.

Okay. Well, we have begun using this software internally.

I like that. Sorry to interrupt but I had to say that.

We have been using the software internally,. It is terrific and we're talking to a number of potential customers at this time. Beyond that, we all like it. We think it is great so we have a lot of confidence in it.

Okay. I guess my next question, any way I'll get one off my chest here, I guess it seems to me, I don't know, I guess with Steve Goldschein there I guess it will be directed because financial. If you see income from operations you still got a Cap Ex and there is still a lot of SG&A there. Is that reflective of the layoffs, yet, in the first quarter or it won't take hold until the second quarter here?

You will begin to see it in the second quarter. You don't see any of the effects of the cutbacks in the first quarter. It will come fully through in the second and third quarters you will see it and we think that is at the rate of a $10 million annual rate so we are looking for at least a $2.5 million quarterly cut.

Then my second question also is I didn't understand one thing. Last year we had the income tax rate of 48 and this year, I think, it is down to 40%. I didn't read the exact numbers yet but are we getting to the right place now, I mean as far as getting everything organized in that area as well?

We're going to get back down to slightly below 40% as we go forward.

I didn't understand the high one before. I didn't understand 48%, that threw me a little bit last quarter.

We had some places where we do business as you know in Europe and the U.S. and we had situations where we have losses in some places with taxes to pay to the certain states and things like that. We didn't have a lot of income so the mix and the effect of some of the state income tax kind of things just drives the rate up a little. We think that going forward as we return to greater profitability the rate will be somewhat below 40%.

I guess I have an overall question. The margins, I know are, squeezing, I know all over it, technology. I'm trying to see, we generated 60 more million almost in revenue and sales and the cost of sales was still a little bit higher, in otherwards, in my opinion, just reading off the sheet, let's generate a little bit more to the bottom line, a little cash flow. See what I'm saying? Tough numbers.

This is Richard. The good news is that on a sequential basis that we have been able to raise our gross profit percentage and that is very, very good news for us because we don't have a sequential slide we have a year-over-year slide but we don't have a sequential slide.

Right.

We're very much focused on that number of course, because we want to have all our sales generate as much gross profit as possible so we are focused on that. And I think at this point we're looking at upcoming quarters to try to stop the year-over-year slide and continue the sequential movement we had so far.

Okay. Thank you very much.

Thank you.

You guys did a good job so far.

Thank you, rich.

Hoping for '04 to be a good year.

Thanks, rich.

Thanks, Rich.

The next question is from Seth Hammit with RRH. Please proceed.

Hi, gentlemen.

Hi, Seth.

Inventory is up. What were your turns in the quarter? I mean on an annualized basis? Hello?

Hold on one second, I just want to check the statistics.

I know you guys keep track of this.

Yeah, we do.

Let me look it up.

There is a followup about this, too.

On a worldwide basis it was 10.4 turns.

Okay. Is this an improvement from last quarter.

It's about the same. It's down a little bit.

Okay. Now, we have going forward the benefit of the restructure and the centralization?

Um-h'm.

Where do you expect for this to go? I mean do you have a goal for this on turns?

Considering the nature of our business and that we have a fair amount of deals that we make on inventory, number one.

Yep.

Number two, we have a fair amount of product that we import ourselves. We're not in this model where we have the majority of our product drop shipped out of distribution like a number of the competitors do. We would expect that our turns would be in the neighborhood of 12-14 times, that's our goal.

That's super. So what we would see is, in general, we'd see working capital usage for this at least going down?

That is clearly our goal.

That's our goal, is to generate cash out of inventory..

Given that we are in the second quarter are you seeing any indications that that is going on?

We have begun to make progress in that.

Okay, super. The retail stores. Strategically, can you tell me how they fit into the business? Like big picture stuff here.

Okay big picture. One is we have found that smaller call centers work better for us than big large call center. People don't like working in big giant call centers. It is harder to attract good people from the area as commuting time has increased in most cities. So we have decided that in a store,that we would combine a small call center in with a store, number one. And so we are almost getting the store at a reduced rent because we have the call center in the back. So that is strategy number one. Strategy number two is we initially started the stores on almost like an outlet store basis because we had returns and we pull open boxes, that we needed a way of handling efficiently. So we were bringing the inventory back in to a store so that we could sell those. As we got better and better on handling and reducing returns we needed to sell more good merchandise or non returned merchandise in the store and we were able to take the store and turn it into being fairly profitable for us rather quickly in selling new merchandise. But based upon that we were able to say, okay, using our internet advertising and out catalog advertising in an area we experimented with if we open a store does the combination of having a store along with the catalog and the internet in that area grow sales more rapidly in the area versus an area where we don't have a store and that has proven to be. Given the three things that I said was the call center in the back of the store, the way for us to handle our returns, et cetera, and having the stores being profitable and the tick up or the combination of all of those is why we see a strategy with that. Are we going to wind up having 900 stores some day? No, we are not. We are doing this on a limited basis and a limited market and we're feeling our way through it. But the stores wind up being profitable rather quickly for us.

The actual phone center behind it, the call center, you don't actually fulfill from the store?

No,. We fulfill out of our distribution center in Naperville but the call center in the store, that's where our outbound sales reps. It is not the inbound call center. That is centralized base for the outbound sales rep.

And those sales reps, that just segue into a question I have, are they specifically targeted at industries or specific customers, outbound sales rep?

The outbound sales reps.

Do you have somebody who calls on the government, somebody calls on federal government, somebody calls on local government, or something of that nature?

Yes, exactly. We have groups that call on industry and then we have groups that call on education and state and local government. So that is broken out differently. We have GSA contracts that we have to manage more so they worry about that they have to be handled separately.

Super. Finally, on this quarter does anybody have a D&A number, depreciation and amortization number?

Hold on one second. $3 million.

Super. I guess actually the very final question, last call we were hearing about a restructuring and I mentioned heavy lifting and how long it was going to take and all the effort and I mentioned how Systemax is severely undervalued compared to many of its competitors in this field. So here we are about to have a operation that can put more revenues over it very easily. Have you guys looked at acquiring other companies? I mean has there been anything gone on with looking to acquire or looking to sell part of our business that maybe someone else with be interested in such a model?

Now, that we have gotten, like you said, the heavy lifting behind us, we're now available to look at all opportunities.

Have you hired advisers on this?

No, I mean for us to go make acquisitions, I mean now we have, as you said, the heavy lifting behind us, now we have our eyes open to all opportunities.

Are you seeing opportunities, I guess is a better question?

At this point, I mean we are still just beginning to get the consolidation under our belt.

Okay.

Okay, so we have been a little busy on that. But I would say we're probably, what did Churchill say, it's the end of the beginning.

The end of the beginning.

So we're beginning on the end of our consolidation at this point.

Okay, all right super. Let us say that our finest hour will be next quarter or the quarter after that, hopefully.

We have been working hard and we have been seeing a lot of progress.

Okay. Wonderful. Thanks a lot for your time, guys

Once again, ladies and gentlemen, if you would like to ask a question please press star 1. Please stand by for a moment to see if there are any further questions. And the next question comes from Michael Prevor with Prevor Foundation. Please proceed.

Good afternoon, Richard, Steve.

Good afternoon.

First I want to congratulate you on a much better quarter than I was expecting.

Thank you.

I think it is amazing that you achieved record sales when you are in an industry where your prices are dropping every day and doing it with less bodies because you must be shipping a hell of a lot of product.

We're doing busy in the warehouse.

My questions that weren't answer was I see Europe is doing better. Was it profitable in this quarter or did it still have a loss?

No, Europe is profitable in this quarter. Many of the European countries economies have turned the corner and we have seen some real progress especially in the United Kingdom.

We don't have this attitude though about worrying about the economy. We are very, very small in our marketplaces and we don't think that really the economy should make all that much difference to us because we're so small. So, I would like to think that we have two benefits. One is that by working harder we're going to get ahead and two as the economies turn around it will make us even farther ahead.

And do you have in your budget any profits for PCs this year?

No, we don't.

We'll take that as it comes.

And I would say the other questions I have all have been answered. Thank you very much and congratulations.

Thank you.

Thanks for your continued interest.

Thank you.

Next we have a followup from Mitchell Paulson with Paulson Financial. Please proceed.

Guys, I just wanted to know if you could give us a little feel, since it is very segmented the markets right now, certain areas of tech are doing very well and certain areas are not. Certain areas of your business are doing well, certain areas are not. I mean how does your outlook look for the rest of the year in Europe and as well as here in the states? Just to get a feel of what is really happening out there? If you can give us some, you know what I'm saying? Yeah, I would think that just looking at the market overall that PCs currently have entered into the replacement phase of life cycle for PCs that people aren't buying PCs for great new applications that are coming out, but they're buying them just because the existing PC has just become old and tired and they need a new one.

We entered the replacement phase which had been stall for a long time. As we enter that I think the marketplace itself is going to continue to see some benefits from that. The wireless networking is still very, very hot and everybody's home is going to be wireless one day. And I firmly believe that the entire country is going to have broadband one day as well. So when you put all that together I think that if the future for our product line is going to continue to be there. As I said before, about the way we view it is we are so small in the marketplace that those type of conditions really shouldn't affect us. We need to do a good job of getting a bigger piece of the market that's there. Whether the market grows or contracts is really, I mean we're tiny. We need to focus -

That gives you the flexibility of what I see, that gives you a flexibility where a lot of companies don't have the flexible to change with the market as well.

That's right. I don't care if next year I'm selling the widget de jour. We're not selling the same product we were selling three years ago, and we're going to be selling a different product three years from today. We're very much distributors of technology and whatever that technology is is what we're going to sell. And even our Systemax's PCs we are distributors of technology. We are screwing together something that somebody else designed. Whether it is Intel or Microsoft or who ever else. So as the industry changes we're going to be there and we are tiny in the industry and we have a lot of opportunity.

I dissected that software package. I mean it really was a nice package. I hope you guys don't just discard that. I think it is a great asset for Systemax. As we know margins are much higher on software and I think that package could go a long way in providing extra bottom line income towards the company.

We hope so and thanks for your support.

Thank you.

Thank you.

Again, it is star one to ask a question. And there are no further questions at this time. Mr. Leeds, please proceed.

I would like to thank everybody for listening to our quarterly report and we look forward to talking to you at the end of next quarter. Thank you.

This concludes your Q1 2004 Systemax earnings conference call. Thank you for your participation today. You may now disconnect.