Global Industrial Co (GIC) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2004 Systemax earnings conference call. My name is Michelle and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. If at any time during the call you require assistance, please press star followed by zero and a coordinator will be happy to assist you.

I would now like to turn the presentation over to your moderator for today's call, Ms. Donna Genrich [ph]. Please proceed, ma'am.

Thank you, operator. Welcome to the Systemax second quarter conference call. I apologize that our-- we're a little delayed. Our earnings have been late in the release. We've been waiting for our earnings to cross. It should be any minute now if it has not crossed already.

I'm here today with Richard Leeds, Chairman and CEO, and Steve Goldschein, SVP 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.

Second quarter net sales increased 10.9% to $431m compared to $388.8m in the same period a year ago. Fully diluted earnings per share were 2 cents per share compared to a loss of 5 cents last year. Before restructuring and other charges, earnings per share this year were 9% per diluted share compared to 9 cents per diluted share in the same period last year.

For the six months, net sales increased 12.4% to $916.7m compared to $815.3m last year. Earnings per share were $3.1m or 9 cents per diluted share in 2004 compared to $3.2m or 9 cents per diluted share last year.

Richard will now go over some of the highlights. Then Steve will go into the financial details. Now I will turn the call over to Richard.

Thank you, Donna. Once again, I'd like to apologize for the lateness of the call and the problem with Business Wire in getting our press release out. Now to the quarter.

The streamlining and reorganization of our computer business, which began during the first quarter this year is substantially complete. Prior to the consolidation we basically had three businesses selling the same products with a multitude of people performing the same tasks.

By consolidating the three U.S. computer businesses and placing the management of TigerDirect in charge, we were able to eliminate more than 225 positions, saving approximately $10m on an annual basis. In fact, in the second quarter we realized reduced payroll costs of approximately $2.5m.

The reorganization was done without any negative impact on our customers. We are now shipping from a single inventory location with improved efficiencies.

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

Thanks, Richard. Geographically, North American sales increased 14.4% to $275.1m compared to $240.5m in the year-ago quarter. European sales increased 5.1% to $155.9m from $148.3m last year. In local currencies European sales were generally lower than last year's levels. TigerDirect continued its strong sales growth, especially its Internet sales.

The gross profit for the second quarter was $67.8m or 15.6% of sales compared to $63.5m or 16.7% of sales last year in the second quarter. On a sequential basis, it increased from 15.4% in the first quarter of 2004.

The increase in gross profit includes an increase in allowances reclassified from SG&A as a result of the adoption of EITF 2-16, accounting for consideration received from a vendor by a customer, including a reseller of the vendor's products.

SG&A expenses for the second quarter increased by $2.4m or 3.3% to $64.1m compared to $61.7m in the same period last year. This resulted from increases of $2.7m in the amount of vendor allowances reclassified to cost of sales in 2004 and $5.8m, representing the adverse effect of movements in foreign exchange rates on our European costs. These increases were offset by savings of $2.5m from work force reductions in the U.S. associated with our computer business streamlining plan and reductions in catalog spending. As a percentage of sales, these expenses decreased to 14.9% compared to 15.9% in the year-ago period, a decrease of 1%.

We have included in our press release a reconciliation of GAAP income 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 incurred during the quarter and six month periods presented from the financial statements for each of the periods.

Our Internet sales continued to grow during this quarter, especially at TigerDirect. In the second quarter of 2004 we had $116.7m in consolidated Internet-related sales or 27.1% of our total revenue. Our Internet sales increased 31.5% 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 order processing costs.

Turning now to the balance sheet, our inventory decreased approximately $28.4m from the end of the first quarter and $7.7m from the end of last year. The decrease resulted principally from the consolidation of our U.S. computer businesses and had no negative impact on filling orders for our customers.

There have been no domestic short-term borrowings now for more than two years. European short-term borrowings are used to finance local working capital needs. The company's U.S. revolving credit agreement has now been extended through March 31, 2005. We believe our available credit lines are adequate for our present needs. We generated $17.7m in cash during the six months ended June 30th.

One final point. We are cooperating in an investigation by the United States Attorney's Office for the Southern District of Florida of one or more government employees and certain former employees of the company of possible misuse of certain previously terminated incentive programs offered by a subsidiary of the company. The government has informed the company that we are not a subject of the investigation at this time.

Now I'd like to turn the call back over to Rich.

Thanks. To wrap up, we're very encouraged by the growth of [inaudible]

Thanks, Steve. To wrap up, we are very encouraged by the growth of our e-commerce and consumer businesses. Sales continue to grow steadily. Our TigerDirect retail stores continue to operate successfully and we have added a second store in the Chicago area.

This combination of Internet catalog stores and outbound sales people create a multifaceted way to penetrate the market. A highlight of the last three months is the strength of our industrial business. Increased sales and improved margins were achieved. As for the remainder of 2004 we are carefully monitoring the economic recovery in the United States economy and are waiting to see the full effect on information technology spending.

The story in Europe is mixed. Certain of our prime markets continue to grow while others are static or slowing.

Profit Center Software, our suite of web-based software applications, is progressing nicely. We're pleased with the progress to date, both the development of the product and the acceptance in the market place.

Our employees have worked steadily to complete the consolidation of our U.S. computer businesses. I am grateful for their combined efforts. Our cost reduction initiatives and improved information systems will help us obtain improved results during the balance of the year and in the future.

I believe we have positioned Systemax to serve the needs of our customers in the future. Thank you for listening. This concludes our formal discussion and we'll be happy to take questions now.

Thank you, sir. Ladies and gentlemen, if you wish to ask a question, please press star, followed by one on your Touch-Tone telephone. If your question has been answered or you wish to withdraw your question, please press star followed by two. Please press star-one to begin.

Your first question, sir, comes from Seth Hammet [ph] of RRH [ph].

Hi, guys. I do not have a press release in front of me, so I'm just going to ask you some questions about things I would be able to figure out if I had a press release.

OK. We apologize, again, but we're not quite sure what's going on with Business Wire today.

OK. Probably a lot of people sending them out.

Can we talk about EBITDA for first half of the year and maybe for the quarter? You know, you can generalize about any specific way you want to define that, too.

OK. How about we-- OK, income from operations for the quarter ended with $2.7m versus a loss of $717,000 in the prior year's quarter.

OK.

The six months it was $7,947,000--

Versus?

--versus $7,848,000 the prior year.

OK.

OK?

Do you want to add to that the restructuring charges?

OK. There's a goodwill impairment in last year's quarter of $2,560,000.

Yep, OK.

This year's quarter included restructuring and other charges of $973,000.

OK. OK, so is that the restructuring charge for the quarter, $973,000?

Yes.

OK, fine. Do you have any indication of what the software sales were in this quarter?

We would-- we really don't want to be releasing that for any particular division as we're going along, but we are having some very nice progress in that business.

OK. Let me see if there's anything else here. It's kind of hard to do this this way.

Again, I apologize.

OK. So what we're having here-- Correct me if I'm wrong, why are we having such a decrease in margins? Obviously, you know, we've got nice sales growth but the margins are under, you know, tremendous pressure. And is that just competitive pressure out there?

Well, I mean, it's coming from a couple of areas but one I want to point out is that on a sequential basis we had a slight uptick in gross profit margin.

OK.

So 15.4% to 15.6%.

But we also took a restructuring that kind of-- you know, kind of made us all feel that things would pop a little better.

Well, also-- I mean, realize that we had to reclassify some vendor allowances from SG&A-- from SG&A into gross margin.

Yeah. Could you go over that again? If we had to take those out as SG&A, how much was SG&A up sequentially if we took out the reclassification?

OK. That's in the press release and I'll just read you exactly how--

Sure. That'd be fine, thanks.

--exactly what it says. SG&A expenses for the second quarter increased by $2.4m or 3.3% to $64.1m, compared to $61.7m for the same period last year. This resulted from increases of $2.7m in the amount of vendor consideration reclassified to cost of sales in 2004 and $5.8m representing the adverse effect of movements in foreign exchange rates on our European costs.

So what that means is we pay our employees in Europe and we pay our vendors in Europe and we pay our landlords in Europe in local currencies and the swing in the exchange rate and those costs are-- I mean, you might think of them as fixed and not going up and down with sales except for commissions and-- commissions and credit card fees and expenses like that. So certain costs are fixed, employees and rent, et cetera.

When there's a change in the exchange rate or an adverse change in the exchange rate, that causes to drive that up in absolute dollars.

OK. So we're looking at about $8m-ish in changes just due to the reclassification and the FX?

Um-hmm [affirmative].

OK. So we're talking about-- if that's the case, we would actually see SG&A be going down, which is what your intention was with the restructuring?

That's right. We actually pulled out about $2.5m worth of salaries in the quarter.

OK. OK. What's book value today, tangible book value of the company?

Hold on. I'll give you that number in a second. $630.

OK. Super. Thanks a lot, guys. I'm assuming that you're expecting-- am I correct, Steve, I remember this from a year ago. Isn't this quarter seasonally a tough quarter for us?

Yes, it is.

Great. OK, fine. So things-- if anything should pop here it should be in the next two quarters?

Next two quarters. Yes, that's correct. This is our weakest quarter.

Super. Thank you very much, guys.

OK. Thanks, Seth.

Thanks, Seth.

Once again, ladies and gentlemen, if you wish to ask a question please press star followed by one on your Touch-Tone telephone. If your question has been answered, please press star followed by two. Your next question, sir, comes from Mitch Paulsen [ph] of Paulsen Financial [ph].

Hi, guys. How you doing?

Hi, Mitch. How are you?

Yeah, I don't have anything in front of me, as well. I just want to know the bottom line figures. I mean, before charges, did I hear 9 cents before charges would have been the earnings?

Yes.

OK. Compared to last year, because I don't have anything in front of me, like I said, again? I mean, that's-- Basically I want to go over, the chart. Because I can go backwards, because you gave the gentleman beforehand the figures for what charges we had to take on the SG&A and for FE, but I want to just get the idea of-- you know, like a pro forma. OK, just the figure, what it would have been without the charges? Can you give me that figure from the sheet or from your release?

Yeah, we have the-- the pro forma numbers are attached. And so--

I just want to make sure I heard right, you know?

OK. So-- OK, on an earnings excluding certain charges per diluted share basis, OK, it increased from 2 cents last year to 4 cents this year.

OK. OK. That helps me. And what was the turn rate this year? Do you have that figure?

I'm sorry?

What was your turn rate this quarter?

I didn't understand you.

The turn rate. Do you have a turn rate for the year for this quarter at all? Do you calculate that?

Term rate?

Yes.

No.

OK. All right. That's all I have, guys. Thanks a lot.

OK. Thank you very much, Mitch.

Once again, ladies and gentlemen, if you wish to ask a question, please press star followed by one on your Touch-Tone telephone. Ladies and gentlemen, this concludes the question-and-answer portion of today's call. I will turn the presentation back to Mr. Richard Leeds for closing remarks.

I'd like to thank everybody for calling in today and listening to our call. And, again, hopefully the press release will be crossing shortly on the wire and you can be getting all your numbers from that. We look forward to talking to you at the end of next quarter. Thank you.

Ladies and gentlemen, thank you for your participation in today's Q2 2004 Systemax earnings conference call. This concludes the presentation. You may now disconnect. Good day.