Global Industrial Co (GIC) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter Systemax earnings conference call. (OPERATOR INSTRUCTIONS).

I would now like to turn the call over to Ms. Donna [Genrich]. Please proceed Ma'am.

Thank you operator. Welcome to the Systemax third quarter 2006 conference call. I'm here today with Richard Leeds, chairman and Chief Executive Officer, Steve Goldschein, Senior Vice President and Chief Financial Officer and Gilbert Fiorentino, Chief Executive Officer of TigerDirect Inc. This discussion may include certain forward-looking statements to 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. I'll now turn the call over to Richard Leeds.

Thank you Donna. I am pleased about that our consolidated sales increased 18% to $575 million compared to $488.5 million last year. North American sales increased 21% to $395.5 million with industrial product sales of 15%, and computer product sales of 22%. Sales in Europe increased 11% reaching $179.5 million in U.S. dollars for the quarter. We recorded sales increases in all of the European markets we serve, operating profitably in each of those markets as well.

Income from operations more than doubled to $19.2 million, compared to $8 million during the third quarter last year. This improvement resulted from both increased sales and all the realignments and cost-cutting steps we have taken over the last two years.

Our Internet sales strategy remains a key component in our continued growth and earnings improvement.

Looking back for a moment, our trailing 12-month income from operations was $69.1 million compared to $22.2 million a year ago, an excellent improvement. More importantly let's look at net income on the trailing 12-month basis.

After adjusting for the unusual tax charge in the fourth quarter of last year, and assuming a normal tax rate and excluding the after-tax gain of $4.3 million or $0.12 per diluted share realized on the sale of our former warehouse in Georgia, our trailing 12-month net income would have been approximately $44.8 million or $1.19 per diluted share. Let me emphasize -- Internet sales are the most efficient way to serve our customers and the earnings increase comes without incurring much additional costs. These sales increased 30% this quarter over last year's third quarter, and now total 34% of consolidated sales.

ProfitCenter Software, or PCS -- which is our startup incubator software operation, is moving along nicely. If you recall our software is often [as a] hosted model. We have continued to sign up a number of customers. We have recorded minimal sales revenue at this point but that will change as the customers come online. While currently operating at a loss I believe this represents a great opportunity for the Company.

Now Gilbert Fiorentino, the CEO of TigerDirect, will discuss highlights of Tiger's third quarter. Gilbert.

Thanks Richard.

As you mentioned our Internet sales have continued to grow providing us the opportunity to reach a wider and wider customer audience with our increased product offerings. We continue to find new and better ways to provide more efficient service to our customers. Evidence of our success includes a recently published article in Consumer Reports, naming TigerDirect as one of the best online retailers to buy a computer from. In addition, according to HitWise TigerDirect increased its market share of visitor traffic relative to our competition in the computer shopping category.

In the third quarter of 2006, TigerDirect ranked 10th and by November had moved up to 9th with a 2.66% market share of visitor traffic.

Other important confirmations of TigerDirect's position in online shopping is a recent report by Blast Radius, an organization which recently evaluated the online shopping experience of the top 100 online retail sites. TigerDirect was named 5th best in this study and Internet retailer named TigerDirect to its top 50 list of Internet retailers in a recent study.

Our expanded product offerings include an extensive selection of flat-panel TVs including BLP, plasma, LCD as well as a variety of projection TVs and related equipment. We work with cable TV shopping channels to serve an even wider customer base with these products.

Richard, we are devoting a substantial effort to building relationships with many of our vendors in order to develop joint marketing programs with them throughout Europe and North America. This will contribute to our future growth in European markets we serve. We believe that we have successfully turned the European businesses around; and we are now concentrating on growing the sales and further improving profitability in Europe.

I will now turn the call over to Steve Goldschein, our CFO.

Thanks Gilbert.

Good morning. I would like to spend a few moments analyzing our sales growth this quarter. First, sales of our industrial products grew 15% for the quarter compared to the same quarter a year ago. For the nine months, sales were up 13%. Sales increases were recorded in virtually all major credit categories. Earlier in the year, we completed our move to a new larger distribution center located in the Southeast. This facility will enable us to serve our customers more efficiently.

Worldwide computer product sales grew 18% this quarter and are up 12% for the first nine months. North America grew this quarter by 19% led in growth by Internet sales. We continued to experience strong growth in Canada where sales have grown 24% of local currency and 31% in U.S. dollars. Total Internet sales of computer products announced 34% of computer product sales, and 42% of North American computer product sales.

In Europe, sales stated in U.S. dollars grew 11% and represent 31% of worldwide sales. If currency exchange rates for 2005 were in effect for 2006, sales would have increased by 6%.

Third quarter gross profit was $91.5 million or 16% this year compared to 14.4% in the prior period. For the nine months, gross profit was 15.3% compared to 14.5% a year ago. Our gross profit percentage has increased this year due to increased volume, reduction of our distribution costs, product mix, and overall improved industrial product margins.

Selling, general, and administrative expenses were $72.3 million or 12.6% of sales, which is substantially the same percentage as last year. Our costs are in line with our expectations. Future increases in Web sales can be accomplished without adding significant SG&A. We expect our annual effective tax rate to be approximately 35.7%, down significantly from last year's rate of 42.5%.

With the return to profitability in the UK we are now able to benefit from our carryforward look, which helped reduce the effective tax rate. Our working capital increased to $217.3 million from $169.8 million at the end of last year with our current ratio improving to 1.9 to 1 compared to 1.6 to 1 at the end of 2005.

During the third quarter cash increased to $70 million from $52 million at the end of the prior quarter. At September 30, 2006, our inventory was approximately 30 million higher than at the same time a year ago but lower on a sequential basis. This inventory increase is to meet the needs of serving our large base of consumer type customers. Short-term borrowings are outstanding only in Europe principally in the United Kingdom. There have been no U.S. short-term borrowings in more than four years now. Our only long-term obligation was repaid in connection with our first quarter sale of the warehouse facility in Georgia which was replaced by a larger leased facility.

A word now about our financial reporting. With this earnings announcement we are now current with our quarterly reporting to shareholders for 2006. We will be filing our third quarter 10-Q with the SEC in the next few days. We are adding qualified staff and strengthening our systems and procedures to improve the timeliness and accuracy of our financial reporting. We look forward to reporting full year 2006 results on time at the end of March 2007. Now back to Richard.

Thanks Steve. Thanks for listening to our third quarter conference call. I'd like to thank all of our employees for their efforts and our shareholders, customers and vendors for the confidence they have placed in us.

I look forward to speaking with you in March with our full year 2006 results. At this point, operator, we would be happy to take questions.

(OPERATOR INSTRUCTIONS) [Ernest Barbola] with [SN Consulting Corp.]

First I would like to congratulate your team, Mr. Leeds, on an excellent job, a fantastic turnaround; as a shareholder who has been with you for quite some time I am really pleased to see the results. But I have a three-part question. The first part is will you be providing for guidance? In connection with that will you be having investor road shows and do you anticipate any -- will you be having investor roadshows and do you anticipate any coverage of some of the major wire houses?

We are not going to be providing forward guidance at this point. Right now, we are just looking at managing our business and running it as best as we can. As for roadshows and coverage, we are going to obviously be working on that going forward. Be more than happy to talk to analysts that want to cover us and we would be very happy to be doing roadshows in the future.

Thank you and congratulations again.

Thank you.

(OPERATOR INSTRUCTIONS) [Greg Greif] with Bodie Brown Assistant Management.

Actually it is [David Foster]. I was just curious if you had cash flow from operations and CapEx for the quarter?

We did had cash flow a strong cash flow from operations during this quarter. CapEx was not a significant number.

Can you quantify those numbers or --?

It is about the -- CapEx, we're in the neighborhood of about $4 million and the cash -- we increased our cash by about $18 million during the quarter.

Did you also issue shares during the quarter or (MULTIPLE SPEAKERS) I noticed share count increased, average share count.

There were some option exercises earlier in the year, but we did not issue any shares other than that.

How much did the option exercises add to your cash balance?

An insignificant amount. I believe it was several hundred thousand dollars.

Did you qualify cash flow from operations?

I said it was in the neighborhood of somewhere between 15 and 18 million. We are still finalizing the cash flow statement before (MULTIPLE SPEAKERS).

Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS) [Michael Prody] with [10-K Capital].

Good morning. Congratulations on getting up-to-date with the filings and so forth.

Thank you.

Also as a West Coast investor I thank you so much for holding such an early call this morning.

So I assume when you say 4 million CapEx that is 4 million for the nine months as opposed to Q3?

Yes. For the nine months.

One thing I was trying to get a sense for in terms of modeling the Company is the operating margin. Let's say that number is bounced around, I'm sure that during the last couple of quarters some -- between say 3.5% in the first quarter and 2% in the second quarter, what is your operating model at this point? What do you think is a reasonable target in terms of the full year operating margin?

I think it's fair to be looking at the last couple of quarters for that. You have to remember, historically, our fourth quarter is our best quarter followed by the first quarter and then the next [few] quarters. So in looking at that I mean you kind of have to take a balance. So that is why I said if you to take the last couple of quarters you will see where we are. That is really where we're targeting of this point.

The other question I had was on European sales. It looked like they were quite strong this quarter although not all that strong in the prior two quarters. Can you talk a little bit about what is going on in Europe?

Gilbert? You want to handle that one?

Sure. We have spent the past year and a half, two years consolidating operations in Europe and really looking to manage the bottom line more than the topline. With a successful turnaround of all of the operations in Europe, you'll see us concentrate on both the topline and the bottom line in the future.

So I think to answer your question, the growth rate over the past year, year and a half is not what we have really tried to manage to. It's been more of a bottom line approach.

So it sounds like from what you're saying that we can expect similar growth going forward in the European market to what you're parted this past quarter?

There's a lot of factors that fell into that. We'll continue to try to manage the growth aggressively but our first focus is to continue to grow the bottom line there.

I guess the final question for right now and I will let other folks ask some questions. Obviously the balance sheet has been in pretty good shape here and generated a lot of cash and so forth. What are your priorities for use of cash going forward?

We are looking at our cash. We have a fair amount of [that] cash. Not a huge amount, but of course the options that we have are making acquisitions, paying dividends. We still have some debt in Europe that we have to pay off. So as we go forward we will be looking at that. Right now, we have no specific plans.

Thanks.

[Kevin Stallings] with [Cyber].

I have three quick questions. First question was on the balance sheet. You have got an item that's prepaid expenses and other current assets. I was wondering how much of that is prepaid expenses and how much of that is other current assets? It seems like you kind of look at it this quarter versus one quarter a year ago. It is up from 19.5 to 35. What is in those buckets?

The prepaid is, typically, it has to do with one of the things like our catalog. Our catalog expenses based upon are the mail scheduled versus the printing schedules. Also versus how we expense those out over what we estimate the life of the catalog to be.

Some of that also is inventory that we have had to pay for it either in advance or where we've had long lead times from whether it is from the Orient or from domestic suppliers. There's a fair amount that goes into that.

It seems like, at least on the catalog side, I know there's some lumpiness I guess in terms of when the catalog gets shipped which might affect that but generally you are shipping less catalogs than you (indiscernible) last year and the year before that. So you'd think that I guess -- I think (indiscernible) that number will be going down?

Except that (MULTIPLE SPEAKERS)

Timing.

Right and except as the business volume increases we are also increasingly buying more product overseas and from some suppliers that require deposits on it.

Then secondly just in terms of questioning your business model. It seems like relative to other direct marketers you are generating your average order (indiscernible) basically $350 and other people are kind of serving businesses and they are generating AOS of say $1200 to $1500, yet you are as profitable and more profitable than a lot of those companies on a $340 average order size rough and tough. Can you generally kind of give me an idea of how that is possible? Because from what I understand it kind of average order size and growth profit dollars per an order. Basically they are kind of the most important indicator in determining the profitability of your business. It seems like you have the least favorable growth of product per order yet you are more profitable than other people are.

Where are you calculating the average order size from?

I get information from your 10-K. I wish I had the 10-Q information but that's what I have access to. So I guess it is a little dated but that's what I have available. So that's what I'm forced to use.

I'm not certain how we compare against others, the other direct marketers, but I will tell you that our team does an excellent job processing orders and focuses on that. I really don't -- comparing us to other people I don't really -- I'm not quite sure what they do. I just know that we have tremendously dedicated employees that are talented and know how to get the orders out the most efficiently.

I'm sure they are very dedicated. I wouldn't question that (MULTIPLE SPEAKERS).

No I am not saying. I can't really speak for what my competition does. We ship our orders -- typically ship our orders same-day which cuts down on expenses. We have essentially located warehouses which cuts down on expenses. So I just know that what our model does. I really can't tell you what anybody else's model is.

Right. Finally, did you have any commentary? I know there's been some news regarding the rebate processing facility, the on direct and I've been there and read through it and it seems like very difficult in terms of how you go about getting a rebate on these things. It seems like you combine that with I guess -- I was on the Better Business Bureau website. It seems like it has an unfavorable mention and wondering if you had any thoughts on maybe reworking or fixing or making it easier in terms of the process to go about getting a rebate? And is there I guess as a follow-up any relationship between that operation and your operation?

We process rebates. We process them timely. If you look at our -- the vast majority of our rebate customers are happy. We have set up rebates so that you have a procedure to follow. Most -- again I am going to emphasize this. Most, most, most customers are happy with that process. But like -- typical with any rebate there are rules and they have time date restrictions and we follow those. We have those rules for our customers to follow and those customers that wind up being rejected for whatever reason turns to vocal, vocal unhappy customers. But we do endeavor to make all of our customers happy.

But the vast, vast, vast majority of them are happy. So I -- while you are -- you could say looking at some of these customers that have complained the numbers that complained versus the numbers that are happy are -- it's just again 90, 99% or whatever. I'm not quite sure what percentage it is.

There might be a whole bunch of them that didn't even go up. I mean, there's probably a very few numbers that actually go to the site and (MULTIPLE SPEAKERS).

Yes; right. I could tell you anecdotal information but I will just -- but I will tell you that the vast majority of our customers are happy. Again going back to the first question, that's evidenced by on our model of how we are getting the Company back to being profitable and that we have happy customers that return to shop with us which reduces our margining expenses and just goes hand in hand. That allows us to grow our sales the way they've been growing and just keep the sales moving forward.

Right. Do have any idea of the book? I mean presumably the ones that -- these things that don't go through? I mean that's -- those rebates end up being income that you would end up keeping. I guess that would reduce your costs of goods or (indiscernible) SG&A or something of that nature?

We book whatever's the expenses. In a rebate model which the electronics industry has somewhat embraced, the model typically is not all customers file for rebates. So we obviously -- we have that as an expense. So whatever the expense is, we have.

So you would book an expense and if the (indiscernible) never occurred you would kind of undo it and that would be released into your P&L if you will? No?

No. We book it as an expense.

What if it never gets -- what if it's never being -- ?

They have to file for rebate. So if they've file for their rebate -- and that comprises everything -- we book it as an expense.

Okay. So if it never gets -- if they never -- you never get the rebate you just end up getting a marginally higher gross margin? I guess if you -- that's kind of what it comes down to?

Yes.

All right. Thank you for the help.

Okay. I would like to thank everybody for (MULTIPLE SPEAKERS). Oh I'm sorry. There's one more question.

My question was answered. Thank you very much.

Thank you. I would like to thank everybody for listening to our call and we look forward to talking to you on the next call. Thank you.

This concludes the presentation. You may all now disconnect.