Global Industrial Co (GIC) 2006 Q4 法說會逐字稿

Welcome to the fourth quarter 2006 Systemax earnings conference call. My name is Jeremy, and I'll be your coordinator for today. At this time, all participants in a listen-only mode. We'll conducting a question-and-answer session toward the end of the conference. [OPERATOR INSTRUCTIONS]

If at any time during the call, you require assistance, please key star followed by zero and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your moderator Ms. Donna Genrich. You may proceed.

Thank you, operator. Welcome to the Systemax fourth quarter 2006 conference call.

I'm here today with Richard Leeds, Chairman and Chief Executive Officer, Larry Reinhold, Executive Vice President and Chief Financial Officer and Gilbert Fiorentino, Chief Executive Officer of Tiger Director, Inc., and General Manager of our Computer, Computer Supplies and Consumer Electronics business. 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. I'll now turn the call over to Richard Leeds.

Thank you, Donna. I'm pleased to note that our consolidated sales for the fourth quarter increased 11% to $648 million compared to $583 million last year.

Sales of computers, computer supplies and consumer electronics grew by 11% and sales of industrial products grew by 15%. Sales transacted via the Internet grew 16% to $235 million compared to $203 million in the fourth quarter of 2005. Gross margin was 12.9% compared to 14.7% in the fourth quarter of 2005. The decrease in gross margin was primarily attributable to price discounting for computer and consumer electronics products.

Our operating income for the fourth quarter was $11.3 million compared to $18.5 million in the fourth quarter of 2005. This decrease was primarily the result of gross margin effect for the price discounting.

Net income for the fourth quarter was $8 million, up 136% from $3.4 million of net income in 2005. North American sales increased 8% to $439 million with industrial product sales up 15% and computer product sales up 7%.

Sales in Europe increased 18% reaching $209 million in U.S. dollars for the quarter. I am most impressed with our results for the full year of 2006. Net sales increased 11% to $2.3 billion compared to $2.1 billion in 2005.

Sales of computers, computer supplies and consumer electronics grew by 11% and sales of industrial products grew by 13%. Sales transacted via the Internet increased 26% to $819 million compared to $650 million in 2005. Gross margin was 14.6% compared to 14.5% in 2005.

Although gross margin dipped during the fourth quarter, our objective is to manage the business from a longer-term perspective and we're pleased that we maintain our gross margin for the full year of 2006 compared to 2005 and that we lowered SG&A expense as a percentage of sales from 12.7% in 2005 to 12% in 2006. Our long-term goal is to closely manage our product pricing to balance sales growth, gross margin and overall profitability.

Our income from operations was $61.8 million compared to $34.8 million in 2005. That's a 78% improvement. Net income for 2006 was $45.1 million, a $295% increase over net income of $11.4 million recorded in 2005.

Profit center software, our start-up software operation did not record significant revenues in 2006, however, we signed 22 new contracts during the year and at the end of 2006, we had 29 customers. We continue to believe this represents a great opportunity for our Company.

As a result of our strong 2006 financial performance and our strong balance sheet, I am pleased to announce that our board of directors has declared a special dividend for our shareholders. This dividend was declared on March 14, 2007 by our board to be $1 per share and will be paid on April 12, 2007 to shareholders of record on April 2, 2007.

And now, Gilbert Fiorentino, the CEO of Tiger Direct and General Manager of our Computers, Computers Supplies and Consumer Electronics business will discuss highlights of the Computer and Consumer Electronics product group. Gilbert?

Thanks, Richard. Our sales for the computer and consumer electronics segments have continue to grow in 2006 as we've expand the breadth of our product offerings. Both North America and Europe saw sales increases in 2006. North American product sales were up 7% in the fourth quarter and 13% for the full-year of 2006. European sales were up 18% in the fourth quarter and 7% for the full-year. Our growth in sales was primarily driven by growth in Internet sales, in both North America and Europe and by increased product offerings.

In 2006, we expanded our product offerings to include an extensive selection of flat panel TVs including plasma and LCD TVs as well as a variety of DLP TVs and related equipment. We also increased offerings of our private label products, which we source in the far east and import under our own brand called Ultra.

In the fourth quarter, traffic to our web sites was up 13% over 2005. hitwise, an industry ranking service for web sites, named TigerDirect.com as a top ten web site for the October through December period. For the full-year 2006 web site traffic was up 32% over 2005.

We continue to strive to improve the functionality of our web sites by making them easier to use and giving our site visitors detailed product information they can use to make informed buying decisions. Tiger Direct has received consumer generated awards from on-line review sites such as PriceGrabber.com's "Gold Customer Service", Shopping.com's "Trusted Store Designation", and "BizRate.com's "2006 Circle of Excellence Award". These web sites combined with over 300,000 reviews from Tiger customers .

We're very proud of these customer service achievements and I would like to thank our dedicated employees who work very hard every day putting our customers first. Now, I'll turn the call over to Larry Reinhold, our

Thanks, Gilbert. The Company's strong financial position continued to improve in the fourth quarter and shows strong growth during 2006.

In 2006, our working capital increased to $229 million from $170 million at the end of last year with a current ratio improving to 1.8 to 1 compared to 1.6 to 1 at the end of 2005. Cash balances were at $87 million on December 31, up $24 million from $63 million at the end of '05 and are significantly higher today. At December 31, our inventory was approximately $233 million, an increase of $41 million over year end of 2005 reflective of our growth of sales.

In 2006, we reduced our debt by over $22 million, down to approximately $13 million at the end of the year as compared to $35 million at the end of 2005. This debt reduction was a result of both the sale of a warehouse and a related extinguishment of the mortgage debt as well as paying down of our revolver from current cash flow. Our total availability under our credit facility at December 31, was $84 million. Giving us a total of over $170 million in cash and available credit at December 31. Ample liquidity to provide shareholders for the dividend and to continue to grow the business.

For the fourth quarter of 2006, our SG&A expenses were $71.2 million or 11.1% of sales. Up 8% over the fourth quarter of 2005 but substantially the same percentage of sales as last year, 11%. For the full-year, our SG&A was $281 million, up 5% over the full-year of 2005 but down as a percentage of sales to 12% as compared to 12.7 in 2005.

In the fourth quarter net income was $8 million or $0.22 per diluted share compared to $3.4 million or $0.9 per diluted share in the fourth quarter of 2005. The fourth quarter of last year was adversely affected by an unusually high effective tax rate, which resulted from the establishment of valuation allowances for $10.2 million of deferred taxes in the United Kingdom.

Our fully diluted earnings per share for the fourth quarter was $0.22 and for the full-year, it was $1.22. Included in these full-year [2000] results is a net gain of $4.3 million or $0.12 a share related to the gain on the sale of our warehouse in the first quarter. I have been impressed during my early tenure with the Company, by the Company and its platform for profitable sales growth and I look forward to an exciting year in 2007.

Now, I would like to turn the call back to Richard Leeds .

[INAUDIBLE]

Hello? [INAUDIBLE]

Gilbert, did you hear the whole speech?

Yes, Richard cut off at the end. Are you still there?

Yes, we're all here but the operator isn't.

I heard Richard cut off at the end.

Yes? Questions?

Hello. Is this the operator?

Yes, it is.

Jeremy?

Yes.

Did you open it up to questions?

No, I was waiting for your go ahead. Ladies and gentlemen, if you would like to ask a question at this time, please press star one on your touch tone telephone. [OPERATOR INSTRUCTIONS] Your question has been answered or if you wish to withdraw your question, please press star two. Questions will be taken in the order received. Please press star one to begin. We'll pause for a moment as questions compile. Your first question is from the line of [Katherine Sailman] with Atlas Capital.

Good afternoon, everyone. I know there is a lot of discussion out there about rebates and how you handle them. And what kind of disclosure or look thereof you publish. Can we expect any additional disclosure on the effective rebates on your business going forward or could you help us think about how to quantify the effect on the financials of rebates? Hello? [inaudible]

Larry, are you there?

Yes. [inaudible]

Gilbert, can you hear the question?

Yes.

Larry, it is a reporting question. Do you want to answer that?

Repeat the question. [inaudible]

Yes,ok. I know there is a lot of discussion about rebates and how it affects your business. And my question is can you help us think about the order of magnitude effect, I guess on your financial statements or what kind of additional disclosure we could expect to see in your future filings about rebates.

Well, rebates are simply one form of price adjustment that the Company has available to it. Rebates are reflected in the sales line item. I mean as a what I call net sales. And there would not be any additional disclosure of rebates on any -- on a product basis or a total. They're just netted against sales.

Could you give us a ballpark idea of what that number is for a given quarter as a percentage of gross sales?

That's not something that we've disclosed historically and I don't think we're in a position to disclose that currently.

Ok. Thank you.

You're welcome.

Your next question is from the line of [Robin Abraham] with Sanford and Son.

Hi. In comparing Q4 2006 results to Q3 2006, your earnings per share dropped approximately 74% in your strongest quarter. What happened?

[ inaudible ]

Hello?

Can you hear me?

Okay..

Sorry. In our North American computer business, we operate in a highly competitive environment that has relatively low gross margins. We closely monitor pricing among our competition and we take necessary actions to address that and look at our growing market share. We look at it -- I look at it on a full-year basis and while this was one quarter, I look at it for the year. We had excellent, excellent results for the year and that you have to remember that where this took place is in North American computer business and we have a large worldwide business where we sell in North America, industrial and computer products and in Europe and that you cannot focus on just this one drop in gross margins this one quarter. [INAUDIBLE]

Your next question is from the line of Jeff [Fehr] with Securities Capital.

Yes, what was the impact of foreign exchange in the quarter?

We don't -- well, that will be -- effective on foreign exchange on cash will come in the 10-K when we disclose the full cash flow statement. It hasn't been historically particularly significant.

Ok. Thank you.

Your final question is from the line of [Vic Kumar] with Sound Post.

Hi, guys. Could you give some additional color on what led to price discounting in this quarter?

I'll take that. Mainly in North America, we have a traditional price discounting week where Thanksgiving falls on a Thursday and there's the day after that, Friday is called Black Friday in our industry.

Right.

For the first time this year, the Black Friday circulars which are where our competitors traditionally advertise their Black Friday deals to try to drive extra traffic into their stores, those circulars became available on many web sites where we could weeks in advance, see some of those circulars and what our competitors were doing with pricing. We always try to produce as much traffic to our web site and to our nine retail stores as possible and with the availability of these Black Friday deals, it was much more aggressive price discounting this year than we have seen in the past. And it was available to us early enough that we were able to respond. That led for several weeks before Black Friday and several weeks after Black Friday to deep discounting throughout the industry because everyone was aware what everyone else was doing. So, it was really just relative to what our competition was doing and the necessity to stay competitive.

Does that price discounting continue on into say into this quarter? Is that something that ends? What's the trend in that going --[inaudible] that you're seeing now?

I don't think we're announcing what the trend is right now. Larry, are we --

no, we're not a forward-guidance-issuing company. We're trying to reserve our commentary for last quarter.

Ok. I mean in general in terms of price discounting and the industry, is that generally just around that Thanksgiving period? How does it work historically then? Not forward-looking.

It is hard to answer that question without making a promise about what it quarter is doing.

Let me try to handle this, Richard. Again, the North American computer business is a competitive business. We feel that we have a model that works for a low margin competitive business. Our model has worked very well for us through the year. And for the past year. It worked very well for us. Our gross margin for the past year was virtually flat on a percentage basis. Year versus 2005. [inaudible] So, while you're looking at the last quarter, you really have to also look at the year and say ok, it was up for the first three quarters and then down in the fourth quarter but for the year-over-year, it was virtually flat and it is not up slightly.

Got it. One more question. It looks like your inventory turns over the last few quarters. They have seemed to have gotten lower over the last few quarters. I was wondering what are you expecting terms to improve or any plans?

While we have moved more into private label products, these private label products are usually imported from the far east and we have to have more of that inventory on hand and so that's why the inventory turns have decreased but it is something that we always concentrate on, making sure that we have the right quantity of inventory. The right quantity of inventory is a tough balance to achieve. It is not too much inventory so that you have great inventory turns and it is not too little inventory so that you sell through and can't service your customers so it is something that we achieved to have the right quantity of inventory.

Great. Those were my questions. Thanks.

Thank you.

You have one question from the line of [Dorothy Gardner]. You may proceed.

Hi, thanks for taking my question. The introduction of Microsoft and vista at first everybody was expecting big things and then it was turned into disappointment and so on. Going forward, it is tough to ask this question without asking your forward ideas but is there -- I've heard from some sources that business in fact is starting to pick up after a lag and is this a big deal for you people or not?

We don't expect it to have significant impact on our business in any unordinary sense. However, we're very excited about Vista. We think it brings a little bit more excitement to the desktop and a lot of multimedia features that will allow people to use video to a greater degree, use sound to a greater degree and hopefully help us sell more hardware with all of the extra horsepower that you have in your system. Certainly, we'll be looking to sell more memory, systems with bigger CPUs and more memory in them. We don't expect that it will have an impact to a great degree either way. We hope the industry continues to grow and that Vista continues to be an important part of it.

And your SG&A was I thought the numbers were terrific for the year and good in the fourth quarter. As the business gets to be bigger and you go from $2 billion to $4 billion or whatever, will the SG&A become a lesser percent or continue to be a lesser percentage or anywhere you can sort of look at that part of it?

This is Richard. We continue to make investments in our business and that is both systemwise and facilitywise. Our goal, obviously, is to drive down the SG&A as percentage of sales as low as possible and to have a scalable business model that, as the business grows, SG&A continues to improve. That's clearly our goal and so if you could picture the graph of having increasing sales and trying to maintain your SG&A but that's the goal and something that we work on that every day.

As you know, the short sellers are sort of all over the stock. And I guess there's really nothing you can do about that. It is the nature of the business, it is not really predictable from quarter-to-quarter. But that's really not a question. It is an observation.

Well, we feel that we have to concentrate on running the business as best we can. And growing the business and taking care of our shareholders by growing the business and growing earnings and really, we have run the business for the long-term.

Are there opportunities to buy other sort of similar companies where you can combine and basically put their customers on your system or vice versa?

We have a history of making acquisitions where we've done things like that. And clearly, any opportunity that comes along, we'll take a look at it with real interest.

Yes. Ok. Thank you very much. [inaudible] Good year.

You have no further questions.

Ok, thank you everybody. We look forward to speaking to you when we announce our first quarter results.

Thank you for your participation in today's conference, ladies and gentlemen. This does conclude the presentation. You may now disconnect. Have a wonderful day.