Global Industrial Co (GIC) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Systemax 2007 First Quarter Earnings Conference Call. My name is Leticia 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. [OPERATOR INSTRUCTIONS]. As a reminder this conference is being recorded for replay purposes.

At this time I would turn the presentation over to Donna Genrich moderator, please proceed ma'am.

Thank you, operator. Welcome to the Systemax First Quarter 2007 Conference Call.

I'm here today with Richard Leeds, Chairman and Chief Executive Officer, Gilbert Fiorentino, Chief Executive Officer of Tiger Direct, Inc., and General Manager of our Computer, Computer Supplies and Consumer Electronics business and Larry Reinhold, Executive 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 10-K. This call is the property of and is copyrighted by Systemax Inc. I will now turn the call over to Richard Leeds.

Thank you, Donna. I am pleased to note that we have achieved record sales of $676 million for the first quarter of 2007, an 18% increase over the first quarter of 2006.

Sales of technology products, computers, computer supplies and consumer electronics grew by 18% and sales of industrial products grew by 16%. Sales transacted via the internet grew 19% to $238 million compared to $200 million in the first quarter of 2006. Gross margin was 14.3% compared to 15.8% in the prior year period. The decrease in gross margin was primarily the result of continued competitive pricing pressure in the technology product segment. However, compared to the fourth quarter of 2006 gross margin improved significantly by 140 basis points.

Our operating income for the first quarter improved to $21.5 million compared to $20.9 million in 2006. Net income for the quarter was $13.9 million compared to $17.6 million in the first quarter of 2006. Net income in the first quarter of 2006 included an income of approximately $4.3 million or $0.12 per diluted share after tax related to our sale of a warehouse facility and net income in 2007 includes income of approximately $1.5 million or $0.04 per diluted share after tax related to a favorable lawsuit settlement. Earnings per diluted share was $0.37 in 2007 versus $0.51 per diluted share in 2006.

North American sales increased 13% to $440 million with industrial product sales up 16%, and technology product sales up 12%. Sales in Europe increased 28% reaching $236 million in U.S. dollars for the quarter. Excluding exchange rate effects sales in Europe grew by 15% in the quarter.

Profit Center Software or PCS, our start-up hosted software operation did not record significant revenues in the quarter. However, we signed two new contracts during the quarter and went live with two customers.

And now, Gilbert Fiorentino, the CEO of Tiger Direct and General Manager of our Technology Products business will discuss highlights of that operation, Gilbert?

Thanks, Richard. Sales for the Technology Product segment continued to grow in 2007 in both North America and Europe. Sales increased in North America by 13% and in Europe sales went up by 28%. After excluding favorable exchange rate effects, the sales in Europe actually went up 15%. Overall sales growth was driven by growth in internet sales and business to business sales. We continue to see growth from our expansion of product offerings creating an extensive selection of flat panel TVs, electronics and related equipment. Despite the competitive pricing pressures on TVs and other fast growing consumer electronics categories, we have been working diligently to improve our overall gross margins with increased emphasis on high margin add-ons and extended service contracts within those categories. We are pleased with our 19.5% margin growth over prior quarter.

Additionally, we have continued to focus a lot of effort on the Build Your Own Computer segment in which PC components generally allow a higher gross margin. In Europe, we have implemented performance incentives income compensation plans which have allowed us to recruit and retain top sales people and profitably grow the business. The implementation of strategies in the UK that we use in the US is starting to show substantial returns as well. As we implement these strategies, we will break huge economies of scale and great competitive advantages to the smaller market that we service. I am very proud of our team in Europe and the fantastic results that we have achieved there.

Back in North America, tigerdirect.com was named a top ten website for 2006 in two categories under shopping and classifieds appliances and electronics and computers according to Hitwise a leading industry ranking service for websites. Tigerdirect.com was the number four site in appliances and electronics and the number nine for computer category.

In the first quarter, traffic to our website continued to grow as we saw a 13% increase in visits over the first quarter of 2006. Tiger Direct has been successfully improving its share of PC sales across its channels as well. According to the most recent NPD data, Tiger's desktop market share of the direct reseller channel increased to 14.3% this year versus 10.9% last year. In the notebook PC market Tiger's share of the channel grew from 7.5% to 10%. Tiger direct continues to enhance and improve its online business model. In the first quarter we began testing a website redesign and further enhance product content and shopping features. We have also improved our online ordering capabilities for our B to B customers in our continued effort to make it easier for customers to do business with us while improving efficiencies in our operations. And now I am turning the call over to Larry Reinhold, our CFO.

Thanks, Gilbert. The company's financial position showed continued strength in the first quarter of 2007. At the end of the quarter our working capital was $215 million down from $229 million at the end of last year. However, our working capital includes the $36.6 million special dividend payable. If we excluded the dividend from working capital it would have increased by about $21 million. Our current ratio at the end of the quarter was 1.6 to 1 compared to 1.8 to 1 at the end of last year. The slight decline is also attributable to the special dividend accrual.

Cash balances were at a $106 million on March 31 up about $18 million from December 31st and cash flow from operations in the first quarter was $18.7 million. At March 31 our inventory was about $247 million up slightly from $233 million at December 31 reflective of our growth in sales. Inventory turned at an annual rate of 10 times during the quarter an improvement of over an annual rate of about 9 times in the first quarter of last year.

Our total debt at the end of the quarter was approximately $12 million, down slightly from about $13 million at the end of 2006. Our total availability under our credit facility at March 31 was approximately a $100 million giving us over $200 million in cash and available credit as of March 31. Ample liquidity to both, pay the special dividend and to continue to invest in growing the business.

For the first quarter of 2007 our SG&A expenses were $75.1 million compared to $69.9 million in the first quarter of last year. Continued to leverage our SG&A expenses and as a percent of sales SG&A was 11.5% in the first quarter versus 12.2% last year excluding the $2.4 million favorable lawsuit settlement.

Net income was $14 million or $0.37 a share compared to $18 million or $0.48 per share last year. Again the first quarter of 2006 included a gain of about $0.12 a share net of tax related to our sale of a warehouse facility and the first quarter of this year included a gain of about $0.04 a share net of tax related to the lawsuit. And now I will turn the call back to Richard Leeds.

Hey thank you, Larry. Now I would like to thank all of our employees for their efforts since the past quarter. At this point we will open up the call for questions, operator.

[OPERATOR INSTRUCTIONS]. Your first question comes from the line of Marc Anderson with Axial Capital, please proceed.

Yes, just a quick question on your incremental margins here, just looking at through the year-over-year gross rate sales which is impressive for the year your EBIT year over year, actually I guess adjusted for the litigation went down. Just trying to understand how you look at sort of -- your sales efficiencies going forward, I mean your gross margins are down a bit and your SG&A as a percent of sales -- where do you think you can drive efficiencies within your operating model such that -- incremental sales actually add to your bottom line as opposed to detract from your bottom line?

Okay, what we saw the first quarter was similar to what we saw in the fourth quarter where we had a very competitive market out there that we responded to. The difference is in the first quarter, throughout quarter we saw that market change not be as competitive throughout the quarter and so we saw a relative increase in gross margins throughout the quarter. What we do prove in our business model is that we have -- that we can leverage SG&A and as we focus on that and driving that down and growing the sales as long as we could, have our gross margins maintained where they are or go up, we will be able to leverage that tremendously.

So if you were to just talk about, I guess the sequential change in gross margin from Q4 to Q1 versus the year-over-year changing gross margin. I am just trying to listen why Q4 was noticeably weaker just relative to I guess Q1 and even the Q3 of last year. What happened?

Okay. There is a lot of -- in the fourth quarter there was a lot of competitive pressure out there especially in electronics, such as TV that we responded to, that competitiveness nature in the market place in the beginning of the first quarter but as we went throughout the quarter we saw a that lessening in competitiveness. We are able to actually have our gross margins go up through the quarter but if you go and look at fourth quarter and when we talked about the fourth one that just continued into the first quarter.

We did improve by about a 140 basis points as we stated already right from Q4 to the first though and that as Richard said it grew across the first quarter so basically we ended the first quarter with margins better than we started the first quarter with.

Okay and just one last question, just given the sort of a competitive environment out there right now, I know your receivables have trended up and up a little bit more and they were relative to your sales, do you find you have to extend better terms to customers in order to compete or is it just if I looked industry wide, is that most people are doing?

No. That's not why. We have a few key customers who had higher than normal purchases and have increased their purchases in the first quarter. It's not across the board it's with the few key customers who we believe are very safe and it was just higher purchases from those few customers.

Okay. Thank you.

And your next question comes from the line of Monique [Jow]. Please proceed.

Yes, thank you. I just wanted to know a kind of -- I am asking the same questions that your first caller did but I am looking at what 2007 -- what were you looking at in the next quarter the same thing that I am concerned about is the gross margin and is there going to be a improvement in that as the year progresses. What do you see for 2007 -- your forward looking statement for the next quarter?

Again and again we are not -- we are a company that purposely does not give forward looking guidance, but both Gilbert and Richard said previously as we did see in Q1 -- did see an improvement in gross margin from the beginning of the quarter to the end of the quarter, but we -- again we don't comment on the future.

Okay. Well, so you think that you are in line with your gross margins you expect them to improve -- you are improving?

We are going to show you that we are working on it -- working very hard. This is a -- we can certainly assure you that gross margin are the subject of intense management developments. Excuse me, tense management focus.

Right. Yes -- you know because I mean obviously the stock dropped quite a bit because of that, well now we are looking at -- you know -- it's going to be happening in the future and I am just trying to get [inaudible].

Clearly our goal as a company is to grow gross margin and limit our growth in SG&A, so that we improve the bottom line that's clearly our goal. We are very much focused on that but we are in a competitive landscape were we sometimes have to respond to competition, but we have to do that with a discretion of growing sales versus making profit and so that's the balance that we are focused on and focused again upon gross margin and on SG&A, I can guarantee you that we are working diligently on both of those.

And if there are possible decrease in the price during the last quarter, if that have anything to do at all with business sales or anything like that?

In the fourth quarter?

Right, the decrease in your prices. I thought it had something to do with Christmas sales and pricing?

I mean the fourth quarter is primarily focused around Christmas and that period leading up to it, so I mean it's clearly what was taking place in a landscape in the fourth quarter.

Okay. Thank you very much.

Okay. As there is no other calls I would like to thank you everybody for joining our first quarter call and we are looking forward to speaking to you about the second quarter. Thank you everybody.

Thank you for your participation in today's conference. Ladies and gentlemen, this concludes the presentation. You may all disconnect and have a good day.