Global Industrial Co (GIC) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you standing by and welcome to the 2007 Third Quarter Systemax Earnings Conference Call. (OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to your moderator for today, Ms. Donna Gehnrich.

Thank you, operator. Welcome to the Systemax Third 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 includes 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 copyrighted by Systemax, Inc.

I will now turn the call over Richard Leeds.

Thank you, Donna. I'm excited to report that we achieved another quarter of stellar sales and profits. Sales of $687 million was an increase of 20% over the third quarter of 2006, an all-time high for the Company with sales growth in each of our business segments. Sales of technology products -- computers, computer supplies and consumer electronics -- grew by 20% to $626 million and sales of industrial products grew by 18% to 62 million. Though not yet a significant source of revenue, our host and software business also grew.

In addition to sales growth, the driver of our strong bottom line results in the quarter was the continued improvement in gross margins. As previously discussed, we have put significant focus on improving our gross margins in 2007. And I am pleased with our success in this area.

We posted 16.1% gross margin in the quarter. We have now recorded three consecutive quarters of higher gross margin, in addition to year-over-year quarterly growth. The improvement is the result of competitive sourcing advantages, cost efficiencies in our warehousing and distribution operation, and the increased competitive pricing pressures in the technology product segment, as compared to the prior quarters.

We have also successfully leveraged our cost structure. We saw selling, general and administrative costs as a percentage of sales decline in third quarter of 2007. All of this has led to an all-time best $25.8 million in operating income, 17.6 million in net income and $0.47 in diluted earnings per share for the quarter.

For the first nine months of 2007, we have now recorded 2 billion in sales, up 18.5%, $45.3 million in net income, up 22% and $1.20 in diluted earnings per share, up 21% over 2006.

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

Thanks, Richard, that's pretty exciting. Technology products continue to grow strongly in Q3 throughout North America and Europe. Sales increased in North America by 16% and in Europe, by 27%, which was 19% after favorable exchange rate effects.

Overall sales growth was driven by our thriving internet and business-to-business sales divisions. Our product expansion strategy to compete in the areas of flat panel televisions, electronics and other consumer electronics equipment has been paying off by helping us drive more customers to our channels and increasing opportunities to build customer value.

Our significant growth has gotten us noticed by tier-one electronics manufacturers and has resulted in Tiger Direct establishing direct purchasing relationships this quarter with companies like Mitsubishi, Yamaha, Nikon, Onkyo and Garmin. These direct relationships enable Tiger to bring the best prices to our customers at the highest margins for our Companies. We also recently began offering Direct TV packages on the web.

During the third quarter, we opened two new retail stores in North America, bringing the total number of Tiger Direct retail outlets to ten. We opened a store in Durham, North Carolina, which is our second in the Raleigh/Durham market. This store has interstate highway visibility and is in close proximity to both Duke and the University of North Carolina, which we expect will be a strong source of customers.

We also opened a store in Burlington Ontario, Canada, which is our fourth in the metropolitan Toronto market. This store is in a heavily-trafficked retail district with easy access to two major expressways. Both of these two new stores will bring us additional economies of scale in advertising and distribution in their markets.

In Europe, we saw a strong sales growth driven by growth in both our business-to-business and our internet sales, as the strategies we have implemented over the past several years continue to show substantial returns.

In North America, TigerDirect.com continues to grow its online business. In October, Stores magazine ranked TigerDirect.com among the top 50 online retailers online retail shopper liked the most. In fact, TigerDirect.com ranked ahead of the industry giant, Dell.com. HeadWize, a leading industry ranking service for websites continues to rank TigerDirect.com in the top ten of most heavily-trafficked sites in computer sales category.

In the third quarter, traffic to our website continued to grow, as we saw a 16% increase in visits over the third quarter of 2006. We continued to enhance the TigerDirect.com website during the third quarter, launching the new question-and-answer feature, which allows customers and vendors to take part in the Tiger community and converse with each other on features and benefits of the products that we offer.

We're confident that these initiatives, as well as others rolling out in the fourth quarter, will help ensure continued growth and a strong fourth quarter selling season.

And now, I'll turn the call back to Richard Leeds to discuss our industrial products and hosted software business.

Thanks, Gilbert. Our industrial products business, Global Industrial and Nexel Industries, continues to perform extremely well due to its business model, offering our customers low price and high-quality products, combined with its industry-leading website technology. We expect to continue growing our product offerings, increasing our business sales representatives and utilizing our ProfitCenter software technology to continue positively scaling the business.

In our hosted software business, during the quarter, we continued to develop the development of our ProfitCenter software web-based on-demand software application to enhance its features and functionality for multi-channel merchants and direct marketers. We also continued working on significant deployments for a number of third-party clients and anticipate successfully going live with these customers in the next few quarters.

We significantly strengthened our leadership team at PCS with the hiring of John Marrah as PCS' new CEO during August. I am extremely pleased to have someone of John's stature come aboard, as I consider John to be the world's leading executive in the direct marketing and multi-channel retail software industry.

John Marrah brings over 23 years of software and technology experience to his leadership role at PCS, most recently as the president of one of PCS' major competitors.

I'll now turn the call over to Larry Reinhold, our CFO, to discuss more detailed financial results.

Thanks, Richard. The Company's financial position showed continued strength in the third quarter of 2007. At September 30, our working capital was 253 million, up from 231 million at June 30. Our current ratio at September 30 was 1.85 to 1.00, up from 1.75 to 1.00 at June 30. Cash balances were 98 million at September 30, up 16 million from June 30.

In the last 12 months, we have generated cash from operations of 101 million while investing 8 million in capital expenditures, resulting in free cash flow of $93 million. This strong cash generation enabled our $37 million dividend for our shareholders earlier this year and our current strong and liquid balance sheet. At September 30, our inventory was approximately 235 million, down 6% from June 30, despite a 6% growth in sequential sales revenue.

During the quarter, we made great progress in lowering our inventory balances in our distribution centers while building inventory in new retail stores. At September 30, we had no debt outstanding on our revolving credit facility, principally the result of the timing of receives and disbursements in Europe where we have historically had net borrowing. Our total availability under our credit facility at September 30 was about 110 million, giving us a total of 200 million in cash and available credit.

During the quarter, our selling and administrative expenses were 84.8 million, compared to 72.3 million in the third quarter of last year. We continued to manage effectively and leverage our SG&A expenses in the quarter, as SG&A as a percent of sales was 12.3%, as compared to 12.6% in the third quarter of last year.

Net income was approximately 17.6 million in the quarter or $0.47 per diluted share, compared to 12.5 million or $0.33 per diluted share in the third quarter of 2006. The effective tax rate in the quarter was 34.5%, down from 36.2% last year, as a result of higher income and location with lower effective tax rate.

Now, I will turn the call back to Richard Leeds.

Thanks, Larry. Thank you for listening to our third quarter conference call. I would like to now open the call for questions -- operator?

[OPERATOR INSTRUCTIONS] Please stand by for your first question. [OPERATOR INSTRUCTIONS] And you have a question from the line of Ken (Cope).

Richard, what was the change in -- increase in the amount of sales on the internet, percentage wise, over in the Company this quarter?

Okay, we don't break that number out anymore but we have--

Oh, you don't?

But we typically have been growing our internet sales at a rather healthy pace, you know, it keeps in line with our sales growth.

Okay, thank you.

No problem.

And your next question will come from the line of Robert Moore of CMJ Partners.

Hello. I was wondering if you might give us a brief update on the prospects for PCS and how that's going and particularly, the prospects for diminishing the loss there.

Sure, PCS is a continuous development of the system. We're continuing to have customers that we implement. It's obviously going to continue to lose money because of a software as a service model has a tail to the revenue stream. But I mean, we're still pretty excited about it and I think that we now have an excellent manager in place that in the foreseeable future that, hopefully, we'll see a return -- the losses diminish.

So we're at maximum loss now in that area?

You know, I would say looking at the business model, again, it's a SAS model, so you have revenues coming further downstream as you bring up the business. But we staff the business now at a level that we feel comfortable at and we think that the strength structure is, from a staffing standpoint, is really where we need to be at for the foreseeable future.

So as we bring customers online, we are able to then start recognizing the revenue from these customers. But that's just how the SAS model works.

Okay, thank you.

You're welcome. Operator?

And your next question will come from Brian Lazar.

Hi. I just wanted you to maybe speak a little bit about your strategy with opening retail outlets and how that kind of works into the internet sales.

All right, Gilbert, why don't you handle that one?

We're concentrating on certain metro market areas. For example, we have several stores in the Miami area and the market would be from Miami all the way up to Fort Lauderdale, Palm Beach, Boca Raton, etc. We're doing very well in the greater Toronto area, so we have four stores there. We have two stores and a third now opening in the greater Chicago area and we now have two in the Raleigh/Durham area.

The idea would be to reach economies of scale, in terms of being able to have advertising that can work across a number of stores. So for example, when you run new ads on the newspaper, ads on the radio, whatever, if you only have one store in that greater market area, then all of the money you're spending might only reach a portion of the customers that might visit that store.

On the other hand, when you start to have a number of stores in the area -- this is a retail phenomenon -- then the advertising becomes very effective. The web and the retail strategy work hand in hand. We find that as we open stores in a metro market area, our web improves. The stores don't take business away from the web. What happens is our brand name improves because now, we're spending money advertising the stores and we're building the brand name not only because of the traffic that goes by the stores and the word of mouth, people who shop in the stores, but also our web marketing as well. And because we collect email addresses from so many customers not only at our retail stores but also on our website, we can use email addresses to advertise very efficiently to those customers.

The web strategy and the retail strategy, to answer your question, feed off of each other. The store strategy, to answer your question, right now, we're concentrating on certain metro markets and trying to reach the best economy of scale for advertising in those markets.

Okay, are you seeing similar margins? I mean, how have the stores been doing since you've opened them?

The neat thing about the store is you can get more impulse purchasing from a customer in a retail store than on the internet site. Typically, an internet customer knows what they want. They go to the site. And while our internet site is very full featured, in terms of having upsells and cross-sells and accompanying products on it and offering extended warranties and things like that to the customer, there's less of an emotional purchase on the internet site. And again, we work very hard to present the customer with additional things that they can buy like cables and accessories.

On the other hand, in a retail store, the customer is there, you know, he's buying a TV or he's buying a laptop computer and when he sees a carrying case or the cables he needs for his television or wall mounts, whatever it might be, the likelihood of selling those additional items at a retail environment are greater. And so we actually find margins to be slightly higher in our retail stores than in our other channels of distribution. And that's really good news because the retail stores have a slightly higher cost of operation than the website. Having greater margins in the retail store makes the model work very, very well for us.

Great, thank you very much.

We have no further questions at this time. I would like to turn the call over to management for closing comments.

Okay, thank you for listening to our third quarter conference call and we look forward to reporting to you on our fourth quarter results early next year. Thank you, everybody.

Ladies and gentlemen, thank you for your participation in today's call. This concludes the presentation. You may now disconnect. Have a wonderful day.