Global Industrial Co (GIC) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth quarter 2007 Systemax earnings conference call. At this time all participants are in listen-only mode. We will conduct a question-and-answer session at the end of today's conference. (OPERATOR INSTRUCTIONS).

As a reminder, this call is being recorded for replay purposes.

I will now turn the call over to Miss Donna Gehnrich, Moderator. Please proceed.

Thank you, Operator. Welcome to the Systemax fourth quarter 2007 conference call. I'm here today with Richard Leeds, Chairman and Chief Executive Officer of Systemax; Gilbert Fiorentino, President of Systemax Technology Products business which includes Tiger Direct, CompUSA and Misco; and Larry Reinhold, Executive Vice President and Chief Financial Officer of Systemax.

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. Richard.

Thank you, Donna.

First, let me apologize for the false start we had last week at the press release announcement. This is our first year where we must comply with Sarbanes Oxley Section 404 and getting everything ready for earnings release is a complex project.

Larry will talk more about that later in the call.

I believe you will agree that the numbers we reported today were worth the wait. I'm very excited and proud to report that we achieved another quarter of stellar sales and earnings. Sales reached $769 million, an increase of 19% over the fourth 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 supply, consumer electronics -- grew by 19% to $712.8 million and sales of Industrial Products grew by 13% to 56.5 million. Though not yet a significant source of revenues, our Hosted Software business, PCS, also grew its revenues.

In addition to sales growth, the driver of our strong bottom-line results in the quarter were the sustained improvements in gross margins. As previously discussed we put significant focus on improving our gross margins in 2007 and we are pleased with our success in this area. We posted 50.5% gross margin in the quarter, down slightly on a sequential basis from the third quarter but still significantly higher than last year.

The improvement is the result of maintaining gross margin levels in the Technology Products segment as compared to last year. Competitive sourcing advantages and cost efficiencies in our warehousing and distribution operations. We are also successfully leveraging our cost structure. SG&A cost as a percentage of sales has been relatively stable despite outstanding significant amounts on cost of complying with the Sarbanes Oxley Act and due to our successful turnaround of our UK operations, we had a significant income tax benefit in the quarter which Larry will discuss later.

All this has led to an all-time best $28 million in operating income, $24 million in net income and $0.64 in diluted earnings per share for the quarter. For the full year we posted $2.8 million sales, [up] 19% over 2006; $96 million in operating income up 54%; $69 million in net income up 54%; and $1.84 in diluted earnings per share, up 51%.

I am also excited to announce that last week we completed our CompUSA acquisition and we are now in possession of all 16 CompUSA retail stores in addition to the CompUSA.com website that we acquired in January. Gilbert will speak more about CompUSA in a moment.

Our strong financial performance has resulted in our Board of Directors last week declaring a special $1 per share dividend. And now Gilbert Fiorentino, President of our Technology Products business which includes our TigerDirect and Misco branded operations, and -- starting in Q1 of this year -- CompUSA, will discuss highlights in those businesses.

Thanks, Richard. Technology Products continued to grow strongly in Q4 throughout North America and Europe. Sales increased in North America by 18% and in Europe by 21%. That's 11% after excluding favorable exchange rate effects.

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

In the fourth quarter we added Bose and Hitachi to our roster of direct tier 1 consumer electronic manufacturers in our efforts to further solidify TigerDirect as a major player in the high margin world of home entertainment consumer electronics. In the CE world we now have direct purchasing relationships with Toshiba, Mitsubishi, Hitachi, Visio, Bose, Yamaha, (inaudible), Harmon Garden, Garman, Magellan and Nokia.

Direct relationships enable TigerDirect and CompUSA to bring the best prices to our customers at the highest margins for our Company.

During the fourth quarter we opened one new retail store in North America bringing the total number of TigerDirect retail outlets to 11. We opened a store in Hoffman Estates, Illinois -- our third in Chicagoland -- bringing us additional economies of scale in advertising and distribution. This new TigerDirect store is located on a very heavily trafficked intersection close to the Woodfield shopping mall, the largest retail district in the state of Illinois, and has quickly become a destination for regional shoppers looking for the largest selection of the best deals in PCs, TVs and more.

We are currently reopening the CompUSA stores that we acquired this quarter and in the long term intend to rebrand our U.S. TigerDirect stores as CompUSA, leaving us with a single brand strategy in the U.S. -- a single retail brand strategy in the U.S.

TigerDirect.com, our website, continues to concentrate on its online business. During October, Stores Magazine ranked TigerDirect.com among the top 50 online retailers the online retail shoppers like the most. In fact, TigerDirect.com ranked ahead of industry giant Dell.com. Hitwise, a leading industry ranking service or websites continued to rank TigerDirect.com in the top 10 most heavily trafficked sites in the computer sales category.

Nielsen ratings ranked TigerDirect.com website as the sixth most visited electronics website during the busy month of December.

In the fourth quarter, traffic to our websites continued to grow as we saw 21% increase in visits over the third quarter 2006. And Computer Shopper readers ranked TigerDirect as one of the best places to buy online as well as one of the best places to buy desktop and notebook PCs in that magazine's 2007 Shopper's Choice awards.

Enhancements made to the TigerDirect.com website in the fourth quarter included the launch of two new payment methods, Google Checkout and PayPal Checkout -- both of which have a loyal base of users who shop at TigerDirect and these options make us easier to do business with. We also launched a new item recommendations page which improved our conversion rates in testing. And TigerDirect.com continues to break new ground for the electronics retailers category by continuing to develop product informational videos on our products.

During 2007, we produced 708 new product videos which attracted a combined 12 million views. We were also very proud to offer our first-ever live broadcast by Electronics Retailer on Black Friday 2007 during which we broadcast streaming live video for 15 hours straight in support of our Pink Friday campaign which -- in addition to stimulating strong sales on the busiest retail date of the year -- also supported our partnership with the Susan G. Komen Fight For The Cure.

Partly as a result of our effort, D.C. Magazine called TigerDirect the best shopping site for Black Friday. By renaming Black Friday to Pink Friday we supported a deserving charity, donated over $100,000 and benefited our shareholders by giving customers another reason to do business with us.

In Europe, we saw strong sales growth in both business to business and Internet sales as the strategies we have implemented over the past several years continued to show substantial returns.

As Richard mentioned previously, Systemax has recently completed the acquisition of CompUSA. We have been operating the new and CompUSA website since the middle of January. While sales are modest on this website in comparison to [TigerDirect], we feel that CompUSA has a tremendous amount of brand equity and we will be capitalizing on that in the future.

In the last several weeks we have completed the acquisition of 16 former CompUSA retail stores in selected Florida, Texas and Puerto Rico. As of today, we have reopened nine of those locations as the new and improved CompUSA retail outlets and we anticipate the remainder will be opened within 30 days.

We are very excited about the opportunities that CompUSA is providing for our customers and employees, and believe it will be a great investment for our shareholders.

I will now turn the call back to Richard Leeds to discuss our Industrial Products and other businesses.

Thanks Gilbert.

Our Industrial Products, Global Industrial and (inaudible) industries continues to perform extremely well due to its business model offering our customers low-priced and high-quality products, combined with this industry-leading website technology. We expect to continue growing our product offerings, increasing our business, sales representatives and utilizing our profit center Software Technology to continue profitably scaling the business.

Our hosted software business, ProfitCenter Software, continues to advance the development of the PCS Web-based on-demand software applications to enhance its features and functionalities for multichannel 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 coming months.

Our strengthened leadership team at PCS led by CEO John [Maret] and COO [Dominic Labord] continues to make excellent progress in developing the product, adding additional features and functionality, and gaining momentum in the marketplace.

Finally, as many of our investors know, one of our small business units processes rebates in North America, offered by both our own businesses as well as by numerous third party customers. During the fourth quarter we were served with a class-action lawsuit and the Florida Attorney General's office ordered us to provide information about historical rebate claims and payments.

We generally do not comment about ongoing litigation (inaudible) . However given the recent publicity surrounding these matters I'm breaking with policy to provide our investors with a few comments. The class action lawsuit was filed by one person claiming he was inappropriately denied one $40.00 rebate. The court has not yet certified this person as representative of the class.

We have moved to dismiss this lawsuit and we will vigorously defend ourselves in this litigation and we are cooperating fully with the Florida Attorney General's office. The various press reports that have been published contain inaccuracies and innuendos. We expect that at the end of the day, these inaccuracies will be corrected for the record and the focus on our Company will return to how we are delivering values to our key stakeholders as shareholders who have entrusted us to provide a healthy return on their investment, our customers who align us with great value and service and our employees who work very hard every day to doing great work in a very competitive environment.

I want to thank all of these people for their confidence in the Company.

I will now turn to call over to Larry, our CFO, to discuss in more detail financial

Thanks, Richard.

The Company's financial position showed continued strength in the fourth quarter of 2007. At the end of Q4, our working capital was $273 million, up from $253 million at the end of Q3. Our current ratio was a healthy 1.82 to 1, essentially flat with a ratio in Q3. Cash balances were $128 million, up $30 million from Q3.

During the full year 2007, we generated cash from operations of $97 million while investing $8 million in capital expenditures, resulting in free cash flow of $89 million. This strong cash generation enabled the $37 million special dividend we paid to our shareholders in Q2 of 2007 and it will enable our second special dividend of a similar amount to be paid next month.

At the end of Q4, our inventory was approximately 250 million, up 7% from Q3, significantly less than our 12% sequential growth in sales in Q4 over Q3. At the end of Q4, we had no debt outstanding on our revolving credit facility, principally the results of timing of receipts and disbursements in Europe where we historically have had net borrowings. Our total availability under our credit facility was approximately $97 million giving us a total of nearly $225 million cash and available credit at December 31.

During Q4, our SG&A expenses were 11.9% of sales compared to 11.1% of Q4 of '06. For the full year, our SG&A was 11.9% versus 12.0% in '06. We are continuing to manage effectively and leverage our SG&A as a percentage of sales, despite incurring significantly increased administrative costs for accounting, auditing, consulting and legal fees, associated with compliance for the Sarbanes Oxley Act.

Our effective tax rate during Q4 was 18.9% and for the full year was 30.5%, both of which were down significantly from the prior year. The reason the tax rate was so low was due to the success of the turnaround in our UK operations. At the end of 2005, the UK had a large net operating loss carryforward. Due to the UK's having incurred substantial losses for several years up to that point, a decision was made to book a valuation allowance and effectively write off those NOLs in the fourth quarter of 2005.

Our effective tax rate was actually 82% in that quarter and 65% for the full year of '05 because of that write-off. At the end of 2007, due to the UK's history of profit since that point, we've made the decision that the valuation allowance of those remaining NOLs carryforwards could be reversed.

Net income was approximately $24 million in the quarter or $0.64 per diluted share compared to $8 million or $0.22 per diluted share last year.

As Richard mentioned earlier, 2007 was the first year that Systemax has had to comply with the internal control and documentation requirements of the Sarbanes Oxley Act. We have operations in numerous parts of North America and Europe and different financial systems. The process of consolidating and reporting our worldwide results is complex and time consuming. We found that we wanted to take a few extra days to dot all the i's and cross all the t's.

For Q1 and subsequent quarters we are going to make some internal changes to ensure that we can better estimate the date when we will be finished and prepared to release our quarterly results. I am pleased, however, that under the requirements of Sarbanes Oxley, management and our outside auditors have concluded that our system of internal control does not have any material weaknesses.

Now I will turn the call back to Richard Leeds.

Thanks Larry. Thank you for listening to our fourth quarter conference call. I would like to now open the call for questions. Operator?

Richard, it's Gilbert. If I could interrupt for two seconds, I have a correction.

Okay.

In the -- I said that in the fourth quarter, traffic to our websites continued to grow as we saw a 21% increase in visits over the third quarter of 2006. Of course I meant the fourth quarter of 2007.

(OPERATOR INSTRUCTIONS). [Dan Mendoza] with [Agin] Corp. Capital.

My question had to do with better understandings of rebates, how that works. Can you give us a sense for what percentage of your volume has like a rebate associated with it? And can you help us understand the breakage assumptions you guys use and what your historical breakage has been?

We don't disclose the detail of rebates. But let me -- and the specific assumptions that go into it -- but let me talk about a couple of things.

First, there are two different types of rebates. First, most rebates are offered and funded by the manufacturers. Second, some rebates are offered and funded by the retailer or the e-tailer. Manufactured rebates do not impact our financial statements. They are simply a transaction the (inaudible) consumer and the manufacturer, although if we process the rebate, we are the manufacturers' agent and act under their instructions.

Retailer rebates are simply one of the tools that the Company can use in the pricing of its products. And the estimated cost of a rebate program are reflected as a reduction in our sales revenue, similar to how estimated sales returns are reflected as a reduction of sales revenue.

Okay and then I guess -- so on those can you help us with that historical breakage has been or what your assumptions are for those?

That's a level of disclosure that we really don't get into. We haven't historically and we won't be doing that today.

Then I guess my other question, you mentioned or someone mentioned in their comments that the recent reports contained inaccuracies and innuendos and I was hoping you might highlight for us what some of the bigger ones were?

I'd pretty much have said whatever I feel that we can say, so I would greatly appreciate it if there could be no more questions about the lawsuits on this.

The question wasn't related to the lawsuits. It was related to the inaccuracies and Barron's report and whatever else.

As I said in my comments, those will come out over time and we feel confident that we will have our reputation restored.

Okay. Thanks.

(OPERATOR INSTRUCTIONS). J.D. Padgett with Boston Company.

Had a couple of questions. One, I was just curious how much do you pay for the CompUSA assets and will we see that reflected in the balance sheet in Q1?

Yes. The purchase price we've disclosed we made the acquisition in a couple of different stages. First we acquired the CompUSA website and related -- other assets related to that and that purchase price was just under $19 million. Then we acquired 16 retail stores, I mean the fixtures and furniture would been those stores, and assumed those leases. The purchase price of that was under -- those stores was under $10 million. The aggregate of all of the -- [for both for the] CompUSA was around $29 million.

$25 million?

29.

$29 million total. Okay. And although stores are under lease, right -- ?

They're all leased.

And did any of that cash go out at the end of '07 or that's all going to happen in '08?

It all was funded in the first quarter of '08.

Okay. Sounds good. Then the rationale behind converting TigerDirect bricks and mortar to CompUSA, have you guys done any work to understand how strong of a brand name in the bricks and mortar world CompUSA still is and if that is going to be a wise conversion?

Yes, we have. At one time CompUSA did nearly $5 billion a year in the United States alone; and to support that they spent literally hundreds of millions of dollars over time, advertising the brand in newspaper circulars and radio advertising and things like that to build their own traffic.

Having a two brand retail strategy would be expensive and fragmented for us. We are confident that the CompUSA brand is nearly household brand recognition and so changing the TigerDirect stores in the United States to CompUSA will give us a single brand strategy at retail. It will allow us to maximize our advertising dollars, and we believe it has the most brand awareness among the customers.

And in the online channel you'll run both separately still?

For right now we have two online websites. Today, we operate the CompUSA.com website. It is really no secret. We don't keep it a secret that Systemax owns that site and of course Systemax also owns the TigerDirect.com site. Towards the end of the year, after we have gone with a single brand strategy at retail and measured how that worked for us in retail, we will look at having a build brand strategy on the Internet versus a single brand strategy and make more decisions.

I guess just one other question for you, Larry. How should we expect the inclusion of the CompUSA assets to impact the P&L going forward?

It's like any business acquisition. We will -- from the sales and the revenues and the costs will hit our P&L and the, what we paid for the assets will be on our balance sheet. We will be doing -- as required we will be doing appraisals of the assets, allocate them between [URL] and other intangibles that we acquired. And so there will be some amortization of those assets that are required to be amortized.

Some of the assets may not be required to be amortized under the accounting rules.

So just thinking about conceptually the online channel you probably can layer that in with pretty small incremental costs, I guess, aside from just running the site and the website redesign?

Yes, (inaudible).

That's got to be pretty accretive.

Part of the rationale for the acquisition and the online business -- again they are separate. TigerDirect.com is separate from CompUSA.com but a lot of the back technology and infrastructure supporting it is leverageable between (technical difficulties). And so we viewed that as very accretive, very synergistic.

Any sense for how much incremental new users that potentially brings or incremental revenue from the online channel, CompUSA online?

We are very excited about that question because during our due diligence, before we purchased the CompUSA assets, we were able to run overlap with a customer list between the existing TigerDirect.com customer list and the CompUSA customer list. And we found there was only a 7% overlap between the two customer lists.

So while we were able to leverage much of the back office functionality, we are also finding that we are taking up a lot of new customers from the brand awareness that CompUSA had, TigerDirect did not have. So that's very exciting in terms of incremental business for us.

Is that something you can quantify percentage relative to the existing base or anything like that just to help us understand?

I could but I think they would shoot me. (multiple speakers)

This is Richard. It's relatively small comparison to the Tiger business.

The current business is.

Yes. We think we have an opportunity there. (multiple speakers) And also (inaudible) the retail outlets that we bought were among the best performing of the old CompUSA format and we think that under us that we will be able to change those and have the best locations. We have picked up some good managers there. So we are pretty excited about the stores as well.

Is that -- that sounds like then it's nothing that is going to be dilutive to earnings, the new retail stores. If anything, it is accretive.

The stores had been closed and then we cleaned them up and reopened them. So there is a little bit of start-up in there, but obviously we like to make acquisitions that are accretive.

So it just takes a little bit of time to kind of rebuild the foot traffic and all of that stuff.

Exactly. We are pretty excited about it.

Stanley [Stackowitz], private investor.

Fantastic quarter. I have a question on the acquisition. What is the volume anticipated in the CompUSA stores or what was the yearly volume on the CompUSA stores?

That's a level of disclosure that we haven't made.

I'm trying to figure out how much -- if you keep the same type of volume, how much it led to revenue for 2008?

As I said in the answer to the last question, I'm not really trying to avoid answering you, but it's clearly are we building old model right now because of CompUSA was not performing well. We closed the stores for a couple, a few weeks, refurbished them and reopened. So what -- I don't think it's fair to look at what they did in the past because there was a company that was in trouble and we think we have a much better formula for getting sales into the store than they were.

So it's really -- it's hard for us to look at. We have our internal projections at this point. We don't want to release our projections (multiple speakers).

Come on, just give us a little (inaudible).

We are just going to work really hard to get them to be successful.

And is there any couple of -- probably something you can't answer either. Do you eventually plan on, with the stock being this low, especially with the hit that we talked of -- $2.30 -- since you canceled the earnings call on Wednesday, of possibly implementing a stock buy back?

A stock buy back is something that the Board continues to -- continually discusses and we will continue to discuss it and evaluate it in the future. I mean if it's something just we will (inaudible).

Gray quarter. Thank you very much.

J.D. Padgett with The Boston Company.

I was just curious if you could elaborate some on the strategy of how you fix it relative to previous operators for CompUSA bricks and mortar or does that kind of divulge some strategies you would prefer not to share with competition?

I think we can share a little bit.

I can share that. A lot of people don't know that we had 11 retail stores opened at the end of the year. They were all TigerDirect stores and we were very happy with the performance of our own retail stores before we got into the CompUSA acquisition. Of course those were the TigerDirect stores. Systemax bought the CompUSA, they're still separate.

The TigerDirect stores, which will be rebranded as CompUSA stores in the future, have a completely different merchandising strategy. They have a different labor model. They have a much different base of customer in terms of a do-it-yourself customer who comes in to buy memory, video cards, hard drives. For example we are currently the largest Seagate hard drive reseller in our channel.

So these customers who come in divide these do-it-yourself. Items, for example we might have 30 motherboards in one of our stores, and while the big box retailers have their place in the world, if you go into one of the big box retailers you might find two or three motherboards. And we will have 30 CPUs to support those motherboards and the big box retailers might have a few CPUs that they sell if they sell any.

Bringing that do-it-yourself customer into the store, means bringing a customer in that is not shopping in those big box stores. It is a customer that is also going to buy laptops and televisions and desktop computers and everything else, but having a much broader depth, much broader line of products and going far deeper into those lines, is what distinguishes us from our competition. And it is what made our retail stores successful before we even considered buying retail stores.

We are not just jumping into a business we don't know. And I will add that even though Comp USA was a company that was in trouble, it was in trouble because of its own merchandising, its own competition, its own advertising model. We have a completely different advertising model. We use the Internet to drive customers into our stores.

So it is a very different business, but even though CompUSA was losing money and even though they were in trouble it was because of their advertising, it was because of their merchandising, it was because of their product selection and how they positioned themselves against their competition. We are very excited that we are changing all of that and we've acquired a tremendous number of very, very good employees as part of the CompUSA acquisition.

So we are excited about the district managers, the store managers and the store level employees, almost 700 employees that were required to support the stores where there were significantly more employees in those stores before we bottom. So the employees give us a tremendous start on this new business that we are reengineering.

I'm trying to think, the old CompUSA, I guess it wasn't as consumer friendly as obviously a Best Buy. It sounds like that is kind of a niche that you preserve, so there's not really any confusion in a message potentially changing for the people that used to go to CompUSA.

We obviously have a rebuilding of the customer base in CompUSA and that's why before I said we really have to look at this as a business model there.

But we're -- this is a long-term business. So I mean this is not a quarterly business. We don't, we are not just trying to make every quarter. We are trying to build very long-term value for the shareholders and this is a long-term commitment, but it is one that we are confident about and that we've analyzed deeply and we feel good in terms of the long-term results.

You think the customer, you're hoping or that you are now in hoping to attract the Comp USA is kind of more the professional IT person that is going in to buy some parts to fix his network or is it the consumer?

It's everything. If we could take a tiny bit of market share away from each of the competitors and there are literally dozens then we can rein share that business into doing very well as previously we have done in our own stores.

One other question, I was just on the software business. I know sometimes you -- in the 10-Qs for instance, you get the segment reporting for that in terms of the amount of money that you are losing there funding the development. Do you have that for the fourth quarter offhand?

I don't have it in the room with me (inaudible) but I certainly have for the full year our PCS segment incurred an operating loss of $15.8 million. As I recall it was around 9. something -- I can't remember exactly. I just don't have that in front of me.

I think I actually have the numbers in here right it was somewhere around $11 million. So looks like maybe another $5 million that you invested in that company. Any sense for when you kind of hit the tipping point there where that's a breakeven proposition?

We don't again we don't disclose very much if any forward-looking guidance. But I think it's not necessarily well-understood that the accounting model for PCS is a heavily deferred revenue recognition and where we, where the customer's pass significant amounts of money to get them live. Which none of that -- none of that what we're paid is recognized as revenue on our financial statement, until the point that they do go live. And then that implementation revenue is spread over a period of time in the future, along with monthly hosting fee recognized as [build].

There's a significant amount at the end of '07, we have a significant amount of difficult deferred revenue on our balance sheet in excess of $5 million that represents cash that we've received in our PCS business for implementations that is not yet hit the income statement that, well, and benefited the income statement.

So the business is certainly expected to be a very profitable and it will turn cash flow positive in advance of when it will be earnings positive. But it's as of 2000 -- as of January 2007 again our -- the operating loss was about in excess of $15 million and it certainly was book cash flow and earnings negative during the year.

But it's something or it sounds like the pipeline is strong and as more of these things go live at some point, probably '08 is a little too soon to think, but '09 and beyond obviously you wouldn't be investing there if you didn't think there was a possibility for nice returns (multiple speakers).

We are very positive about the business. There's a number of companies out there with similar type businesses that have done very well and we see that the opportunities there are huge and the product is a great product. We use it ourselves. And as we bring our customers live they will be making it easier for us to get more and more customers.

Ladies and gentlemen, that does conclude the time that we have for questions today. I'd like to turn the call back over to Mr. Richard Leeds for closing remarks. Please proceed, Sir.

Thank you for listening to our fourth quarter results and we look for two announcing our first quarter results in the future. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.