Global Industrial Co (GIC) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first-quarter 2008 Systemax earnings conference call. My name is Towanda and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). 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 Gehnrich. Please proceed, ma'am.

Thank you, operator. Welcome to the Systemax first-quarter 2008 conference call. I am here today with Richard Leeds, Chairman and Chief Executive Officer of Systemax; Gilbert Fiorentino, General Manager of Systemax's Technology Products business, which includes TigerDirect, 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. I will now turn the call over to Richard Leeds.

Thank you, Donna. I am very pleased to report that we achieved another record quarter where we increased sales year-over-year and earnings as well. Consolidated sales for the quarter were $725 million, a record amount for a first quarter and an increase of 7.2% over last year, with sales growing in our two largest business segments despite a challenging macroeconomic environment. Sales of Technology Products -- computers, computer supplies and accessories, consumer electronics -- grew by 7% and sales of Industrial Products, material handling equipment, storage equipment and consumable industrial items grew by 11%.

Continuing to drive our strong bottom-line results was sustained focus on improving or gross margins. Consolidated gross margin improved 150 basis points over last year and continues the overall trend of improvement we saw throughout 2007. This improvement was primarily attributable to our Technology Products segment with less price discounting than a year ago and greater efficiencies in our warehousing and distribution operations due to higher volumes.

We are also continuing to leverage our existing cost structure. Consolidated SG&A costs as a percentage of sales, excluding CompUSA startup costs, have been in a relatively stable range despite our continued spending of significant amounts on costs on regulatory compliance. All this has led to an all-time best first-quarter result of $28 million in operating income, a 28% increase; $18 million in net income, a 30% increase; and $0.48 in diluted earnings per share, also a 30% increase.

As we reported in March, during the first quarter, we substantially completed our CompUSA acquisition and we are now operating the new and improved compusa.com website and 16 new and improved CompUSA retail outlets. While our technology product sales revenue did not grow as fast as in prior quarters through our focus on the CompUSA integration, we believe we have positioned this business well for the future. And we declared our second $1.00 per share special dividend during the quarter. Our stockholders should have received their dividend payments during the first week of April.

I will now turn the call over to Gilbert to discuss highlights of our Technology Products businesses, including TigerDirect, Misco and now CompUSA.

Thanks, Richard. The first quarter was an extremely busy one for the Technology Products group. While we are extremely happy with the growth in operating income, we are not happy with the growth in revenue in the Technology Products segment.

In the US during the quarter, we acquired the CompUSA Web and 16 retail CompUSA stores. While we refer to this as an acquisition, in substance, it was just an asset purchase of the Web URLs and 16 store locations. It was night not like acquiring an ongoing business where, in many cases, you simply sign legal documents, change the organizational chart and then start tracking ongoing revenues that you own.

On the day we took over the compusa.com URL, there were no sales and in fact, we did not even acquire the old compusa.com website engine. On the days that we took over each store, it was empty except for shelving and signage.

During the first quarter, we devoted much of our attention to converting the CompUSA URL to an entirely new compusa.com e-commerce site with all new content and e-commerce capabilities. As expected, we have seen significant sales and a steady growth increase in the nearly four months since we acquired the assets.

Likewise, during the quarter, much attention was spent on the conversion, refurbishment, restocking and reopening of the 16 CompUSA retail stores. This included all new point-of-sale and other IT systems, employee hiring and training, restocking of the stores with new inventory and grand opening promotions and events. We added about 700 new employees during the quarter relating to the new retail stores and retrained those employees on our business model and approach to retail. In fact, the CompUSA store grand reopenings extended into April of this year.

Even with that distraction, we were able to improve our income substantially after absorbing the CompUSA startup costs. More importantly, we expect that in the second half of the year we will have completed substantially all of the integration of CompUSA business and will again look to aggressively grow our sales.

As of today, our total store count in North America is 28 with four in Canada and 24 in the United States and Puerto Rico. We currently have plans to open three more stores, two in Canada and one in Florida. Long term, we intend to rebrand our US TigerDirect stores as CompUSA, leaving us with a single brand retail strategy in the US.

Overall, Technology Products continued to grow in Q1 in North America and Europe despite increasing concerns over a recession in the US. Revenues in North America from the compusa.com website and from the few CompUSA retail stores that were open before March 31 were about $18 million.

Revenues in Europe were favorably impacted by favorable exchange rates of about $18 million. The Easter holiday came during March of this year versus April of last year, which had an additional impact, mostly in Europe. So our sales continue to be driven by our diverse channels -- business-to-business, business-to-consumer over the web, television shopping and retail stores.

Our product expansion strategy to compete in the areas of flat-panel TVs and other consumer electronics equipment continues to pay off by helping us drive more customers to our selling channels and increasing opportunities to build customer value.

In the first quarter, we added Sony retail products to our roster of tier one consumer electronics manufacturers in our effort to further solidify TigerDirect and CompUSA as a major player in the higher-margin world of home entertainment and consumer electronics. In the CE world, we now have direct purchasing relationships with Toshiba, Mitsubishi, Hitachi, Sony, Visio, Bose, Yamaha, Onkyo, Harmon Kardon, 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.

In the markets we serve and particularly in the online consumer business, competitive price discounting is pervasive. Although we are committed to bringing great value to our customers every day, we are concentrating many of our efforts to giving customers the best service experience possible. By making us the easiest place to do business, offering one-stop shopping for items our customers want, shipping orders quickly and correctly and offering a single contact resolution for any customer that has a problem, we will attract more loyal and repeat customers.

In order to do that, we have reduced customer discounts, preferring to focus on sustainable profitability instead of short-term revenue. This strategy is proven by the growth in our operating income in the computer sector.

TigerDirect continues to concentrate on its online business as well. During the first quarter of 2008, Hitwise, a leading industry-ranking servicer website, ranked tigerdirect.com as the sixth biggest website for marketshare in the electronics and appliances category. Traffic to our websites continued to grow as we saw a 25% increase in total traffic over the first quarter of 2007. Once customers arrive on our site, the user experience has improved with enhanced Web content, 90,000 user reviews and over 20,000 user-generated questions and answers. Our previously discussed video content program generated almost 5.7 million video views during the quarter.

Also in the first quarter, we implemented a 90-day satisfaction guarantee program with a third-party provider, [Assures]. We offer customers the option of paying a small fee to add the Assures service to their order. The customer then has 90 days to request a return if they are not satisfied with the product for any reason. Assures pays all the shipping, inspects the item and issues a full refund directly to the customer with no financial cost to Systemax. During Q1 alone since we launched this program, over 20,000 customers have taken advantage of this service.

We are very excited about the Technology Products segment results, the integration of CompUSA and the opportunities that lie ahead of us to continue to grow our revenues and offer operating profits. So now I will turn the call back to Richard Leeds to discuss our Industrial Products division and other businesses.

Thanks, Gilbert. Our Industrial Products business, Global Industrial and Nexel Industries, continues to perform extremely well through its business model, offering our customers low-priced and high-quality products combined with its industry-leading website technology. We have added to our product offerings and we expect to continue to do so. We have increased our business sales representatives and we are utilizing our ProfitCenter Software technology to continue profitably scaling the business.

We continue to increase our sourcing capability and purchasing strength both in the US and abroad. This enables us to offer better values to our customers, as well as maintain profitability on staple items. That also allows us to bring one-off promotions to our customer base, at times filling in slower periods of our business cycle, thus increasing operating efficiencies.

And finally, it has helped us increase our product selection on the Web by over 60% than just a year ago. New web visitors to our Global Industrial website were up over 40% this quarter compared to last year and even more important, the number of new Web customers grew almost 30%. The fast expanding Web customer base creates synergy with our outbound telemarketing salesforce and traditional catalog mailings.

The sales group solidifies the relationship with many of these new customers by reaching out to provide them sourcing help, competitive pricing and customized solutions. The catalog, including a hardcover edition sent in January to our best customers, keeps our name front and center. We believe this special handling has contributed to our healthy increase in average order size this quarter.

Our [hosted] software business, ProfitCenter Software, is advancing the development of the PCS Web-based OnDemand software application to enhance its features and functionality for multichannel merchants and direct marketers. During the quarter, PCS delivered version 3.0 of the product, culminating over a year of development effort. This new version of the product includes new features and functionality, including continuity, worldwide shipping, advanced search and faster navigation, personalization and enhanced accounting functionality.

We also continued moving closer to deployment for a number of well-known third-party clients and anticipate successfully going live with these customers in the coming months.

Finally, as we disclosed in our 10-K and discussed on our last quarter's conference call, one of our small business units that processes rebates in North America was served with a Class-Action lawsuit and the Florida Attorney General's Office requested us to provide information about our historical rebate claims and payments. The status of both of these remains essentially the same as reported in our fourth-quarter conference call. The court has not yet certified that this person is represented by Class and there has been no rulings on our Motion to Dismiss. We continue to also corporate fully with the Florida Attorney General's Office. I will now turn the call over to Larry Reinhold to discuss more detailed financial results.

Thanks, Richard. The Company's financial position showed continued strength in the first quarter of 2008 after the purchase of CompUSA. At the end of Q1, our working capital was $227 million, down from $274 million at the end of Q4, principally as the result of the cash used to fund the CompUSA purchase and for inventory to fill the new stores. Our current ratio at the end of the quarter was 1.6 to 1. The cash balances were $99 million, down $29 million from Q4, again, principally related to CompUSA.

During the quarter, we generated cash from operations of $9 million, while investing $30.4 million for the CompUSA acquisition and another $6 million in other capital expenditures, principally IT equipment. At the end of Q1, our inventory was $269 million, up 8% from Q4, primarily the result of our adding stock to the 16 new CompUSA retail stores.

At the end of Q1, we had $2.1 million in debt outstanding, all in Europe. The total availability under our credit facility was approximately $108 million, giving us over $200 million in cash and available credit as of March 31. And we paid the $1.00 per share special dividend early in Q2, on April 2.

During Q1, our SG&A expenses were 12.0% of sales compared to 11.1% in Q1 of 2007. The increase in SG&A as a percent of sales is due principally to approximately $2.5 million of costs related to CompUSA. We incurred most of these costs related to hiring and training over 700 new employees for the retail stores, which were just beginning to have grand openings at the end of March. These employee-related expenses, as well as store lease and other costs, were incurred in advance of the stores being open and the sales revenue ramping up.

Our effective tax rate in Q1 was 36.1%, down from 37.6% last year. The tax rate benefited in 2008 from the favorable resolution of a state tax matter of about $400,000. Net income was approximately $18 million in the quarter or $0.48 per diluted share compared to $14 million or $0.37 per diluted share last year. Included in the 2007 results was a gain of about $2.4 million or $0.04 a share. Diluted shares outstanding was 37,628,000 in 2008 versus 37,701,000 last year. This results from using a smaller number of unexercised stock options in the calculation due to different stock prices this year than last year. And now, I will turn the call back to Richard Leeds.

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

(OPERATOR INSTRUCTIONS). David Kaczorowski, Signal Hill Capital.

Hi, folks. I will try to keep this brief. For the CompUSA stores, you said there were 700 employees. Were there any of those inherited from the former operations of CompUSA?

Gilbert, do you want to --?

Good morning, this is Gilbert. Essentially all of those. There may have been a few that we hired outside of the acquisition of the stores and website, but essentially all of the new employees -- in fact, all of them working in the stores essentially were previous CompUSA employees.

Oh, really? Okay. So the purchase price, as it is in the financials, is $30 million. Can you give a little bit of a breakout about how much of that was goodwill and how much of that was tangible assets?

One second while Larry looks for the exact number.

Okay. The -- again, it's approximately -- we still have -- we will be finalizing the purchase accounting over the course of the year, but of the $30 million, about $17 million was trademarks and trade names, $8 million for domain name, some for a customer list and about $4 million for goodwill. We think a portion of the costs that will be advertised is really about less than $1 million. Most of it will be not subject to amortization, but instead subject to impairment testing like other long-term assets.

And as far as the rebranding of your TigerDirect stores, is this going to be like a quick change to CompUSA? Is it going to be tearing off a Band-Aid or are you going to have a double logo for half the year or how is that going to work?

Yes, hi. It's Gilbert again. Right now, in states where we have stores, we are collecting sales tax in both the CompUSA and the TigerDirect businesses and so you are seeing some overlap in branding right now. In some of the CompUSA stores, you see dual-branded CompUSA/TigerDirect catalogs. In some of the Tiger stores, you see employees starting to wear the CompUSA -- dual-branded to CompUSA/TigerDirect uniforms and so we expect that we are going to take our time and let customers -- let it settle in, let all of the dust settle and probably towards the end of the year, change the names of the Tiger stores to CompUSA.

And then one more and I will jump back in the queue. You have got the breakout of Technology versus Industrial and all that. I don't suppose you have got numbers for the Technology Products brick and mortar store versus website do you for the revenue and margins?

We don't disclose our revenue in a breakdown at that level of detail by any of our channels yet.

Okay, well it was worth a try. Thank you very much.

[Andre Gardner], Argos Management.

Hey, guys. Congratulations. It's sort of a similar question on the revenue, but on the CompUSA side, have you let us know what the breakdown there was before on retail versus Internet?

Again, we have disclosed that CompUSA added about $18 million to the top line in the quarter. Again, as we said, we are not giving the specific breakout between Web and stores. We did say that the stores though for the most part did not have their grand reopenings until April.

Okay. What about previously, previous to the acquisition when CompUSA was functioning? Was there any indication of the breakdown then?

Well, this is Richard. They were in a wind-down mode for quite a while, so when we took over, as Gilbert had mentioned, when we turned on the website, there was zero sales. When we took over a store, the store was empty, except for shelving, so we have a complete rebuilding. What we are seeing on the stores is an opening pattern similar to as if we had a new store opening. We have some pick-up from the location. Primarily the attraction that CompUSA had for us was the brand name, being able to look at the locations of the stores and seeing how their sales were doing for them. As opposed to us having to take a shot on a new location, we were able to see if that location was performing for them. So that was the benefits that we had seen in it, but really when we looked -- when we look at this in hindsight, it was more as if it was opening up new locations and opening up a new website as opposed to a traditional acquisition.

Okay. Finally, would you guys ever consider doing an Investor Day in New York where we could get the story out to some more people?

Yes, we would. We plan on participating in some investor conferences later this year and we would think about holding an Investor Day at some point in the future.

Great. Thanks.

JD Padgett, The Boston Company.

Yes, hi, nice results. A question on the software business and just trying to figure out what the average economics per customer might look like there once you go live with these couple or several customers you are pursuing?

Right now, it is still a relatively small business and we are not breaking that out, but there is -- it is a seat-based business, so basically as we get paid each much for the seats. As Larry had discussed last quarter, we only are able to recognize revenue as those customers come live. So we look forward to that taking place in the future as we bring those customers up.

Is there any way to quantify what average economics per customer could look like for you in terms of monthly revenue or quarterly revenue?

Well, we certainly have the businesses modeled internally, but we are not prepared to disclose any of that publicly.

That would be a recurring monthly revenue?

Remember, I went through this last quarter, but I will try to repeat it, the software business we have long and complex implementations, which we are paid for and then they have a contractual period following go-live for a number of years. The accounting model that we follow for this is that all of the cash that we receive for the implementation is deferred and then it will be recognized once they go live and it is recognized on a straight-line basis over the contractual period.

Also when they go live, there are monthly hosting fees based on the number of seats. So it is a very -- after go-live, the revenue model is very predictable, but it is certainly very back-end weighted and that is where we are right now. We have a handful of customers who are live and using the product to run their business and we have several very large customers who we expect to go live later this year.

Would you be upset if you don't have a couple of customers go live here in the second quarter or is that too early to think?

We are looking at them later this year.

Okay. And the other question would just be on the stores, now that you have the new CompUSA stores open I guess, are you starting to see growth in foot traffic there or do you have kind of more work to do to repair and reinvigorate that brand name?

This is Richard. What we are seeing is it is similar to a new store opening where, as opposed to it being as if there was a store there -- or one of our stores there for a length of period. It grows after a time. We get a big burst from the grand opening and then it settles down a little bit and then it continues to grow. So it is following pretty much a traditional store opening pattern.

But on the positive side, this is Gilbert, and I will add to that. We were able to open 16 stores in a short period of time where if we were just opening stores at our own, that would have taken much longer and we are also very happy with the quality of the management and district managers and store managers that we were able to acquire with the stores. That would've taken a tremendous amount of time to go out and find and train and get the kind of experience that the CompUSA people have. So that is very positive. It is not so positive, as Richard said, in terms of -- it is like opening a new store, but it is very positive because you were able to get 16 of them quickly and you were able to get a lot of employees and managers that we are very, very happy to have as part of our team.

Okay and the last question is just the expenses that you called out related to CompUSA, how much of that is ongoing versus sort of grand opening and recruiting and hiring and stuff that is more one-time in nature?

Well, as we said, we incurred about $2.5 million in SG&A costs in the quarter. Certainly the 700 employees, the cost of those employees is substantially greater than that. But you can see that that is what -- what we were doing in the quarter was the acquisition, the integration and the grand reopening. So I think that you could anticipate that we did it very efficiently, only incurring $2.5 million in the quarter.

Okay. And there will be some more grand opening costs it sounds like that bleed into the second quarter here?

Yes, there are some grand opening costs in Q2, but all of the stores have had their grand reopening.

Okay. Call that out in the second quarter when you report results how much of it was kind of one-time versus the ongoing lease and employee expense?

We will consider doing that.

Okay, that would be helpful. Thank you.

David Kaczorowski, Signal Hill Capital.

Hi, I wanted to ask a couple questions about the PCS group. You mentioned that it is on a contract basis and that until they go live, it is deferred revenue. Can you give an idea of the average contract life that you sell with this?

Yes, it does vary customer by customer, but most of them have a three-year, 36-month contractual life. Some have longer, some have shorter with options, but I think the typical model is about a three-year commitment post go-live.

Okay. And maybe I am missing the -- I think over the last quarter you gave the deferred revenue associated with PCS. Do you have that now?

Yes, I do. I think it is $5.1 million, $5.3 million.

Roughly the same as last quarter?

No, it is slightly higher.

Okay. As far as the product, do you see yourselves as a competitor with salesforce.com in the respect of how the software works, what it does?

Well, our product is really more geared towards direct marketers around the world out there and multichannel marketers and while Salesforce integrates with other pieces of software, it is really a CRM product. CRM is a piece of ours, but we have kind of a different take on what we are doing and that is directed towards the direct marketers and multichannel marketers. So yes and no is really my answer.

Okay, thank you.

At this time, there are no additional questions. I would now like to turn the call back over to Mr. Richard Leeds for the final remarks.

Thanks for listening to our first-quarter results and we look forward to reporting our second quarter. Thank you.

Thank you for joining today's conference. That concludes the presentation. You may now disconnect and have a wonderful weekend.