Global Industrial Co (GIC) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Systemax's 2008 second-quarter earnings conference call. (OPERATOR INSTRUCTIONS). At this time all participants are in a listen-only mode. We will be conducting a question-and-answer session later in the conference. This conference is being recorded today, Thursday, August 7, 2008 for replay purposes. The webcast will also be available on the Company's website for 30 days. I would now like to turn the conference over to Denise Roche. Please go ahead.

Thank you, Operator. Welcome to the Systemax second-quarter 2008 conference call. I'm here today with Richard Leeds, Chairman and Chief Executive Officer of Systemax; Gilbert Fiorentino, General Manager of Systemax 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 Mr. Richard Leeds.

Good afternoon and thanks to everyone for joining us. I'm pleased to report that during the second quarter we delivered strong financial results despite continued softness in consumer spending and more specifically in IT spending. Consolidated sales grew by more than 17% to $756 million driven by sales in our two key business segments.

Technology product sales which includes computers, computer supplies and consumer electronics grew 17.5% to $694 million. Growth in this segment came from three sources -- our websites, primarily TigerDirect.com; our brick and mortar TigerDirect locations, and the CompUSA assets that we reopened. In our industrial products group, which includes material handling equipment, storage equipment and consumable industrial items, sales increased 10.4% to approximately $62 million.

On a consolidated basis or gross margin for the quarter was unchanged compared to the second quarter of 2007. Our operating income grew 5.2% versus the same period in 2007. This translated into a 2.8% operating margin, a 30 basis point decline from the second quarter of 2007.

Our operating margin, as well as additional expansion in our gross profit margin, was tempered by the investments required to establish the 16 CompUSA stores and the website as well as opening two additional stores that were already in the works. Some of the cost were from one-time expenses related to grand reopening promotional events, branding and other related expenses.

While the majority of the increased expense is attributable to employee costs, these costs are expected to stabilize now that we are fully staffed. Further, as store sales ramp up we expect to see improvement in operating margins.

Consolidated SG&A cost as a percentage of sales was 12.6% in the quarter, up 40 basis points from 2007. For the six months ended June 30, 2008 SG&A costs were 12.3% as a percentage of sales, up 60 basis points from 2007. Going forward we expect to leverage our SG&A as sales from CompUSA ramp up.

Net income for the quarter remained virtually flat in the second quarter at $13.5 million versus $13.7 million in 2007. On a diluted EPS basis the Company earned $0.36 versus $0.37 during the same period last year. Earnings per share was negatively impacted in 2008 by lower interest income as a result of lower cash balances, higher tax expense and a higher operating loss in our hosted software segment. Larry will provide further details on the financials later in the call.

We remain excited about the potential to create value with CompUSA. We remain confident that the investments we are making in the near term will increase our profitability over the long term. Further, we've positioned our business for growth when the economic environment and, more specifically, consumer spending improves.

Management remains committed to returning value to shareholders. In May we announced that our Board of Directors approved a stock buyback plan for up to 2 million shares of the Company's common stock. Although we did not repurchase any shares during the second quarter, we belief repurchasing shares at recent market prices may be a prudent use of the Company's cash and demonstrates the confidence we have in our operations and assets.

I will now turn the call over to Gilbert to discuss highlights from our technology product segment including TigerDirect, Misco and CompUSA.

Thanks, Richard and good afternoon, everybody. The technology products group remained hard at work this quarter which translated into net sales of 17.5% versus the second quarter of 2007. Additionally, we grew our operating income within this division by 12.4% versus the same period one year ago.

Our team made great strides in implementing our near-term strategy to effectively integrate the CompUSA assets that we purchased last quarter into our overall business. This included launching new marketing and branding initiatives for co-branding CompUSA with our established TigerDirect business. Newspaper circulars are already being dually branded across our entire retail footprint as our employee work shirts, name badges and in-store signage and other items.

Our long-term goal is to create a single CompUSA brand retail strategy in the United States and have both CompUSA and TigerDirect.com brands in the United States on the Internet. Getting 18 new brick and mortar stores opened successfully and running in a short period of time was a tall order, but by the end of April we had already re-staffed, restocked and held grand openings for all of our new stores. This is an accomplishment we are very proud of and one that would not have been possible if not for the hard work and dedication of our employees.

As a result of this hard work we were able to recognize revenue of over $76 million from CompUSA in the second quarter. Despite a challenging economic environment for retail business we are seeing improving sales and close rates at many of our new stores as we continue to have high expectations for CompUSA.

While we are very pleased with the streamlined rollout of the physical locations, we still intend to reconfigure each store's layout over the coming months to more closely reflect the proven layout of our TigerDirect stores. This means more emphasis on PC component categories, improved merchandise of televisions and consumer electronics and a spotlight focus on our stores' in-store technical services.

Our total store count, both TigerDirect and CompUSA, has now reached 29 with 24 in the United States and five in Canada. We currently have plans to open one more store in 2008. Further, we successfully converted the CompUSA URL into an entirely new e-commerce site with improved content, a more attractive layout and new functionalities and, as expected, we have seen promising growth and a steady increase in sales and traction. In the second quarter CompUSA.com had over 10 million visits to its site. Our average weekly unique visitors improved by 24% over the first quarter of 2008 and it continues to grow.

We remain very excited about the TigerDirect and CompUSA online businesses. During the second quarter of 2008 Hitwise, a leading industry ranking service for websites, yet again ranked TigerDirect.com in the top 10 most heavily trafficked sites in computer sales category. In its June 2008 issue Internet Retailer magazine ranked Systemax number 22 in its annual review of the top 500 Internet retailers, up two spots from the prior year.

Traffic to our website continued to grow as we saw a 31% increase in total traffic over the second quarter of 2007. When users arrive at one of our sites their experience continues to improve with more enhanced Web content, over 100,000 user generated reviews, and almost 30,000 user questions and answers posted on our site. Our video content has been viewed over 6 million times now.

During the second quarter our development team was also very busy improving our site to provide a better online experience for our customers. We added PayPal as a method of payment for the CompUSA.com website in addition to an aggressive cash back promotion to help stimulate incremental demand. We implemented a state-of-the-art Web analytics package from Coremetrics to give us improved insights into our customers' behaviors and this will help us serve to market more effectively to them in the future.

During the quarter we also completed some major infrastructure improvements, adding a new state-of-the-art data center to house our critical servers, improve our network capacity, handle traffic more quickly and with more failsafes than ever before. In the second quarter we added Panasonic Consumer Electronics to our list of Tier I direct consumer electronics manufacturers in our efforts to further solidify TigerDirect and CompUSA as a major player in the higher-margin world of home entertainment consumer electronics.

In the consumer electronics world we now have direct purchasing relationships with Sony Retail Products, Toshiba, Mitsubishi, Hitachi, Visio, Bose, Yamaha, Onkyo, Harmon Cardin, Garmin, Magellan and Nokia. We will continue to cultivate more direct relationships in our effort to improve service and product availability to our customers as well as increase our sales margins.

Turning to product sales, revenue from TVs in the second quarter increased by 13% versus the same period one year ago. In the computer category TigerDirect is leading the industry growth. Notebook revenues climbed 45% in Q2 compared to a nationwide retail average of only 16.5% compared to -- according to NPD Group. Accordingly desktop sales grew by 17% versus the nationwide retail average of only 8.4%.

The North America business-to-business group has also been quite busy. While our core B2B business has continued to grow faster than the industry average we've been quietly expanding into new areas. In partnership with our brick-and-mortar retail group we are creating small business sales departments in many of our stores to provide more customized service to small business markets in the local areas that we serve.

In response to an opportunity that we observed in the marketplace we formed a specialized sales group focused on software licensing. This is a very exciting market for a number of reasons -- less intense competition, increased complexity of the products creates a higher barrier to entry for others, and high margins in a captive audience of potential customers.

In Europe revenues grew by 13% in the quarter, 5% after taking into account favorable exchange rates. Revenue growth was driven by strong Internet and business-to-business sales. We continue to see substantial returns from the strategies we've implemented over the past several years there.

We are pleased with our results in the technology products group and the progress we've made integrating the CompUSA brand and stores into our business and the prospects for our continued success through this and future years. With that I'll pass the call back to Richard.

Thanks, Gilbert. Our industrial products business, Global Industrial and Nexel Industries, continued to grow at a double-digit pace during the second quarter. We continue to utilize our proprietary ProfitCenter Software Solution, which I'll speak about further in a moment, to increase levels of efficiency and further scale this business and increase profitability. Our growing customer base continues to report high levels of satisfaction for our low priced, top quality product selection as well as the ease-of-use associated with our leading website technology.

By maintaining the growth in our product offerings and better managing those products that have not performed well in the recent past we've increase net sales in this division by 10.4% versus the same period one year prior. Further, because of the operating efficiencies we've been implementing our operating income grew 18.4% in the quarter. Our efforts have helped us increase our product selection on the Web by 40% versus 2007. New Web visitors to our Global Industrial website were up 41% versus the six-month period last year. What's more, the total number of new Web customers grew 29%. The growth generated from our websites parlays nicely with our outbound telemarketing sales force and traditional catalog mailings.

As I mentioned earlier, our hosted software business, ProfitCenter Software, has played a big role in helping us grow our business. It was developed as 100% web-based on-demand application designed specifically for sales to multichannel direct marketing companies challenged with the need to automate and manage products for the entire customer lifecycle across multiple sales channels.

Last quarter we announced the rollout of version 3.0 which improves continuity, worldwide shipping, advanced search and navigation, personalization and enhanced accounting functionality. We currently have two customers live with this new version, one went live during the quarter and one went live more recently in July. We have a great deal of confidence that this solution is best of breed and will play a big part in our growth further.

Finally, I would like to note that we settled a portion of the rebate litigation. PC USA, a third-party vendor that engaged us as a subsidiary on rebate -- to process its rebate, had sued OnRebate.com and TigerDirect claiming initially that we had not paid all of the customers that purchased PC USA products covered by a PC USA rebate program. Then revising it to claim that we had in fact overpaid these customers by accepting incomplete rebate applications and/or extending the deadline to file rebate applications.

While we continue to believe that our business dealings were appropriate and in good faith, we came to a settlement with PC USA in July for a total payment of US$5,000, an amount that is less than nuisance value. The status of the rebate lawsuit and the Florida Attorney General investigation remains substantially unchanged since our last call. In the lawsuit the court has yet to certify the case as a class action and therefore has not been able to rule on our motion to dismiss and we continue to cooperate with the Florida AG office.

I will now turn the call over to Larry Reinhold who will provide a more detailed review of our financial results.

As Richard mentioned earlier, the Company reported solid second-quarter results. Consolidated sales for the quarter were $756 million, up 17% from $647.1 million in the second quarter of 2007. Net income for the quarter was $13.5 million or $0.36 per diluted share compared to $0.37 per share in the same period last year. Earnings per share in the quarter was impacted by about $0.5 million of lower interest income and by about $700,000 in higher income tax expense.

Interest income was down due to lower cash balances as a result of the cash used to purchase CompUSA, stock the new retail stores and to pay the special dividend. Income tax expense was higher principally due to our United Kingdom income being taxed this year. You may recall that through Q3 of 2007 we had a large valuation allowance on our United Kingdom deferred tax assets. This valuation allowance was released in Q4 of 2007 due to the success of our turnaround in that business.

Technology product sales were $694 million, an increase of 17.5% over the second quarter of 2007, representing 92% of the Company's overall revenue. Operating income from this division was $23.3 million, an increase of 12.4% over the second quarter of 2007. Our technology products operating income for the quarter was impacted by an operating loss of about $1 million at the CompUSA retail stores.

During the second quarter of 2008 net sales for our industrial products division was $61.6 million, an increase of 10.4% over the second quarter of 2007. Operating income in 2Q of '08 was $6.7 million, an increase of 20.8% over the second quarter of last year. In the second quarter our hosted software business incurred an operating loss of about $4.5 million which was $1.5 million greater than the same period of last year as we invested in infrastructure to support development and implementation needs.

Turning to our geographical breakdown, total North American sales were $512 million, an increase of 18.8% from the second quarter and representing 68% of our total sales in the quarter. Our total European sales were US$244 million, an increase of 13% from the second quarter of last year representing 32% of our total sales. We benefited from movements in foreign exchange rates as the weak dollar positively impacted European sales comparison by about $18 million in the quarter.

During the second quarter our SG&A expense increased 40 basis points to 12.6% of revenue versus the second quarter of 2007. This increase is mostly attributable to additional employee costs associated with the reopening of the CompUSA stores and related expenses and growth in our other businesses. In total we hired more than 700 employees to staff the stores.

Fortunately most of these employees were legacy employees from the original CompUSA operation, saving us a considerable amount of time and capital associated with employee training. What's more, this allowed us to reopen the stores faster and therefore begin to generate revenue sooner. Total SG&A costs in the quarter from CompUSA were about $8.3 million. Our effective tax rate in the second quarter was 37.1%, up from 34.5% last year and, as previously discussed, was primarily due to our United Kingdom profits being fully taxed this year.

Moving to the balance sheet, the Company continues to maintain a strong financial position. At June 30, 2008 our balance sheet reflected $240.8 million of working capital and $66.8 million in cash. As previously mentioned, cash balances for the quarter decreased as we paid the dollar per share special dividend on April 2nd and invested in inventory to stock the stores. Our current ratio at the end of the quarter was 1.7 to 1.

During the quarter we generated $9.4 million in operating cash flow, had $290.7 million in inventory, a 16% increase over $250 million we had on hand at December 31st, primarily the result of the additional 16 CompUSA stores as well as the other two that we opened. At the end of the second quarter we had about $2.1 million of debt outstanding, principally in Europe. Currently we have $107 million available under our credit facility and together with the cash on our balance sheet we have access to a total of $174 million providing us with additional financial flexibility. With that we'd like to open the call up for questions. Operator?

(OPERATOR INSTRUCTIONS). [Andre Gardner], [Agros] Management.

Congratulations on the quarter. Could you talk a little bit more about the PCS business and specifically about the customers? You said there are two live customers with the 3.0 version. Can you tell us anything about what markets they're in or what size companies these are?

Sure, this is Richard. I'm not going to give you the names on an open conference call, but if you did want to call I would. But they're B2C businesses that have a substantial Web business. I would characterize them as on the smaller side customers where their website is, in my opinion, is substantially better than what they've had in the past and I think it's worked out well for those customers.

Okay. Are you going to at some point -- or when do you plan on breaking out the PCS numbers on the income statement?

PCS has already reported as a reporting segment, so the revenues and its operating loss or future income are in Note 8. So if you looked at Note 8 of the 10-Q, it should be on file today, you'll see that broken out. It's also in the 10-K's for prior years.

And I'd like to remind you that as a hosted software product, that it's a deferred revenue. So as those customers get live we get to start recognizing the revenue.

So that's subscription-based then, it's recurring?

Yes.

And there's in excess of $5 million of deferred revenue on the balance sheet.

Okay, great. And the $76 million attributed to CompUSA, can you tell us whether -- is that retail?

It's both. We haven't broken out specifically the revenue between the website and retail.

Okay.

That's an aggregate number.

Okay. And finally, I think I asked on the last call, you guys said you would be willing to look at some conferences. Any plans for attending conferences this fall?

We haven't announced any yet but, yes, we are planning on attending. We've got (technical difficulty) lining them up sort of in the queue, but we do. They'll be announced in advance when we finalized what our space and time is.

Great, thank you.

John Curti, Principal Global Investors.

Good afternoon. I had a question on the hosted software business. You just mentioned $5 million of deferred revenue. Over what time frame will that be recognized?

It varies, but we've talked about this in the past. The model that PCS business uses is that we get paid to implement the software on a customer's site and then once they sort of get it installed and implemented and they go live and we're paid on a subscription per seat basis over a contractual period.

So with the customers that are in the implementation phase we perform services, we collect cash, and we defer all that cash and the accounting model has us at the point of go live we amortize that deferred revenue to income over the contractual hosting period. So if you had -- and typically that hosting period can range from one to many years, but I think it's probably safest to think about as a three-year --

How many years? Three?

Like a three year on average.

What is your kind of anticipated path towards breakeven for this unit or profitability? Because you're running at a -- first half of the year you ran at about an $8.6 million loss, it was up $1.5 million in terms of the operating loss for the quarter.

We're obviously not happy losing money there and we want to really focus on getting that business to be making money and that will come from a number of things. One is getting more customers live, scaling up as we scale up the business, because you have to have a certain infrastructure in place to run the business. So it's a business that can scale and will scale and once it's scaled will be profitable.

But are we looking at maybe like a three-year ramp towards that breakeven point -- or longer?

I would say from where we're looking at today -- I really didn't want to make a forecast on this, but we're working very hard on getting a number of large customers live where not only do we recognize the revenue that Larry talked about as deferred, but also at that point we start collecting hosting revenue and that all starts figuring in the model. But we're clearly not happy losing money there.

A question on the CompUSA business. You mentioned about $1 million I guess in -- a $1 million loss for CompUSA. Were the 18 stores that you opened, were they open for the entire quarter?

No, they weren't. We started opening them in late March and finished in April and then there were two additional stores that were already on our roadmap that were also opened during the period. And keep in mind, we open these stores basically not with a running start, but almost from zero. And so we've spent the entire quarter trying to build the revenue during May and June.

This is Richard. I'm actually quite pleased with the progress that Gilbert and his team have made with these stores. In a typical new store environment is when you open a store that you expect to lose money until the traffic, the sales are there to support it, that we've lost so little here we're quite pleased.

Are you anticipating that the stores will be profitable by year end?

We don't really forecast that type of stuff on public calls. But fourth-quarter typically for a retailer is the best quarter. And so on the whole I think our retail operation will be very successful in the fourth quarter.

We disclosed that we had a loss as the retail stores of about $1 million in the quarter. That's really in the first quarter that these things were --.

And that was just from the stores?

That was from the stores. So you can do your own modeling on that, but it's kind of an heroic outcome for what started out to be in the quarter were 16 empty stores that said CompUSA signage. It was a Herculean effort and that was the end result in a quite challenging retail environment.

What are your plans for store openings next year? And maybe on a longer-term basis, say over a five-year period, what's your retail footprint going to look like?

It's Gilbert. We're very excited about the retail business because when you get a model that works, rolling that model out to additional stores has been proven by many competitors to be very successful. And so we are hoping to spend the rest of this year perfecting the model, getting the systems in place and the people in the training to be able to come back and say we are ready to open more stores and at that point it's a very exciting business for us because you can grow it basically as rapidly as the real estate market allows and your own internal systems and people would allow. So there's a lot of short-term investment being made there in people, time and money, but we really are excited about the possible future into coming years.

But do you have some leases lined up for next year?

There's an amazing retail environment out there for space with some of the problems that competitors and others in the retail world are having. And so it seems like the longer we wait the better the deals are going to be.

Sure. And then my last question has to do with I guess kind of on a segment basis the unallocated and corporate and other expenses were up about $1.2 million for the quarter to about $4.6 million. I was wondering what was behind that increase and should we look for something in that $4.5 million to $5 million range for the back two quarters of the year?

Certainly we had increased costs and many of them were associated with external reporting and an internal audit organization that was really just being created starting in the second quarter of 2007. So from a corporate infrastructure run rate that's looking to be more efficient, but that amount is probably not going to come down significantly.

I'm sorry, I didn't hear you?

I said that amount is probably not going to come down significantly.

Okay. All right, thank you very much.

And we have no further questions in the queue. I'll turn the conference back over to our speakers for additional or closing remarks.

Thank you, everybody, for listening to our conference call and we look forward to talking to you next quarter. Thank you.

That does conclude today's conference. We do thank you for your participation. Have a great day.