Global Industrial Co (GIC) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Systemax's Inc's first quarter 2008 earnings teleconference call. During the presentation, all participants will in a listen-only mode. Afterwards, you will be invited to participate in the question-and-answer session. (Operator Instructions). As a reminder, this call is being recorded today, May 12, 2009.

At this time, I'd like to turn the call over to Denise Roche of Brainard Communicators. Please go ahead.

Thank you, operator. Welcome to the Systemax's first quarter 2009 earnings conference call. I'm here today with Richard Leeds, Chairman and Chief Executive Officer of Systemax; Gilbert Fiorentino, Chief Executive of Systemax Technology Products Group, which includes Tiger Direct, Comp USA, Misco and Larry Reinhold, Executive Vice President and Chief Financial Officer. This discussion may include certain forward-looking statements that should be understood that actual results could differ materially from those as 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 report. This call is the property of and is copywrite by Systemax Inc.

I will now turn the call over to Mr. Richard Leeds.

Good afternoon, and thank you for joining us on today's call. There is no question that the economic environment is challenging, but we continue to grow market share and attract new customers. In the context of this environment, I am pleased with Systemax's performance in the first quarter, and specifically the continued strength of our consumer Technology business. Our solid first quarter performance is evidence that our key focus of delivering value to our customers has served us well. This market has shown us that companies in our spaces can do one two things, but not both. They can maintain pricing and suffer lower sales volume and reduced profitability, or they could lower pricing and maintain or grow market share with reduced profitability. We have chosen the latter, as we expect this will make us much stronger, more profitable when the economy improves.

The downturn has affected parts of our business differently. But we believe we have the experience and discipline to adapt accordingly. Our B to B operations in both the Technology Products and industrial products group have been most effective, as companies continue to reduce their spend. This is a trend that began in the fourth quarter of last year continues through Q1 and is continuing today. We are rereacting to the sales slowdown with cost reduction initiatives that better align our expenses business to the current size of the business. We continue to monitor these businesses very closely, and will adjust as the environment involves.

Our B to C business, on the other hand, has held relatively steady through the this period on a constant currency basis. As a price competitor retailer with a strong focus on customer service, our strategy has resonated with consumers, and we've been able to grow market share and further solidify our brands, Tiger Direct, CompUSA and Misco as retailers of choice for consumers. Challenging markets also present unprecedented growth opportunities, one of which is the opportunity to grow through select acquisition.

In April, we announced that we had signed an "stalking horse" agreement to purchase select assets of Circuit City's ecommerce business. An auction was held last night and Systemax's revised bid was selected as the highest or otherwise best bid subject to court approval. Systemax is a profitable and growing business with a strong balance sheet. We believe we are well positioned to that thrive when the macroeconomic environment normalizes.

I will now turn the call over to Gilbert to discuss highlights from our Technology Products Group, including Tiger Direct, CompUSA and Misco. Gilbert?

Thanks, Richard, and good afternoon, everybody. The Technology Products Group once again produced solid results, driven by sales of notebooks, lap tops and high definition televisions. We are growing share and attracting customers with our buyer-friendly environment. In the first quarter, Technology Products Group net sales grew 6% in US dollars, and on a constant currency basis, would have grown 15%.

Revenue growth in the quarter was driven by our North American operations, where sales grew about 21% over the prior year and were up over 23% on a constant currency basis. North America represented 71% of Systemax Technology Products total revenue in the first quarter. However, the strong growth in our North American division was offset by declining sales in Europe of approximately 19% in US dollars. European sales were significantly impacted by the exchange rate changes; and if we exclude the exchange rate effect, sales would have been flat with the previous year. In North America, we have been busy converting US Tiger Direct stores into CompUSA stores. With CompUSA leading our retail storefront strategy, we are positioned to maximize our marketing initiatives and differentiate between our two strong brands in the United States, positioning Tiger Direct as our web ecommerce business and CompUSA as our US brick and mortar operations, supported by the CompUSA.com Web site.

Our CompUSA web operations continue to gain traction as demonstrated by the traffic on the site. The traffic this quarter was up 11% compared to 9.9 million visitors last year; and during the quarter, there were 592,000 average weekly unique visitors. On the brick and mortar front, our retail 2.0 initiative is continuing to successfully meld our industry-leading web presentation, will the instant gratification of making a purchase at a store location. Just two weeks ago, we unveiled retail 2.0 in our plantation Florida location. We had a great turnout and received positive feedback from Technology and Retail industry veterans as well as our savvy customers. Currently, four stores have been fully converted to retail 2.0, and we're working quickly on others. In our Tiger Direct business, we saw mixed results across various channels. Our core Tiger Direct.com consumer web business continues to perform well.

Web traffic was up 36% to 45.8 million visitors compared to last year; and during the quarter, there were 2.2 million average weekly visitors. Internet retailer has recently published their top 500 guide for 2009, and named Systemax the 21st largest online retailing company for 2009 and also named us the ninth largest in the computers and electronics category: looking at customer satisfaction levels, our customer review ratings for the first quarter of 2009 continue to improve across the online merchant review sites, including reseller ratings, BIS rate and price grab. The Tiger Direct.com Web site has recently been ranked as the number 7 top ranked online retailer for customer satisfaction by [4C] results in the Spring 2009 Top 100 Online Retail satisfaction index. Our Tiger Direct B to B business had mixed results as did all of our North America B to B business, which was impacted by the general slowdown in corporate purchasing that began late last year and has accelerated through the beginning of this year.

In the long-term, we believe that B to B offers significant growth opportunities for Systemax, and so we continue to strategically invest in this part of our business. During the quarter, we added B to B call centers in Boise, Idaho and Sioux City, South Dakota, to focus mainly on government and enterprise accounts. Our specialized software team reached many new agreements during the quarter as well. We have become an Adobe Authorized Licensing Center, and Adobe has authorized us to be part of the Corporate Licensing program. We have also completed an agreement to be a large account reseller for the Recovery Management Division of CA, Inc., which represents a new $12 billion market opportunity. Additionally, we continue to progress on our successful Microsoft practice as we were selected to be The Partner of Choice for the Microsoft Strategic Alliance program.

Our Canadian division is now ranked number two out of 200 partners in the ultimate [VAR] program. As we have previously said, the specialized software market is a very exciting market for us.

Moving to European operations, our performance in Europe has differed by country as has the economies of those countries. The UK, our largest European operation, delivered increased sales and operating profit in the first quarter on a local currency basis. The UK operation benefited from our strong strength in the public sector, with much of the business coming from government and educational sources.

Results in other countries were disappointing. With the middle market scaling back, large orders are dwindling, creating the need for more volume we have focused on cutting expenses, especially in markets that have experienced the most softness, through head-count reductions and other cost-cutting niche practice.

In summary, we are quite pleased with the first quarter panels of our Technology Products Group. Systemax strives to deliver value to our customers and differentiate from the consumer retail experience. Through our leading retail brands, we are doing just that.

And now I'll turn the call back over to Richard.

Thanks, Gilbert. Our Industrial Products Division, which includes global industrial and excel industries has been impacted by the current economic climate more than any other parts of our business, as it is primarily a B to B business. While the average order size from our small business customers has remained relatively stable, we have seen a significant decline in both the average size and frequency of orders from our core middle market B to B customers. We responded to the session by significantly reducing their spending.

In the first quarter, Industrial Product Group revenues were done 20% from the prior year. We implemented cost reduction initiatives across the business to better rationalize our cost to our sales, and were able to drive down operating expenses by 7%. Our gross margin remained relatively flat. While we acknowledge that this is a tough market, as I said earlier, where there are challenges, there are also opportunities.

During down markets, competitors have a tendency to reduce services in an effort to contain costs. While we have rationalized expenses to support the decline in sales, we also continue to invest in opportunities to grow market share. These include offering our customers competitive pricing and reduced shipping, providing premium customer service, making ongoing improvements to our Web site as well as continuing to expand our product lines with complimentary products.

Storage and office furniture remains our core product focus; and as we mentioned last quarter, we have successfully expanded our product categories to now include janitorial, maintenance, lighting, safety, packaging, and we continue to see traction in these categories. As we approach this summer, we have significantly expanded our air conditioning and cooling product selection and are offering special campaigns to bolster this segment. This product category has been a strong seller for us during the second and third quarter. Besides adding HVAC items to our product selection, we've also added the number of seating products in the office furniture line and we have expanded our selection of sinks and single steel tables in the food service category .

At the end of the first quarter, we had about 74,000 products in key product categories, up from 68,000 at the end of 2008. We remain encouraged by our position in the Industrial Products marketplace and our ability to serve customers and gain market share despite these challenging and uncertain times.

In our Software Solutions business, we have significantly narrowed our focus over the last several quarters. We have reduced our operating loss for the quarter by about 31%. We'll continue to closely monitor the business, and we'll take additional actions as necessary.

With that I'll turn the call over to Larry.

Thank you, Richard, and good afternoon, everyone. Systemax posted sold first quarter consolidated sales of 752.3 million, up 4% compared to the first quarter of 2008. Our performance was highlighted by 20% growth in our North American Technologies Product Group, which I will discuss in further detail shortly.

Gross margin for the quarter was 14.3% versus 15.7% in 2008. Primarily the result of the strategic product price and freight discount incentives offered in the Technology Products Group, as well as a mixed change from higher gross margin Industrial Product sales comprising a smaller portion of consolidated sales. Net income for the quarter was 8.7 million or $0.23 per diluted share, down from $0.48 the same period the last year. Interest income for the quarter was down due to lower interest rates and lower cash balances. Income tax expense in the quarter was about 5.6 million. Our effective tax rate for the quarter was 39.5%, up from 36.1% last year due principally to a higher percentage of our taxable income being in the United States, while our corporate tax rate is typically the highest. Our Technology Products net sales were 706.3 million, an increase of 6%, versus the first quarter of last year, and represented 94% of the Company's overall sales revenue. On a constant currency basis, Technology Product sales would have increased 15% compared to last year. Technology Products operating income in the first quarter was 22 million, compared with 29.1 million first quarter of last year. Industrial Product sales during the first quarter of '09 were 45.6 million, a decrease of 20% over the first quarter of last year.

Turning to our geographical breakdown, our total North American sales were 548.4 million for all segments in US dollars, an increase of 16% from the first quarter of last year, and represented 73% of our total sales for the quarter. Our total European sales were 203.9 million US dollars, down 90% over the year ago quarter, and represented 27% of our total consolidated sale. Again, excluding the exchange rate, our European sales would have been essentially flat compared to the first quarter of last year.

During the quarter, our total SG&A expense increased about 20 basis points to 12.3% of revenue versus last year. The Company continues to maintain a strong financial position. As of March 31, 2009, our balance sheet reflected 262.6 million of working capital and over 80 million in cash and cash equivalents. Our current ratio at the end of March was 1.8 to 2. We ended the quarter with about $310 million of inventory. We have no debt outstanding, other than about 2 million in capitalized leases, additionally, our 120 million credit facility remains undrawn. We have over 180 million of cash and available liquidity as of the end of the quarter. During the quarter, we purchased about 32,000 shares of the Company's common stock at an average price of $11.63 per share pursuant to our stock repurchase plan approved by the board of directors of May of last year. To date we have repurchased about 508,000 shares for 6.2 million for an average price of $12.21 per share.

With that, we would like to open the call up for questions.

Thank you. We'll take our first question from Andre Gartner from Argus Management.

Thank you. I'm curious did you acquire any leases from the compUSA retail operation in the first part of this year? I know you commented you thought it was an attractive time to find some new locations?

Yes, we did. We have two exciting new locations, both in Dade County, Florida. It's Gilbert Fiorentino, by the way. The first one in Aventura, Florida, a former sound advice location, which was a twitter operation, and the second one in West Kendall Florida, also a former sound advice location. We're excited about those two locations, and continue the opening of the [Pin Brook] Pine store on Pines Boulevard also in South Florida.

And with Circuit City, there are no retail locations that you acquired. It's strictly the online operation?

Yes, we have only acquired the online assets.

Okay. And what percentage of your sales are receipt sales? That would be the online sales, I guess?

I'm sorry. This is Richard. We don't price that out.

Okay. Thank you.

Okay. And once again, that is star 1 to signal for a question at this time. And we'll go next to Brad Christian with Market Force Information.

Hi gentlemen. Brad Christian here. Can you comment, if you haven't already, about the sales performance of the 29 retail locations that you currently operate?

Hi. It's Gilbert. The sales performance on a year over year basis, obviously with the CompUSA stores, which we were just opening last March and April, are obviously, very good for us? On the same-store comps we are also looking at growth both year-over-year as well as sequentially.

And at this time we have no further questions from the phone line. So I'd like to turn the call back over to Mr. Leads for any additional or closing remarks.

Thank you, everybody for listening to our first quarter results, and we look forward to speaking to you after the second quarter results. Thank you.

This does conclude today's teleconference. Thank you for your participation.