Global Industrial Co (GIC) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Systemax' second quarter 2009 earnings teleconference call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the question-and-answer session. (Operator Instructions). As a reminder, this conference call is being recorded today, August 11, 2009. And now at this time I would like to turn the conference over to Ms. Denise Roche of Brainerd Communicators. Please go ahead.

Thank you, operator. Welcome to the Systemax second quarter 2009 earnings conference call. I am here today with Richard Leeds, Chairman and Chief Executive Officer of Systemax; Gilbert Fiorentino, Chief Executive of Systemax Technology Products segment which includes TigerDirect, CompUSA, CircuitCity.com, and MISCO; and Larry Reinhold, Executive Vice President and Chief Financial Officer.

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 turn the call over to Mr. Richard Leeds.

Good afternoon, and thank you for joining us on today's call. The second quarter, much like the first, was confronted with a very challenging global economic environment and declining consumer confidence that has affected the broad retail sector.

As we stated in our press release, I'm very pleased that we managed to grow our overall revenues in this environment on a constant currency basis. Most other companies operating in our markets and most retailers in general are reporting significantly lower revenues compared to last year.

As we said last quarter, we intended to grow market share in this economy and we delivered on that. Our second quarter results, led by our North American Technology Products Group, were very solid. Our success is the result not only of our continued focus on gaining market share, but also leveraging our strong portfolio of retail brands which now include TigerDirect, MISCO, CompUSA, and the newly launched CircuitCity.com.

In our earnings press release issued earlier today, we provided additional transparency on the business including a summary table on revenue mix by product category and details on revenue breakdown from retail channels and B-to-B channels. I would like to take a moment to discuss how the current environment has impacted each of these channels.

Our B-to-B operations, both in technology products and industrial products, have been most affected by the economic slump as businesses of all sizes continue to cut back on spending and are either reducing the size of orders or postponing purchases altogether. This is a trend that began in the fourth quarter, accelerated in the first quarter and has continued since.

While we can't control when spending will resume we have implemented cost reduction initiatives to better rationalize our expense of a sale. But we haven't done this at the expense of future growth. We continue to strategically invest in areas we believe that will help Systemax grow this part of the business in the long run. This includes investing in our sales force, improving our eCommerce site, increasing product selection, and expanding into complementary product categories.

Although B-to-B sales for the quarter and six-month period are down, we have seen our customer base grow and believe that we are modestly gaining market share which will benefit our bottom line once the market resumes more normalized activity. By contrast, we believe our consumer retail operations are performing well ahead of the market. During the quarter, we saw top line growth in both our eCommerce properties and retail stores.

We're also expanding our brands and on May 19 we closed on the acquisition of Circuit City's eCommerce business for $14 million in cash plus a share of future revenue over a 30-month period. A few days later, on May 22, we launched the new and improved CircuitCity.com website. I would like to thank everyone on our team that worked so hard to get the website up so fast. We believe that this iconic brand is a great fit to our eCommerce portfolio.

CircuitCity.com is now fully integrated into Systemax's operations and contributed five weeks of sales for the quarter. While the dollar amount was not material during that short period, we have seen a healthy increase in traffic to the site.

We continue to develop our advertising campaigns, website features and product categories to leverage our experience in the online retailing of computers and consumer electronics and our established back end and distribution infrastructure to grow the Circuit City business.

We are also seeing improved traffic across our established sites, TigerDirect.com and CompUSA.com. Today Systemax' three sites, TigerDirect.com, CompUSA.com and CircuitCity.com combined ranks third in terms of traffic in the United States' consumer electronics segment according to Hitwise.

This data validates our belief that Systemax has positioned itself as a leader in online retailing of value priced branded computers and consumer electronics.

In addition to growing our eCommerce business, we have continued to focus on improving and expanding our storefront footprint. Our Retail 2.0 initiative is progressing as planned offering premier service and satisfaction to our customers.

We have converted five stores. We've also continued to expand our brick-and-mortar locations and in the second quarter opened our 30th store located in Pembroke Pines, Florida. We continue to look at opportunities for additional expansion and target geographical areas around the country.

Before I turn the call over to Gilbert, who will discuss highlights for the Technology Products Group, I would like to briefly discuss our rationale for exiting the ProfitCenter Software business. Although we have significantly narrowed the focus of our PCS business over the last several quarters in an effort to establish a sustainable business model, after a thorough evaluation we concluded that it was in the best interest of the Company and our shareholders to reduce our investment in the software business.

This will improve our profitability, strengthen our balance sheet, improve our operating cash flows and allow us to deploy our capital in areas which are better aligned with our core retail and direct marketing businesses. During Q2, PCS incurred an operating loss of $4.1 million. And during the last four quarters the operating losses aggregated $16.1 million.

Systemax has evolved over the years and with the acquisition of CompUSA last year and the recent addition of CircuitCity.com we have cemented our position as a leader in the consumer electronics retail market. Despite the macro challenges that remain, the Company performed well in the second quarter and we remain dedicated to our strategic expansion and the amplification of our brands.

Systemax is a profitable and growing business and is well positioned to prosper once the industry and economic environments improve. I will now turn the call over to Gilbert.

Thank you, Richard, and good afternoon, everybody. The second quarter was an exciting period for the Technology Products Group. As Richard mentioned, we added CircuitCity.com to our portfolio of brands. Our core consumer businesses continue to grow as we prepare to open new stores and complete the Retail 2.0 conversions of our existing stores.

The eCommerce business also grew stronger. Clearly the highlight of the quarter was Circuit City. Circuit City is a well-known national brand with a 60-year legacy in consumer electronics. We launched the new and improved website a few short days after the acquisition was completed.

The new CircuitCity.com website features everyday low prices Systemax's other businesses are known for. Great deals, a wide selection of products, and fast shipping, world class customer service, advanced search capabilities, enhanced content and much more. We are energized by the opportunities that Circuit City presents. Since it went live, site traffic has consistently grown and is now averaging over 900,000 visitors per week.

We have been building out advertising campaigns, website features and product categories. In July, we began an online advertising campaign to reinforce the brand messaging and launched an affiliate marketing program to attract new customers to the site. We are currently developing plans to leverage the customer lists and offering great opportunities for our vendors to reach these known buyers with their product messaging.

We are also expanding the product categories on the Circuit City site with categories and brands which legacy shoppers have historically been known to buy such as music and movies, houseware and small appliances and mobile electronics. Moving on to overall performance of the Technology Products Group, in the second quarter net sales decreased by 3% in U.S. dollars. But if you look at it on a constant currency basis, sales growth would have been 3%.

Revenue growth in the quarter was driven by our North American operations where sales grew about 11% over prior year. North America represented 74% of Systemax Technology Products Group total revenue in the second quarter. However, the strong growth in our North American division was offset by declining sales in Europe of approximately 29% in U.S. dollars.

European sales were significantly impacted by exchange rate changes and if we exclude the effect of exchange rate changes sales would have declined only 13% against the previous year.

In North American Technology, laptops, LCD high definition TVs and monitors were the best performing product categories and represented about 20%, 10%, and 7% of total revenue for the quarter respectively. Laptop sales grew over 70% from prior year driven by continued strength in netbooks.

Of the laptop sales, netbooks represented about 24% of the revenue during the quarter.

CompUSA continues to lead our retail storefront strategy in the United States supported by the CompUSA.com website. While TigerDirect.com and now CircuitCity.com encompass the majority of our eCommerce business, our CompUSA Web operations are a nice complement to the core brick-and-mortar business and we had 566,000 average weekly unique visitors to that site.

In the Hitwise rankings for market share in the top 20 websites in the shopping and classified computers category, CompUSA is ranked number 13 representing 1.5% share of visits at the end of the second quarter which is up from 16th place or 1.3% share of visits at the end of the first quarter. TigerDirect.com, which is the largest of Systemax' eCommerce businesses in terms of activity and Web traffic, was up 45% over 2009.

During the quarter, there were 2 million average weekly visitors to the site. In total, Systemax' three consumer retail sites are performing well. comScore Media Metrix lists the three websites combined as having the number two fastest growing traffic across all websites with 59% growth from May to June 2009.

In fact, if you add the market share for the Systemax Technology websites in the United States combined, TigerDirect.com plus CircuitCity.com and CompUSA.com, they generate enough traffic to rank our Company the third largest computer and electronics reseller on the Web according to Hitwise reporting.

Within the brick-and-mortar segment, our Retail 2.0 initiative is successfully progressing and receiving much acclaim as an innovative way to meld our industry leading Web presentation with the instant gratification of making a purchase at a store location that is unlike anything else provided to consumers in our industry. By the end of the quarter, we had five stores that had been relaunched to Retail 2.0.

Customer response to Retail 2.0 has been quite positive with customers appreciating the additional product information available, the ability to shop without leaving the store, the knowledgeable staff as well as the independence it gives them to make their own buying decisions. Recently a new addition to the Retail 2.0 model is the inclusion of the waterfall display for cameras and GPS devices and MP3 devices.

The waterfall installation is just the next step of advancing the Retail 2.0 model with its ability to project information about these products on a screen immediately when a customer picks up one of the products from the installation. For example, if a camera is picked up on the installation there is a screen that automatically shows the customer the website version of what that camera's content is.

We're constantly innovating and as we spend time in the stores talking to sales associates and to our customers as well as in our discussions with vendor partners we continue to make modifications and add features to further improve the Retail 2.0 experience.

Our B-to-B's business was down 11% compared with the prior year for all of the reasons that Richard mentioned earlier.

We still believe B-to-B offers significant growth opportunities for Systemax and we continue to strategically invest in this part of the business and position it for growth when the economic environment improves.

Throughout our Technology business everybody is making plans to capitalize on Microsoft's planned October launch of Windows 7. As a close partner of Microsoft, we are well positioned to gain significant share of the estimated $320 billion in revenue that IDC reported will be generated as a result of Windows 7 launch between October and the end of 2010.

Moving to our European operations, our performance has differed by country much like their economies has varied. The most challenging countries are Spain, Germany and Italy where deepening economic crisis and soaring unemployment rates significantly impacted second quarter revenue as business decreased corporate spending.

One shift we did see across the board was that while in the first quarter the impact had been mostly on our small and medium-sized business customers, in the second quarter all customers regardless of size were impacted by the economic slowdown. We have focused on cutting expenses especially in markets where we've experienced the most softness through head count reductions and through other cost cutting initiatives.

The bright side in Europe was the UK, our largest European operation. The UK operation benefited from our strength in the public sector with much of the business coming from government and educational sources.

As we have said previously, challenging markets present opportunity to grow through select acquisition.

At the beginning of August we signed a definitive agreement to acquire WStore Europe, a European supplier of business IT products with operations in France and the United Kingdom. We think this is an exciting growth opportunity within the vast and fragmented European IT market.

This acquisition will strengthen our presence in the region, grow market share and enable us to leverage our experience in the sector and our established background and distribution infrastructure to grow our European operations. We expect that acquisition to close in the third quarter.

In summary, while we are certainly not immune to the macroeconomic environment we believe that our overall consumer business is faring well considering the current macroeconomic business. In the segments most impacted like B-to-B we are managing our expenses and watching the bottom line.

We're gaining market share across the businesses, taking advantage of the opportunities to grow strategically through acquisition and innovating to improve the overall retail experience, all of which will benefit the Company in the long term. With that, I will pass the call to Larry.

Thank you, Gilbert. Good afternoon, everyone. Before I provide details on the quarter, I would like to review a couple of housekeeping items. First, as you likely noticed, we instituted a new format for our quarterly earnings release.

We believe this new format, which includes details on comparable channel sales growth and revenue mix by channel and product categories, provides increased transparency into our business and better matches with the needs of our investors.

Secondly, I want to comment briefly on the one-time pre-tax charges we quoted this morning, this afternoon.

These charges totaled $6.3 million and included $2.4 million related to the previously announced plan to exit the PCS-hosted software business which Richard discussed earlier. The other $3.9 million in one-time charges were principally related to litigation settlements and severance payments in various business units.

The largest individual item included in these special charges was a settlement with a patent troll. These total charges impacted our second quarter net earnings by $4.5 million after tax, or $0.12 per diluted share. Systemax posted second quarter consolidated sales of $721.6 million, down 4.6% compared to the second quarter of last year.

When you look at revenue on a constant currency basis, sales grew 1.4%. Comparable second quarter retail channel sales increased by over 15% compared to last year while B-to-B sales were down 17%. Our performance was, again, highlighted by growth in our North American Technology Products Group which I will discuss in more detail shortly.

Gross margin for the quarter was 14.8% versus 15.2% last year, down mostly due to product mix and the continued use of discounted freight charges. Net income for the quarter was $6.5 million, or $0.17 per diluted share, down from $0.36 in the same period last year. Income tax expense in the quarter was about $2.5 million.

Our effective tax rate for the quarter was 27.6%, down from 37.1% last year due principally to a tax reserve reversal of $1 million. Excluding this tax reversal our effective tax rate would have been 39.1% which was 2% higher than last year. This tax rate increase is the result of a higher portion of our taxable income being in the United States where our corporate tax rates are typically the highest in the world.

Technology Products net sales were $672 million, a decrease of 3% versus the second quarter of last year representing 93% of the Company's overall sales revenue. On a constant currency basis, Technology Product sales would have increased 3% compared to last year. Operating income in the second quarter was $16.0 million compared to $23.7 million in the second quarter last year.

Industrial Products, really the long-term legacy business, is a profitable and strong cash flow generating business and continues to be an important overall part of our business. The revenue growth in our Technology Products Group has far outpaced that of the Industrial business. In the second quarter, total revenue from Industrial Products was $48.8 million, a decrease of 21% over the second quarter of last year.

This represents only about 7% of Systemax' consolidated revenue. As its percentage of total revenues decreases it will have less of a material impact on our results and will become less of a focus during these discussions.

Turning to our geographical breakdown, our total North American sales were $547.9 million for all segments in U.S. dollars, an increase of 7% from the second quarter of last year, and represented 76% of our total sales for the quarter. Our total European sales were $173.7 million in U.S. dollars, down 29% over the year ago quarter and represented 24% of our total sales. Again, excluding exchange rate changes our European sales would have been down about 13% compared to last year.

If we look at our revenue mix by channel, our total consumer retail sales which includes sales from retail stores, websites, catalogs, and television shopping were $387.4 million, an increase of 18% from the second quarter of last year due in large part to the CompUSA acquisition and represented 54% of our total sales for the quarter.

Business-to-business sales, which includes sales generated from our outbound call centers, business extranets and the entire Industrial Products segment, were $309.1 million U.S., down 24% over the year ago quarter and represent 43% of our total consolidated sales.

I would like to highlight our revenue mix by product category in the second quarter. The computer category represents our largest individual product category by revenue, accounting for $197.1 million in sales, 17% growth over last year. This increase was driven by a high demand for netbooks and laptops.

Our second largest product category was consumer electronics which includes televisions, display screens, et cetera, and represented $166.8 million in sales, really flat with last year. Our computer accessories and software category represented $108.6 million in sales, an 18% decline in mix compared to last year. As I said at the start, additional information on revenue mix has been made available in our earnings press release.

During the quarter, our total SG&A expense increased about 120 basis points to 13.6% of revenue versus last year. If we exclude the special charges incurred this quarter our SG&A was about 12.8% of revenue, a 40-basis-point increase versus last year. That increase is the result of costs added at our CompUSA stores as sales have ramped and various IT initiatives.

The Company continues to maintain a strong financial position. As of June 30, 2009, our balance sheet reflected $258.9 million of working capital and over $87 million in cash and cash equivalents. Our current ratio was 1.8 to 1. We ended the quarter with about $310 million of inventory.

We have no debt outstanding other than about $2 million in capital leases. Additionally, our $120 million credit facility remains undrawn and we have about $190 million of cash and available liquidity as of the end of the quarter.

During the quarter, we repurchased about 66,000 shares of common stock at an average price of $11.99 per share pursuant to our stock repurchase plan approved by the board of directors in May of 2008.

To date we have repurchased about 574,000 shares for $7 million at an average price of $12.19 per share. With that, we'd like to open up the call for questions. Operator?

Thank you, sir. (Operator Instructions) And we'll pause for just a moment to allow everyone a chance to signal. We will take our first question today from Ross Licero with Wisco Research.

Hi, guys. Thanks for taking my call.

No problem. How are you doing?

Good. I wanted to know about that $2.4 million for the charge related to the software business. What more can we expect? Is it still the $5 million in guidance for the rest of the year?

Well, this is -- the software business not every charge can be taken in the quarter, the accounting rules don't allow you to do that any more. There is a tail to the wind down of the business that will happen in Q3 and Q4. We expect it to be, the numbers to be much smaller than we had in Q2.

As we said in our press release when we announced the announcement on the PCS business, we expect that our cost structure will be reduced by at least $10 million on an ongoing basis after we've finished exiting the business.

Okay. Great. Thanks. And in terms of the Retail 2.0 stores, could you give me a little color on how much does it cost to transition one of these stores to the Retail 2.0 and if you plan to do this with any more stores in the next year?

Hi, it's Gilbert. We are currently converting all of our stores and hope to have that conversion done by the end of the year. And, obviously, for competitive reasons we don't really talk how much it costs to convert the stores.

Okay. Thanks a lot, guys.

You're welcome.

Thank you.

And we will take our next question from Dorsey Gardner with Kelso Management.

My question was answered. Thank you.

And at this time, there appear to be no further questions. I would like to return the call to Mr. Leeds for any additional or closing comments.

I'd like to thank everybody listening in on our call and we look forward to reporting our results next quarter. Thank you, everybody.

And that does conclude today's conference call. Again, we do thank you for your participation.