Global Industrial Co (GIC) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Systemax Inc. third-quarter 2009 earnings teleconference call. During the presentation, all participants will be in a listen-only mode. Afterward you will be invited to participate in a question-and-answer session. (Operator Instructions). As reminder, this call is being recorded today, November 10, 2009. At this time, I would like to turn the call over to Ms. Denise Roche of Brainerd Communications. Please go ahead.

Thank you, operator. Welcome to the Systemax third-quarter 2009 earnings conference call. I'm here today with Mr. Richard Leeds, Chairman and Chief Executive Officer of Systemax; Gilbert Fiorentino, Chief Executive of Systemax Technology Product segment, which include TigerDirect, CompUSA, CircuitCity.com, MISCO, WStore; 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 now turn the call over to Mr. Richard Leeds.

Good afternoon and thank you for joining us on today's call. Despite the continued economic challenges, Systemax posted solid third-quarter results, growing consolidated sales, both on a US-dollar basis and on a constant-currency basis.Our results are primarily driven by strong performance in our consumer channel businesses, where sales grew over 10% in US dollars and 12% on a constant-currency basis. During the quarter we experienced some erosion in our overall gross margin resulting from the continuing impact of shipping promotions, coupled with changes to the product mix. However, on a sequential-quarter basis our gross margin improved 20-basis points. We continue to carefully control our operating cost, which result in double-digit bottom-line earnings growth. In our earnings press release issued earlier today we provided a revenue breakdown from consumer, which includes retail stores, consumer websites, inbound catalog and television shopping, and our business-to-business channel, which include managed relationships conducted through outbound call centers and externets with business customers, and I would like to discuss how the current environment has impacted each of these channels.

On the consumer front our operations performed well relative to the current economic environment, with same-store channel sales up 6%. This growth has been aided by our Retail 2.0 initiative, which is now live in 23 CompUSA stores. Since our last call, CompUSA has opened two new retail locations in south Florida and there is one additional store scheduled to open in that market later this month. This will bring CompUSA's total number of retail locations to 27. In addition, TigerDirect continues to operate five retail stores in Canada. The retail storefront expansion remains a key focus for CompUSA and leases have been signed for stores in several new US markets. Our strategy is to expand in the large metropolitan areas where we already maintain a presence and in new markets that can support stand-alone destination stores. These are stores located in areas that are within driving distance from several large metropolitan areas and where we believe CompUSA can generate significant volume and deliver a profitable and growing store.

Systemax's three large retail eCommerce sites -- TigerDirect.com., CompUSA com and CircuitCity.com -- continue to place well on industry ranking for site traffic according to Hitwise. Combined they rank in the top five in terms of traffic market share in the United States in the consumer electronics segment. This is a strong indication that Systemax has positioned itself as leader in on-line retailing of value-priced branded computers and consumer electronics to consumers. CircuitCity.com is our newest eCommerce site, and while the brand has a long history in retail it is still in its -- it's still in its early stages as a Systemax company and is an on-line eCommerce site only. CircuitCity has taken deliberate strategy to efficiently relaunch the site and reintroduce the brand to the public. In the short term that that -- in the short time that the site has been live, it has expanded product categories and selection, adding more consumer electronic and houseware products, reactivated customer base with targeted e-mail campaigns, and initiated a robust marketing campaign. While results will be measured near term, the strategy is progressing smoothly and we are excited about the potential, as sales from CircuitCity.com already contributed to overall sales growth in the third quarter. In addition, CircuitCity's a prized asset with significant value outside of eCommerce and we're currently exploring opportunities to extract that value.

Now I'd like to turn the B-to-B channels, which include MISCO in Western Europe and Global Industrial in the US. In general, B-to-B operations have continued to be the most effected by the economic slowdown and businesses of all sizes have yet -- have not yet returned to normalized spending. However, we are cautiously optimistic that we have reached bottom of the decline. Our businesses are continuing to make prudent investments to improve marketing position while carefully controlling costs. As I've said in the past, where there are challenges there are also opportunities. In mid-September Systemax closed on the acquisition of WStore Europe, a supplier of business IT products with operations in France and the United Kingdom. European IT market is large and fragmented, which presents tremendous opportunities for long-term growth and adding WStore to Systemax's portfolio of companies significantly strengthens our presence in France and adds to our UK operations where MISCO already has substantial operations.

Global Industrial sales for the third quarter and nine-months periods were down. However, on a sequential quarterly basis sales improved and there are other positive indicators that the downward trend may be bottoming. While customer acquisition is at a slower rate than last year, Global Industrial is modestly gaining market share. The entire industry waits for spending to resume, but to mitigate the impact, continued cost reduction initiatives are implemented to better rationalize expenses with sales without sacrificing strategic investments in areas that can help grow this part of the business in the long term. Global Industrial continues to invest in its sales force, improve its eCommerce sites, increase product selection and expand the complimentary product categories.

One major initiative for Global Industrial was the deployment of an entirely new eCommerce website that went live last month. The new site features over 100,000 industrial products in a vast number of categories, which we are rapidly expanding in an array of new features designed to make the on-line shopping experience as efficient as possible for customers. Global Industrial's customers have expressed a desire for a convenient and fast way to purchase products and manage accounts for their industrial needs. The enhanced site combines our strength in web functionality and outbound sales enabled to increase partnership with these customers. We believe the new site is more advanced than the sites of any other company in the sector.

With the recent acquisition of CircuitCity.com and WStore and the acquisition of CompUSA last year, coupled with the consistency of our established TigerDirect and MISCO brands, Systemax has strengthened its position of a leader in the global consumer electronics retail market. We remain diligent in our objectives to achieve strategic expansion and brand awareness. We achieved solid results in the third quarter and remain optimistic in the rest of the year and heading into 2010, believing we are well positioned to grow faster over the economic environment improves.

I will turn the call over to Gilbert.

Thank you, Richard, and good afternoon, everybody. We are pleased with the solid performance of the Technology Products Group during the third quarter. Net sales increased by 4% in US dollars and 8% on a constant-currency basis. Revenue growth in the quarter was driven by our North American operations, where sales grew about 11% over the prior year. North America represented 71% of Systemax's Technology Products total revenue in the third quarter. In North America, consumer business CompUSA continues to lead the retail storefront strategy in the United States. CompUSA has recently opened two new store was third one set to open later this month. Taking advantage of attractive rents there are already several leases for new CompUSA stores signed and we continue to explore opportunities to open additional locations in target metro areas in the US. Our Retail 2.0 initiative is successfully progressing as we look to continue our leading position as an innovator in our industry. By the end of the quarter, 23 CompUSA stores had been relaunched in the Retail 2.0 strategy. Currently four CompUSA stores and five Canadian TigerDirect stores are in the conversion process and we remain on track to convert all retail stores to Retail 2.0 layout by the end of the year.

Customer response to Retail 2.0 remains positive, with customers appreciating the added value Retail 2.0 offers. The stores are a one-stop shop for product information, comparisons and reviews, as well as price match comparisons without leaving the store. Last quarter we noted the addition of Intelligent Retail 2.0 waterfall displays for cameras, GPS devices, MP3 players and cell phones. We are always looking for new ways to innovate and keep Retail 2.0 as unique and current as possible and we spend time in our stores talking to associates, talking to customers, and looking for vendor and partner feedback as we continue to make modifications and add features based on those discussions. Microsoft's long-awaited Windows 7 operating system launched a few weeks ago. To commemorate the launch CompUSA held midnight events at many stores, featuring contests and giveaways of Window 7 products and others. Initial reviews and customer reactions to the software are extremely positive and we expect it will provide significant marketing opportunities, not only for Microsoft but also related vendors. Marketing campaigns featuring the software and components campaign to upgrade the necessary hardware for Windows 7 will be undertaken throughout the duration of the fourth quarter.

TigerDirect.com, our largest direct sales website in terms of activity, continues to be a market leader in the on-line retailing of computers and electronics. Web traffic increased 14% over the prior-year period, with approximately 1.9 million average weekly unique visitors to the site. TigerDirect received recognition for excellence in customer service from American Express and the National Retail Federation, Computer Shopper magazine, BizRate, pricegrabber.com and reseller ratings, among others. TigerDirect.com, and now CircuitCity, encompassed the majority of our direct web business. CircuitCity.com website traffic is averaging over one million visitors per week. Site traffic continues to improve, as the site is further enhanced and the customer base for Circuit City is reactivated. As Richard mentioned, this was the first full quarter with CircuitCity.com and the integration of this brand into our portfolio and it is going well. CircuitCity continues to offer great deals and a wide selection of products, fast shipping and world-class customer service, while working to expand the product categories and advertising campaigns.

Our North American B-to-B technology business was down compared to the prior year for all the rich -- reasons that Richard mentioned earlier. However, B-to-B technology still offers significant growth opportunities for Systemax. As we start to see signs of a possible economic turnaround on the horizon we continue to strategically invest in this part of our business and position it for growth once the economy improves. The call centers we open during Q2 in Idaho and South Dakota are ramping up and we have selectively increased sales representatives with specific product expertise. In the

European B-to-B business, where sales are primarily generated by MISCO, the financial performance has differed by country. The most challenging countries, much like last quarter, were Spain, Germany and Italy. Those countries have economies that are still in deep recession. MISCO continues to focus on cost cutting -- on cutting expenses, especially in markets that have experienced the most softness, through headcount reduction and other cost-cutting initiatives. The bright side in Europe remains the UK, MISCO's largest European operation, where sales modestly increased. The UK operations continue to benefit from MISCO's strength in the public center -- sector,with much of the business coming from government and education sources. While France experienced lower sales, this was offset by a growth in margins. After the UK, France has been the strongest market in Europe this year. As Richard mentioned, in September Systemax closed on the acquisition of WStore Europe. The acquisition has minimal overlap with MISCO's existing operations in these countries, increasing Systemax's penetration of these markets. We were excited by this growth opportunity, which essentially doubles the size of the Technology Group's business in France and further adds to the existing operations in the UK.

In summary, although we are certainly not immune to the macro environment, we believe that the overall consumer business is performing well and we feel optimistic heading into the end of the year. In the segments most impacted, like B-to-B technology, we are managing our expenses, but also feel encouraged by new customer additions and the progress of internal initiatives to support additional growth. We are focused on executing on strategic growth opportunities and implementing innovative initiatives with the intent of changing the retail landscaping for the good of the customer, all key ingredients to Systemax's long-term growth and prosperity.

So with that I'll pass the call to Larry.

Thank you, Gilbert, and good afternoon, everyone. Systemax posted third-quarter consolidated sales of $753.9 million, up 2% compared to the third quarter of 2008. When you look at revenue on a constant-currency basis sales grew 6%. Third-quarter consumer channel sales increased by over 10% US dollars and 12% on a constant-currency basis compared to last year while business-to-business channel sales were down 7% in US dollars and 1% on a constant-currency basis. Our performance was again highlighted by growth in our North American Technology Products Group. which I will discuss in detail shortly. Gross margin for the quarter was 15.0% versus 15.6% in 2008, down mostly from a change in product mix and the continued use of discounted freight charges. Sequentially gross margin was up in the third quarter over the second quarter by 20-basis points. Net income for the quarter was $12.6 million, or $0.34 per diluted share, up from $11.3 million, or $0.30 in the same period last year.

Income tax expense in the quarter was about $8 million. Our third-quarter results include pre-tax charges of $1.0 million or costs related to the WStore acquisition and the previously-announced plan to exit the PCS-hosted software business. Charges impacted our third quarter net earnings by $0.02 per diluted share after tax. Our effective tax rate for the first nine months was 36.3%, down from 37.3% last year. Included in the 2009 rate is a reversal of tax reserves of approximately $1 million as a result of statute expiration. If we exclude reserve reversal the Company's effective tax rate would have been 38.7%. This higher effective tax rate this year is primarily the result of a higher percentage of taxable income in the United States where corporate tax rates are the highest.

Technology Products' net sales were $701.8 million, an increase of 4% in US dollars versus the third quarter of last year, and represented 93% of the Company's overall sales revenue. On a constant-currency basis Technology Products' sales would have increased 8% compared to last year. Technology Products' operating income in the third quarter was $21.7 million compared to the $22.1 million in the third quarter of last year. Industrial products is profitable and it generates strong cash flow and therefore it continues to be an important part of our overall business. In the third quarter total revenue from industrial products was $52.0 million, a decrease of nearly 18% over the third quarter of last year. Operating income was $3.6 million.

Turning to our geographical break down, our total North American sales were $552.1 million for all segments in US dollars, an increase of 8% from the third-quarter last year and represented 73% of our total sales for the quarter. European sales for the third quarter were primarily generated by MISCO. as the WStore was included in consolidated results for only a few business days during the quarter. Total European sales were $201.8 million in US dollars, down 11% over the year-ago quarter, and represented 27% of our total consolidated sales. Again, excluding exchange rate changes. our European sales would have been flat to the third quarter of last year.

Looking at our revenue mix by customer channel, our total consumer channel sales, which includes sales from retail stores, consumer websites, catalogs and television shopping, were $426.2 million, an increase of 10% from the third quarter of last year, due in large part to the acquisitions of CompUSA and acquisition launch of CircuitCity.com. Consumer sales represented 57% of our total sales for the quarter. Business-to-business sales, which include sales generated from outbound call center and business externet and the entire industrial product segment were $327.7 million in US dollars, down 7% over the year-ago quarter, and represented 43% of our total consolidated sales. I'd like to highlight our revenue mix by product categories in the third quarter. The computer and the consumer electronics categories were our largest growth categories, with 29% and 7% growth respectively. Additional information on our revenue mix has been made available in the earnings press release.

During the quarter total SG&A expense decreased about 40-basis points to 12.4% of revenue versus last year. Excluding the charges incurred this quar -- in this quarter's, SG&A expense -- excuse me -- would have been 12.3% of revenue, a 50-basis point decline versus last year. Although we hired during the quarter for new retail stores, we were able to control overall SG&A spending as a result of various cost reduction initiatives implemented over the past year. Systemax continues to maintain a strong financial position. As of September 30, 2009, our balance sheet reflected $256.8 million of working capital and over $102 million in cash and cash equivalents. The current ratio at end of September was 1.6 to one. We ended the quarter with about $316 million in inventory. Short-term debt totaled $18.8 million of September 30th and included about $17.1 million revolving debt assumed as part of the WStore acquisition. The remainder is capitalized lease obligations. Additionally, our $120 million credit facility remains undrawn and we have approximately $199 million of cash and available liquidity as of he end of the quarter.

With that, we'd like to open the call up for questions. Operator?

Thank you, sir. (Operator Instructions). Our first comes comes from Ali Motamed with Boston Partners.

Hi, guys, a couple quick questions. First of all, can you talk a little about the CapEx outlook for the next quarter and maybe the next year what we should be looking at?

This is Larry. We -- our CapEx has been relatively modest for the Company, typically under $10 million a year for normal kinds of activities. I think that we have some -- we're spending on -- as you know, we've commented on our Retail 2.0 initiative and also some other IT system upgrades. I think you could probably look to the future as normal CapEx in about the same range with -- possibly we're going to be looking at some additional distribution center capability as our volume of business grows.

Okay. And then NewEgg's meant to be coming public any day soon. I see the valuations that are put out in their perspectives and you guys are pretty much the best comp. They're looking at 20 times earnings and 30% of sales. Obviously, it's a little bit of a different business, but are you going to use this as an opportunity to maybe get out and discuss the Company a little more and meet investors and make -- you don't really have much analyst coverage, so make yourselves more available to the investment community?

Well, this is Richard. We obvious look at all of our competitors and while they're one of them and they're a good competitor, we certainly want to have the best stock price that we could possibly have and we always look at things like that.

So will you be going out and doing that more, or do you have any plans?

I hope so, that's our intent to get more as we can.

And then what about reporting analyst coverage (inaudible)?

We're always trying to get more analyst coverage and if you could help with us that we'd appreciate it.

Okay. Thank you.

Our next question comes from [Ross Lucero] with Wisco Research.

Hi, congratulations on the quarter.

Thank you.

Wanted to know how many new leases are signed for the new Circuit -- or CompUSA stores -- pardon --?

Hi, it's Gilbert. There are two right now. There's one new store opening in Aventura, Florida imminently in the next few weeks. Other than the ones that are imminent to open for competitive reasons we just don't like to talk about where we're putting stores or the markets we're looking at.

Okay, thanks. And for the other category you had listed in your press release, can you explain what that is exactly and why it's going from -- it's consistent year over year, but it drops from about 100 to 15.5 from the second to third quarter?

Is that on the product category mix?

Correct.

There's a -- that's the catch-all net of everything that doesn't make the specifically-identified list, so it's really too voluminous to go into there.

Okay, that's all I got. Thank you, guys.

Thank you.

No additional questions in queue, I'd like to turn it over to Richard Leeds for any additional comments and closing remarks.

Like to thank everybody for listening to our call and we look forward to speaking to you next quarter. Thank you.

That does conclude today's conference call. Thank you for joining us.