Global Industrial Co (GIC) 2009 Q4 法說會逐字稿

Welcome to Systemax Incorporated fourth quarter 2009 teleconference call.

(Operator Instructions).

This call is being recorded today, March 8th, 2010. At this time, I would like to turn the call over to Denise Rose from Brainerd Communicators. Please go ahead.

Thank you, operator. Welcome to the Systemax fourth quarter and full-year 2009 earnings conference call. I am here today with Richard Leeds, Chairman and Chief Executive Officer of Systemax. Gilbert Fiorentino, Chief Executive Officer of Systemax Technology Products, which includes TigerDirect, CompUSA, CircuitCity.com, MISCO and 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 Incorporated. I will now turn the call over to Richard Leeds.

Good afternoon, and thank you for joining us on today's fourth quarter and full-year 2009 earnings call. Our top-line consolidated sales grew over 24% for the quarter, and over 6% for the full-year on an equivalent week basis. Our record sales were driven both by B2B and B2C channel sales. Our strong organic in B2B was supplemented by the WStore acquisition completed in September. Our organic B2C sales were supplemented by the purchase of Circuit City assets in May. We have always only strived to be price competitive, and that has been a necessary ingredient for success in our business during this holiday season in particular. As on the consumer side, and our customers continue to watch their spending, and look for lower price products such as net book computers, digital cameras, and smaller flat screen televisions.

On the bottom line, operating income grew 92%, and diluted earnings per share rose 81% for the quarter, driven by our continued focus on cost control, and by the leverage we have generated from our existing infrastructure. While these results would have been characterized as very good in a normalized economy, we believe they are most impressive given they were delivered during what has been described as the worst recession of our generation. I think we can all agree there are winners and losers this season in retail, and Systemax was most certainly a winner. Expanding our retail store footprint has been own of our key growth initiatives. During the fourth quarter we opened three new CompUSA stores, and entered several important markets including Dover, Delaware and Houston, Texas. Our philosophy has been, and will continue to be about opening stores at a pace, and in markets that will add to our long-term growth and profitability. As of the end of the year, we had 34 retail stores open and operating in North America,

On the web front, Systemax's two largest retail e-commerce sites, TigerDirect.com and CircuitCity.com continue to drive sales by attracting customers with a board product selection, competitive prices and superior customer attention. TigerDirect.com continues to be the largest direct sales website in terms of sales volume. CircuitCity.com is ramping up nicely. We continue to regain CircuitCity brand awareness, and reactivate customers with targeted advertising campaigns and by word of mouth. In the near term, we have concentrated on expanding our product offerings by adding additional categories. In addition, we continue to explore other opportunities to utilize and grow the CircuitCity brand. But these initiatives are still in the early stages, and we view these opportunities as long term goals.

Our B2B operations improved in the fourth quarter driven by the WStore Europe acquisition, and the modestly improving economic condition, certain geographies which we sell into, particularly Great Britain and France. Overall, we remain optimistic about what lies ahead for our B2B operations in 2010. In our Industrial Products group, sales for the quarter and full-year were down, but the segment continues to generate strong margin, strong margins and had a positive impact on our bottom line. As in our other B2B channels, we are starting to see some initial signs of recovery. This growth is being driven by our expanding product offerings, and improved customer website. New web customers were up 30% in the fourth quarter compared to the prior year. Global Industrial average unique visitors increased 11%, aided by a positive response in the newly launched e-commerce website. We are continuing to expand our product categories, and determine new ways to add top metric products to existing inventory. SKU count was 109,000 at the end of the fourth quarter, up 11% sequentially, and up more than 200% from 35,000 SKUs in the fourth quarter of 2008.

In closing, when you consider 2009 as a whole, it has been a year of great execution at Systemax. We have achieved great success in expanding our CompUSA retail footprint, and integrating our network of stores with retail to point out our pioneering concepts, which empowers customers and revolutionizes how they shop for consumer electronics, all while continuing to drive our TigerDirect-e commerce business. In addition, CircuitCity.com and WStore offer significant expansion opportunities, which coupled with our established brands TigerDirect, CompUSA, MISCO solidify our status as a leader in the global consumer retail electronics market which positions us well for 2010. I will now turn the call over to Gilbert.

Thank you, Richard. And good afternoon, everybody. We are pleased with the 2009 performance of our Technology Product Group, which was highlighted by a strong finish in the fourth quarter. While the past year can only be described as challenging for the consumer electronics business, and retail segment in general, we were able to deliver strong top-line growth, driven by both our B2B and our consumer channels. For the quarter, Technology Product Group net sales increased 26% on a equivalent weeks basis. For the full-year,Technology Products Group net sales increased 8% on an equivalent week basis. Results were driven by our European operations, where sales for the fourth quarter grew 24% over the last year. And our North American operations also delivered strong results with fourth quarter sales growing 14%.

In the European market, where our businesses are primarily B2B, our financial performance continues to differ by country. Similar to last quarter, the UK and France performed well. And the top-line performers for both countries benefited -- performance for both countries benefited from the addition of WStore Europe, which increased our penetration in both markets. In fact in France, we have essentially doubled the size of our operations. However, the integration of WStore is still in it's early stages, and as expected, we did not see a benefit to the bottom line from the additional revenue. In the UK, our the largest European operation, we expect to continue to benefit from our strengthened public sector, which is a significant contributor to our UK sales.

In North America, we have significant presence in both B2B and the consumer channel. Our B2B operations grew 7%, and we believe we outperformed the market. We expect B2B to offer significant growth opportunities for Systemax, once IT spending in the enterprise sector improves. In anticipation of this recovery, in 2009, we opened two new sales offices. And we are selectively opening small B2B offices, within select retail stores, where the SMB market is most attractive to operate, and where we are pleased with the results of these new offices so far. In the North American consumer channel, CompUSA continued to lead the retail store front strategy in the US.

During the fourth quarter, we opened three new stores including one in south Florida, our first location in the Delaware market, and a destination store located in an area that is within driving distance of several large metropolitan areas. Also, a store in Bunker Hill, Texas which marks our entry into the Houston market. So far, in 2010, we have opened four additional CompUSA stores. In our retail stores, customer response to our Retail 2.0 platform has been very positive. And we have seen customers gravitate to this novel shopping format that offers the most efficient, convenient, and effective way way for our customers to make our consumer electronics buying decisions.

As in previous quarters, we are committed to continuing the innovation of Retail 2.0. And we are constantly looking for new ways to improve it, and offer our customers an even better shopping experience. Several enhancements have been released, including enhanced landing pages with extended educational and comparison information. New endcap fixtures are being deployed which provide a customer friendly touch screen interface, and customized high end displays to better showcase products, and solutions, and include proprietary Retail 2.0 technology, to guide consumers through their purchasing decision.

Moving to our e-commerce operations, TigerDirect.com, our largest direct sales website in terms of activity, continues to be a market leader in the online retailing of computer products and consumer electronics. Web traffic in fourth quarter in creased over 15%, from the same period in the prior year, and is up over 40% sequentially with 2.6 million average weekly visitors to the site. As in the past, TigerDirect continues to receive positive recognition in customer service. The site ranked in the top ten of 2009 within ForeSee results, holiday e-retailer satisfaction index. Additionally, TigerDirect.com was featured in stores, Third Annual Favorite 50 features, based on customer rankings of overall favorite shopping experience.

The fourth quarter was also a good one for circuit city. com, which offers great deals and a wide selection of products. With new product categories being added continuously, the site had over 1 million average weekly visitors for the fourth quarter, and represents a large opportunity for us to continue growing sales, as we expand and differentiate product categories, and explore opportunity for this iconic national brand. While we saw a significant resurgence of customers during the holiday season, we understand we are in the early stages of this -- building this new brand, and view this as a long-term process with significant upside potential for our business. In summary, like most companies, 2009 was about confronting and overcoming the economic challenges facing both North America and Europe.

Despite this macro situation, Systemax proved itself to be a strong Company, with outstanding consumer brands and a loyal customer base ,as evident by our record financial results. Although margins continue to be affected by pressures, we have been affected in our cost control measures and differentiating ourselves from others. Looking to 2010, we are continuing to drive revenue growth by leveraging our portfolio of brands, and exploring opportunities within both new, and existing markets. Overall, we are very confident that Systemax's long term growth potential and in our ability to successfully execute our growth plan. With that, I will pass the call to Larry.

Thank you, Gilbert. Good afternoon, everyone. Systemax posted fourth quarter consolidated sales of $938.2 million, up over 15% compared to fourth quarter of 2008, and a record for the Company by a wide margin. When you look at revenue on a constant currency basis, sales grew 14%. While these results are good on their own, they're even better when we account for the fact that this year's fourth quarter was 13 weeks, as compared to 14 weeks last year, or 91 days versus 98 days. Fourth quarter consumer channel sales increased by over 9% US dollar, and 8% on a constant currency basis compared to last year. While business-to-business channels sales increased 25% in US dollars, and 22% on a constant currency basis.

Gross margin for the quarter was 14.2% versus 14.1% last year, which is essentially flat as the impact of discounted shipping no longer significantly impacts comparability. SG&A expense was 10.9% of sales during the quarter versus 12.2% last year, and operating margin grew to 3.2% this year versus 1.9% last year. The cost controls that we began implementing in late 2008 as the macro economic situation started declining, facilitated the strong performance. Net income was $18.4 million or $0.49 approximate per diluted share, up from $10 million or $0.27 in the same period last year. Note that our fourth quarter results included a $1.8 million benefit from a favorable litigation settlement, charges of $0.6 million for net costs relate today the WStore acquisition, and the previously announced plan to exit PCS hosted software business. These charges impacted the fourth quarter net earnings by about $0.01 per diluted share after tax.

For the full-year, consolidated sales grew over 4% to $3.2 billion, a record level for the Company. Again, this is against the 2008 which included 53 weeks versus 52 weeks this year. Gross margin was 14.5% compared today 15.1% in 2008. Operating margin was 2.3% for the year, versus 2.7% for 2008. The decline is attributable to the macro economic conditions that were significantly impacting the Company in the first three quarters of the year. Our effective tax rate for the fourth quarter was 37.5%, up from 35% last year. Our effective rate for full-year of 2009 was 36.8%, flat compared to last year. Included in the 2009 rate was a reversal of taxes of approximately $1.2 million as a result of statute expirations. If we exclude this reserve reversal, the Company's effective tax rate would have been 38.4%. This higher effective rate this year is primarily the result of a higher percentage of taxable income in countries that have higher corporate tax rate. Net income was $46.2 million or $1.24 per diluted share, down about 12.6% versus last year.

Now turning to the two largest business segments, Technology Products net sales for the fourth quarter were $887.9 million, an increase of over 17% in US dollars, versus the fourth quarter of last year, and it represented nearly 95% of the Company's overall revenue. On a constant currency basis, Technology Product sales increased 15% compared to last year. Technology Product's operating income in the fourth quarter was $29.1 million compared to $21.0 million in the fourth quarter of last year. In the fourth quarter, Industrial Products generated sales of $49.6 million, a decrease of 9.5% over the fourth quarter of last year, which was a far smaller decline than in the first three quarters of the year. Operating income was $5.5 million compared to $5.1 million last year, due to cost controls implemented early in the year.

Turning our geographical break down, our total North America was $669.0 million for all segments, an increase of 12% percent from the fourth quarter of last year, and represented 71% of our total sales for the quarter. This includes sales from Circuit City. European sales were $269.2 million US dollars, up 24% over the year ago quarter, and represented 29% of our total consolidated sales. This includes sales of approximately $56 million from WStore which was acquired in December 2009. Excluding exchange rate changes, our European sales would have grown 20% over the fourth quarter of last year.

Looking at our revenue mix by customer channel, our total consumer channel sales, which include sales from retail stores, consumer websites, inbound calls generated from printed catalogs and television shopping were $537.6 million, an increase of over 9% from last year, due in a large part to the expansion of our retail stores, as well as our purchase of Circuit City assets. Consumer sales represented 57% of our total sales for the quarter. business-to-business sales, which includes sales generated from outbound call centers, business extra nets, and the entire Industrial Products segment were $400.6 million, up 25% over the year ago quarter, and represented 43% of our total consolidated sales.

Moving to the balance sheet, as of year-end, our balance sheet reflected $252.5 million of working capital, and approximately $58 million in cash and cash equivalents. Our current ratio at the end of December was 1.6 to 1. Our cash balance is lower at the end of 2009 than it was at the end of 2008, as a result of several factors. First in 2009, we completed two corporate transactions, the purchase of Circuit City assets and the WStore business acquisition. Cash used during 2009 for these deals was about $18 million. Second, the timing of the payment 2009 special dividend fell in the fourth quarter, and accounted for $28 million of cash. Third, we invested over $75 million in additional inventory to support the growth in the business, as well as additional retail stores where inventory turns slower than in e-commerce fulfillment warehouses.

Fourth, our accounts receivable increased by $59 million due to growth in open account business-to-business sales during Q4, and the acquisition of WStore. Finally, our accounts payable grew by $69 million reflecting the acquisition of WStore and inventory growth. However, accounts payable did not grow at a commensurate rate from the inventory growth, as we took advantage of early pay discounts and operated under tighter market credit conditions. At December 31st, short-term debt totaled $15.2 million, and included about $14.2 million in revolving debt assumed as a part of the WStore acquisition. The remainder is capitalized lease obligations. With that, we would like to open the call up for questions. Operator?

Thank you, sir.

(Operator Instructions).

Our first question in queue comes from David Strasser with Janney Montgomery. Please go ahead with your question.

Thank you very much. I have a couple of questions, the first one you talked about 2.0, and then sort of the latest version of that, the one that you had shown, that you had demoed at the -- has that, is that the one that has been rolled out? Or where is the roll out of that? I thought at the time you said it would be some time around March that that should be in most stores.

Hi. It is Gilbert Fiorentino. So the Retail 2.0 platform has been rolled out. Of course to all of the new stores, and to almost all of the older stores. There are still a few stores that need to be converted. But for the most part we have converted all of the stores. The, we talk about Retail 2.0 changing over time. It is not a static implementation, everyday we walk through the stores and we talk to customers, and we watch how customers behave, and we have new ideas for how to change things and how to implement ideas. Just like the internet, in its early years, the internet is probably 15 years old now. And in the early years, we watched customers, and we made changes just to change the experience. We can do the same thing now, because Retail 2.0 is at the beginning, and this whole new retail revolution of changing the customer experience is very early. It is not unusual for us. We have weekly meetings, and talk about what can we do to change it, what can we do to implement. So it is, very exciting in terms of changing.

All right, yes, what I saw actually at CES it was one of the best retail merchandising systems I have seen, and I walk a lot of stores. I guess, have you guys -- you have the whole year out of the way, you are a little more into the, into this year, any thoughts on store growth for 2010, as far as some sort of number? And whether or not you would do anything with circuit city from the stores standpoint or anything further? I guess that's two question, one a little more about Circuit City and one about just general store growth in general.

A compliment on the Retail 2.0 demo that you did see at CES. We are not talking about how many stores we will open or where or anything like that, first just for competitive reasons, and second just to try to keep expectations where they should be. So, lots of discussions happening, lots of research taking place, but not really something we can talk about.

All right. I will follow, two more things I guess for Larry. One, when you said you were you talking about the DC growth, were you talking about a second DC, and that the the CapEx involved in that? And then the second one around that, do you have a kind of a clarification, I don't think you broke out of sales growth X Circuit. And would it be meaningful?

First question, the business has embrown substantially in North America. And we are looking at our internal distribution capability, to support the business growth, in all channels in North America. But we are really not at a point where we can announce anything about an additional distribution center. Your second question was about --

Circuit City.

Well, again, Circuit City was an asset purchase, it is not like a business combination, like WStore. So, all of our growth has been organic. And we really haven't -- broken that out historically. And, it is an important part of our business, but we manage our various web businesses carefully. And there's a lot of synergies between them, but we really aren't breaking out the revenue for any one of our e-commerce sites. It is all -- I think -- the most, the way we try to present to think about it is, in our press release, we have broken out, we call quote unquote same-store channel revenues for quarter. And in our consumer channel which includes all of our web and retail and the like, that grew 12% during the quarter. And that excludes the effect of Circuit City. And just as in the B2B which is 11% in the quarter, that excludes the effect of the WStore acquisition, and a few call centers, that were not open for the full fourteen months.

All right. Listen, thank you very much. I appreciate your time, and congratulations on a nice quarter. Thank you.

Thanks.

Thank you. Our next question in queue comes from Andre Gardner with [Argos' Management. Your question, please.

My question was answered right there. Thanks.

Thank you, sir. Our next question in queue comes from Steve Stelmach with FBR Capital. Your question, please.

Hi. Thanks. I guess maybe for Larry, the, your gross profit margin improvement versus a year ago, was better than where you had been trending for the year, and versus what you had done last quarter. And I was wondering if you can get a little or provide a little more color on the improvement, and then I thought you had mentioned early near the call, about competitive pressures that you were dealing with. So in that context, can you speak to that as well?

Well, I think essentially, yes, well, the number improved from 14.1% to 14.2%. We just view that as flat -- that we have a wide variety of mixed product, and that kind of a change is really in the detail. Competitive pressures, we remain operating in a very competitive industry. As I mentioned in the text, that it has been quite a while now since shipping charges, the ability to charge customers shipping rates as in the past -- is I think it is history now. So I think we are looking at this, and we don't really see a change in the competitive environment. It remains very competitive. And we are pleased margins have been stable.

And so kind of looking forward here, getting to the future quarters -- and this year, should we kind of think about -- I mean how do you think about the gross profit margin going forward?

I would caveat this, that we obviously don't give any specific quarter guidance. But we are pleased that margin, gross margin -- appears like it is been relatively stable, and we are going to continue operating the business. We -- don't see any change in that.

Okay. Thanks. Second if I could, and I know it is small, but in your -- do you have it handy in your other category, the product category, of your sales mix actually had a probably -- I know it is small, but the percentage increase was probably the most, of maybe all of the product categories. Is there -- what was the strength in, that for the quarter?

What category were you talking about?

Just other.

Other. Yes. Of course, other. The smallest one with the biggest change. I don't have that handy. The details of that, there's a whole host of products, that don't fit neatly into the macro categories that we provided. So I just -- I don't have it handy. Sorry.

No, that's fair. We can talk about it off line. Okay. Thanks.

Okay. Thank you.

Thank you, sir. And there appear to be no further questions in queue. I would like to turn the program back over to you.

Well, thank you everybody for listening to our call, and we look forward to speaking to you when we announce our first quarter results. Thanks.

Ladies and gentlemen, this does conclude today's program. Thank you for your participation, and have a wonderful day. Attendees, you may now disconnect.