Global Industrial Co (GIC) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to Systemax Inc. first quarter 2010 earnings teleconference call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question-and-answer session. (Operator Instructions). As a reminder, this conference call is being recorded today, May 11, 2010.

At this time, I would like to turn the call over to Denise Roche of Brainerd Communicators. Please go ahead.

Thank you, Operator. Welcome to Systemax first quarter 2010 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 Segment which includes TigerDirect, CompUSA, Circuit City.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 Inc.

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

Good afternoon, and thank you for joining us on today's first quarter 2010 earnings call. 2010 is off to a good start with consolidated sales growth of nearly 22% of quarter. A testament to the diversification of our business, a key component of our growth strategy. Our business-to-business operations were the highlight of the quarter with same channel growth of 20%. Add to this the contribution from the WStore acquisition that was completed in September and our overall B2B business performance was outstanding.

We continue to keep a keen focus on our bottom line. Operating income grew 36% and diluted earnings per share rose 35% for the quarter, driven by our continued focus on cost controls and by the operating leverage we have built into our businesses. We faced a difficult comparison in our consumer business from the year-ago period as last year. In the peak of the recession, we delivered double-digit growth that we believe significantly outperformed the market. Our consumer channel sales grew moderately in North America during the quarter. But a decline in Europe where we don't place as much emphasis on the consumer marketplace.

Pricing remains under pressure from a competitive standpoint and continues to impact our gross margin. Systemax has always made offering the best combination of price net of shipping and service a key priority, which became particularly vital during the most recent economic down cycle when consumers were even more focused on finding the best value. We compete on assortment, price and quality and do not emphasize a lost-leader approach. Our consumer sales channels continue to represent a significant growth opportunity as our experience, adaptability, strong customer service and established brands uniquely position us in this segment. As I mentioned, we saw a significant recovery of our B2B operations this quarter. We're seeing many positive indicators pointing to a start of a sustainable recovery in this market. Business spending is beginning to steadily increase. Most of the European economies in which we operate showed signs of improvement and there has been an uptick in sales from our North American call centers. Overall, we're encouraged by our B2B performance and remain optimistic about what lies ahead in 2010.

Within B2B our Industrial Products group is worth highlighting. Sales for the quarter were up over 19% from the prior year and 10% sequentially with growth coming from both outbound and inbound sales. We continue to expand our product offerings, and our website traffic has increased significantly with average weekly visitors at the Global Industrial site up 50% from the prior year. New web customers were up 75% in the first quarter compared to the prior year. Our product categories and selection also continues to grow. SKU count at the end of the quarter was up more than 20% sequentially and up 120% from the first quarter of 2009.

In closing, one of our core strategies has been to build a diversified company, which distinguishes us from our competitors and contributes to our long-term success. With a look in our business segments, sales channels, geographies or product line, the breadth of our businesses are clearly evidence. While in recent years many have come to know us because of our highly visible consumer retail brand, TigerDirect, CompUSA and Circuit City, our legacy is in B2B where we built and continue to grow our presence in technology and industrial product sales. Geographically we have established businesses in North America and Europe that allowed us to capitalize on opportunities such as the acquisition of WStore, which doubled our business in France and boosted UK operations. We believe our diversification and prudent approach to our businesses will continue to serve us well in the years ahead.

I will now turn the call over to Gilbert.

Thank you, Richard, and good afternoon, everybody. Our technology sales increased 22% in US dollars. Results were driven by our European operations where sales for the first quarter grew 37% over last year. If you exclude WStore's contribution, European sales still increased double digits over the prior year. Our North American operations also delivered strong top-line growth with sales increasing 16% over the prior year. While these were great results by any standard, we experienced the highest growth in our B2B operations, which was up in North America and Europe. In our B2C business, we had modest same-store sales growth in North America driven by our multi-channel operations and the decline in Europe where the consumer marketplaces are extremely competitive and our primary focus is on serving business customers.

In Europe, our performance continues to differ by country. Overall, most countries are seeing a positive trend in sales compared to last year. Similar to last quarter the UK and France performed well continuing to benefit from the addition of WStore Europe. In the UK, our largest European operation, strong sales in the public sector continued to drive the business, particularly as government agencies increased their spending before the March 31 fiscal year ends. Certain countries, including Spain and Germany, are still under significant pressure. During the first quarter, we formalized our plans for the operation and legal integration and merger of the acquired WStore businesses with our Misco operations in France and the UK. Recently we received additional approvals for the merger and can now proceed with our integration plans which include workforce reductions and the consolidation of warehouse facilities. We expect the integration to be substantially completed by the end of the year.

Our North American B2B operations generated growth of 32%. We believe that we have reached a turning point in this business as small and middle-market customers have started to loosen the purse strings and are refreshing their IT infrastructures. We expect to benefit further from B2B growth opportunities throughout 2010 as businesses continue to gradually return to normalized spending and we leverage capacity at our 13 North American call centers. In the North America consumer channel, CompUSA continues to lead our retail storefront strategy. We ended the quarter with 36 retail stores open, including a new store in Euless, Texas and one in Newark, Delaware, which expands our existing presence in the Delaware and Texas markets. Retail 2.0, our innovative in-store system, continues to be a real game changer for us on the brick and mortar front, bringing our technology expertise to create a totally differentiated in-store experience for shoppers and allowing us to keep one step ahead of the competition. As our CompUSA, brick and mortar retail stores have grown, our CompUSA.com e-Commerce revenues have grown similarly, evidencing the success of our multi-channel strategy with this valuable brand.

Taking a look at our pure 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. Catering to our niche tech-focused consumer, TigerDirect.com had 2.1 million average weekly visitors to the site during the quarter. In Foresee's spring 2010 online retail satisfaction index, TigerDirect.com ranked number two behind only Apple. Circuitcity.com had over 700,000 average weekly unique visits for the quarter. We continue to explore how to strategically expand and differentiate product categories for this national brand. Although we are still in the early stages of refreshing the Circuit City brand, we recognize we have many possibilities for a long-term growth available to us and we will continue to prudently explore these opportunities.

In summary, we are pushing ahead with our strategic initiatives and committed to building our brands and expanding our customer base. The B2B channel did exceptionally well as it is showing improvement and continued stabilization. Europe also performed well and the WStore is progressing. While on the consumer side, we're encouraged by the improving consumer confidence reports. We look forward to what lies ahead in 2010 and believe we're well-positioned to leverage our strong portfolio of brands and prudently expand our business in existing and new markets.

With that, I will pass the call to Larry.

Thank you, Gilbert. Good afternoon, everyone. Systemax posted first quarter consolidated sales of $915.2 million, up 22% compared to the first quarter of 2009, primarily driven by our B2B operations, which includes our technology B2B businesses in North America and Europe and our Industrial Products business. When you look at revenue on a constant currency basis and exclude the WStore results, sales grew 12%. First quarter consumer channel sales increased by 9% in US dollars and increased by 1% on a constant currency basis compared to last year, while B2B channel sales increased 38% in US dollars and 27% on a constant currency basis, excluding WStore results. Gross margin for the quarter was 13.8%, versus 14.3% last year. Primarily the result of strategic product pricing, changes to mix and some residual effects from freight discount incentives.

SG&A expense was 11.6% of sales during the quarter, versus 12.3% last year. And operating margin grew to 2.2% this year versus 2.0% last year. The cost controls we began implementing in late 2008 as the macro economic situation started declining facilitated this strong performance. Our high top-line sales growth translated to even greater bottom line results. Net income for the quarter was $11.8 million or $0.31 per diluted share, up from $8.7 million or $0.23 in the same period last year. Our effective tax rate for the first quarter was 37.5% compared to 39.5% last year. The lower rate in 2010 is a result of the Company having a higher percentage of its pretax income in countries with lower tax rates.

Now turning to our two largest business segments. Technology Products net sales for the first quarter were $860.6 million, an increase of 22% in US dollars versus the first quarter of last year and it represented nearly 94% of the Company's overall revenue. On a constant currency basis, and excluding WStore, Technology Product st sales increased 12% compared to last year. Technology Products operating income in the first quarter was $21.8 million compared to $22.3 million last year.

Industrial Products generated sales of $54.5 million, an increase of nearly 20% over the first quarter of last year. A return to growth after four consecutive quarters of decline. Operating income was $3.6 million for the quarter compared to $2.3 million last year due to the return of revenue growth and cost controls implemented during 2009.

Turning to our geographical breakdown, our total North American sales were $636.2 million, an increase of 16% from the first quarter of last year and represented 70% of our consolidated sales for the quarter. European sales were $279.0 million in US dollars, up 37% over the year-ago quarter and represented 30% of our total consolidated sales. This includes sales of approximately $48 million from WStore which was acquired in September of 2009. Excluding exchange rate changes and first quarter WStore results, our European sales grew 6% from the first 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, inbound call centers and television shopping were $470.0 million, an increase of 9% from the first quarter of last year due in large part to the expansion of our retail stores, as well as the purchase of Circuit City selected assets. Consumer sales represent 51% of our total sales for the quarter. Business to business sales, which include sales generated from outbound call centers, business extranet and the entire Industrial Product segment were $445.2 million and represented 49% of our total consolidated sales.

Before I move to the balance sheet, I want to touch on our long-term infrastructure planning. The growing volume in our North America consumer channel, which has been driven by the rapid expansion of our network of retail stores, the addition of Circuit City to our portfolio, and our growing TigerDirect business, has created a need for a second distribution center for our Technology Products business. We recently signed a lease for a new distribution center in Jackson County, Georgia. We believe this is a great place to locate, due to its proximity to Interstate 85, which connects Atlanta and Charlotte, North Carolina. The location will allow us to lower the cost of replenishing our brick and mortar stores in the eastern United States as well as delivered shipped orders to customers on the East Coast more efficiently. Our expectation is to have the distribution center operational so it's up and running in time for the 2010 holiday season.

Moving to the balance sheet at March 31, our balance sheet reflected $264.7 million of working capital, an increase of about $15 million from year-end and approximately $37.6 million in cash and cash equivalents. The current ratio at the end of the quarter was 1.7 to 1. At March 31, short-term debt totaled $16.6 million and included about $13.4 million in revolving debt assumed as a part of the WStore acquisition.

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

(Operator Instructions). Our first question comes from David Strasser of Janney Montgomery Scott.

Thank you, I have a few questions. First of all, looking at the gross margin being down and you seem to be at the same time having better B2B sales than most other people that we have talked to, the Staples and those type of people. Are you trying to take share via a more aggressive pricing posture? How should we be thinking of that throughout the year?

Hi, it's Gilbert Fiorentino. There are a few reasons for our success there. First, we concentrate in a big way on small and very small businesses. Typically businesses with less than 150 seats Our sweet spot is 50 to 150 seats. And those customers never had too much technology. When the economy turned in 2008 and 2009, those customers didn't have hundreds of computers more than they needed. So, by focusing even more on these smaller business customers, we have been able to succeed because our 13 call centers allow us to serve these customers in a unique way. It's not so much price competition, it's more servicing those customers who are beginning to refresh the needs.

Are you seeing more creation of those small businesses? Because it had seemed like, once again, listening to other people, that they have been frustrated by a lack of creation of small businesses in this recovery to date.

I don't know that we're seeing more. I think we're targeting in a more aggressive way, actually.

The existing ones. So it's not necessarily an impact of an increase in creation of these businesses? It's more going after existing ones?

Really both. We're acquiring a lot of new business customers with our Internet strategy. Because of our strong search on the search engines and the many ways that we promote ourselves on the Internet, we get many business customers who come to our Internet sites to buy products. We then identify them and turn them over to our B2B group to service in a bigger way.

I want to change the topic a little bit, talking about the DC. Can you give any parameters as to how we should be thinking about that from a molding standpoint, ie. CapEx versus expensing in the back half of the year?

Obviously we will have some startup costs associated with the DC. We also will receive assistance from the state and municipalities down there to offset some of our startup costs. I think from a capital perspective, we're looking at somewhere plus or minus, somewhere in the neighborhood about $15 million.

I'm sorry? How much?

Somewhere in the neighborhood of $15 million. But that will be incurred not all in 2010, we'll have a phased approach to really outfitting the DC, so some of it will occur in 2011.

All right, I appreciate it. Thank you.

(Operator Instructions). Our next question comes from Ross Licero of Wisco Research.

Thank you for taking my question. I had one more question about the gross margins. You said it was due to shipping price and product mix. I was wondering what the breakdown, a rough estimate of what the distribution of those hits were?

Yes, Ross. That is a granular level that we're probably not going to get into right now. Again, it's the business that we have with the numerous channels, different kinds of products, exchanges, and obviously the impact of shipping is industry wide. All of those things contribute towards a modest impression of gross margins.

Okay. Great. Thank you very much.

I would like to turn the call back over there to Mr. Leeds.

I would like to thank everyone for listening to our first quarter call and we look forward to speaking to you next quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great evening.