Global Industrial Co (GIC) 2010 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Systemax Inc's second 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 the question-and-answer session. (Operator Instructions). As a reminder, this conference call is being recorded today, August 10th, 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 the Systemax second quarter 2010 earnings conference call. I'm here today with Richard Leeds, Chairman and Chief Executive Officer of Systemax; Gilbert Fiorentino, Chief Executive of the Systemax Technology Products segment, which includes TigerDirect, CompUSA, Misco, (inaudible), WStore; and Larry Reinhold, Executive Vice President and Chief and 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 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 for today's second quarter 2010 earnings call. We had another record sales quarter, which was once again led by our business-to-business technologies and industrial operations. Consolidated sales grew nearly 12% for the quarter, with B2B channel sales growth of 35%, while our consumer business was off by 6%, reflecting the current challenging consumer environment, which Gilbert will elaborate on later in this call. Overall, our results continue to demonstrate the benefits of our diversification strategy. Systemax is a dynamic company with both B2C and B2B operations and an expanding geographic footprint in North America and Europe. Historically, this has enabled us to grow throughout challenging business and economic cycles.

Our European business, which is primarily B2B remains a bright spot, an encouraging result in light of the continuing economic uncertainty in the region, with double digit increases on the top and bottom line. Our integration of WStore in the UK and France is progressing according to the expected timeline and we are very confident of the benefit of the acquisition as we start to realize a number of operating synergies. In the UK, the functional integration of the Misco and WStore operations is complete, and we are proceeding with wrapping up the merger. In France, the merger has been completed, which now enables us to proceed with the integration of our operations. This integration is expected to be completed by year end.

Within B2B, industrial sales are up 27% from the prior year and 14% sequentially, with the majority of the increase driven by the web. In addition, while the consumer is a very small part of our industrial business, we have experienced an uptick in sales in this channel, which is in part aided by the addition of PayPal as a payment method this quarter.

As we move forward, we will continue to focus on prudently building our businesses and leveraging our robust brand portfolio. Our B2B operations have had a strong first half of the year, and while our second quarter consumer sales results were soft, we are well positioned to capitalize as the environment improves. We have assembled a diversified and multifaceted company to feel optimistic about the long-term prospects for Systemax.

I will now turn the call over to Gilbert.

Thanks, Richard and good afternoon, everybody. Our worldwide technology sales increased 11% in the second quarter. Results were driven by our European operations, where sales for the quarter grew 39% over last year. Our North American operations reflect a soft consumer environment as sales increased approximately 1% from the prior year.

Much like the first quarter, our B2B operations were the highlight for the second quarter. In Europe, our performance was strong in almost every country that we operate in. The UK and France continue to perform well, and the longer term outlook remains bright as we complete the WStore integration. The UK remains our largest and strongest market in Europe, with sales from the public sector once again being one of the primary drivers. Our North American B2B operations grew 24% in the quarter as we have benefited from improved spending from our core small and middle market customers. These customers are spending more on computers and computer accessories as they begin to refresh their IT infrastructure coming out of the recession. Our 13 North American call centers have been a key to our success in driving sales and we are continuing to make prudent investments in our B2B sales teams.

In the North American consumer channels, we are not satisfied with our overall results in the quarter. While we are pleased with our performance in consumer electronics and particularly high definition TVs, we were disappointed with our consumer sales of computers and computer accessories, our largest product category. We attribute some of the softness to iPad, which we do not sell, as well as generally soft consumer spending.

On the retail front, we ended the quarter with 37 retail stores. Since the end of the quarter, we have opened two additional stores and have two stores currently under construction. The expansion to our footprint remains focused on the cluster strategy, which allows us to fully leverage our existing infrastructure and advertising budgets. The real estate market continues to provide a number of unique opportunities and we remain committed to making smart leasing decisions. We have recently made the strategic move to co-brand two of our core retail brands, CompUSA and TigerDirect. As you visit CompUSA.com, you will now see the tag line Powered by TigerDirect. And at TigerDirect.com, you are now able to find a listing for our CompUSA retail stores. We believe this shift will result in a better multi channel strategy for our retail and web businesses by enabling us to cross promote these brands to our entire customer base. The co-branding will also enable us to much more efficiently utilize our advertising dollars.

We are also progressing towards the opening of our new distribution center in Jefferson, Georgia. We are on track to start shipping from this location in the third quarter. This new distribution center will allow us to lower the cost of replenishing our brick and mortar stores in the eastern United States, as well as deliver web orders to our customers on the East Coast more efficiently. In addition, the new site also includes a retail store and a B2B call center which we anticipate opening in the fourth quarter, well in advance of Black Friday, or Pink Friday as it has become to be known in our stores and online shopping sites.

TigerDirect, our largest direct sales website, continues to be the market leader in the online retailing of computer products and consumer electronics. Catering to our tech-focused consumer, TigerDirect had 1.8 million average weekly visitors to the site during the quarter. We also continue to be pleased with our CircuitCity.com acquisition which is fully integrated into our e-commerce consumer business.

In summary, we are executing on our strategic initiatives, building our brands, and expanding our customer base. Our B2B channels continue to perform exceptionally well. Europe looks to have turned the corner, and we should see additional momentum in the second half of the year as we fully capitalize on the WStore acquisition. And the consumer environment is challenging, but we remain optimistic that given the unique position of our brands and growth opportunities, we seek to expand our presence on the web and in retail. With that, I will pass the call to Larry.

Thank you, Gilbert. Systemax posted second quarter consolidated sales of $805.9 million, up 12% compared to the second 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] 6%. Second quarter B2B channel sales increased 35% in US dollars and 22% on a constant currency basis, and excluding WStore, compared to last year. Consumer channel sales decreased by 6%, both in US dollars and on a constant currency basis. Gross margin for the quarter was 14.3% versus 14.8% last year, primarily the result of strategic product pricing, changes to mix, and some effects from freight discount initiatives. SG&A expense was 12.3% of sales during the quarter versus 13.6% last year, and operating margin grew to 2.0% this year versus 1.2% last year. SG&A expense in 2009 included costs related to our former hosted software segment.

Our high top line sales growth translated to even greater bottom line results. Net income for the quarter was $9.5 million or $0.25 per diluted share, up from $6.5 million or $0.17 per diluted share last year. Our effective tax rate for the second quarter was 37.1% compared to 27.6% last year. The lower rate in 2009 was a result of a reversal of approximately $1 million in tax reserves. If you exclude this reserve reversal, the company's effective tax rate in 2009 would have been 39.3%. This lower effective tax rate this year is primarily the result of a higher percentage of taxable income outside the US, where corporate tax rates are generally lower.

Now, turning to technology products, net sales for the second quarter were $743.1 million, an increase of 11% in US dollars versus the second quarter of last year, and represented more than 90% of the company's overall revenue. On a constant currency basis, and excluding WStore, technology product sales increased 4% compared to last year. Technology products operating income in the second quarter was $15.1 million compared to $16.3 million last year. The decrease was primarily driven by lower gross margin in the current quarter. Industrial products generated sales of $62.2 million, an increase of 27% over the second quarter of last year. Industrial operating income was $6.1 million for the quarter compared to $4.0 million last year as revenue grew and we benefited from cost controls implemented during 2009.

Turning to our geographical breakdown, our total North American sales were $564.7 million, an increase of 3% from the second quarter of last year, and represented 70% of our consolidated sales for the quarter. European sales were $241.2 million in US dollars, up 39% over the year ago quarter, and represented 30% of our total consolidated sales. This includes sales of approximately $46.9 million from WStore, which was acquired in September of 2009. If you exclude exchange rate changes and the second quarter WStore results, our European sales would have grown 17% from the second 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 $388.5 million, a decrease of 6% from the second quarter of last year. Consumer sales represented 48% of our total sales for the quarter. Business-to-business sales, which includes sales generated from outbound call centers, business extranets, and the entire industrial products segment, were $417.4 million and represented 52% of our total consolidated sales.

At June 30th, our balance sheet reflected $271.6 million of working capital, an increase of about $21 million from year-end, and about $33 million in cash and cash equivalents. Our cash position, as expected, was impacted by an increase in inventory, which reflects additional retail stores, as well as early pays to vendors to secure discounts. The current ratio at the end of the quarter was 1.67 to 1. At June 30th, short-term debt totaled $13.1 million, and this included about $12.2 million in revolving debt assumed in the WStore acquisition.

Looking ahead, our current line of credit expires at the end of October. We are currently in advance discussions with various lenders and expect to have a new credit agreement in place well in advance of that expiration. Finally, as previously mentioned, our WStore franchise integration is accelerating this quarter and we anticipate that one-time special charges for severance and other costs over the remainder of the year will aggregate about $3 million in US dollars, most of which should be incurred in Q3.

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

(Operator Instructions). You have a question from David Strasser of Janney Montgomery. Your line is open.

Thank you. I have two questions. One on the top line and one on gross margin. On the top line, I mean, it just seems like particularly the US was disappointing -- was a disappointing number. You talked about predominantly the economy. It seems like the economy is your biggest foe. Anything else from that, as you look -- like, what was the strength, I guess in consumer electronics that drove it? Because it was actually better than what we anticipated. And what else, in general, drove the weakness? I mean you mentioned Apple and you mentioned the economy. Is there anything else we should be thinking about, especially as we look out to the back half of this year or even 2011? And then the gross margin side, I'm trying to get a little more -- I was wondering what happened with shipping margins and how we should be thinking about gross margin in the back after as well.

Hey, it's Gilbert Fiorentino. On the economy, we are really not that big, and we try not to look at macro factors. But we felt real good in the fourth quarter like the economy was coming back and that carried into the first and there was a lot of consumer confidence in it. It just felt like in the second quarter, consumer confidence in the products that we sell was not as strong as it was in previous quarters. On the consumer side, like I said, we did well in televisions and consumer electronics. In our biggest category, again, in laptop computers, we didn't see any growth. We did see substantial growth in computers on the B2B side, but just looking at the consumer side, that was an area that we didn't experience the growth that we had in the past. Regarding margins, Larry has got your answer. Maybe.

Well, yes, David. As we have talked about in past quarters, the world of freight in our industry continues to be one where in North America freight revenue continues to be something that's a challenge to collect with our consumers. And it affects everybody, not just us. We have a number of initiatives, if you will, of trying to address the cost side of freight, and I think we've got some things that we're going to be rolling out in the next remainder of the year, which we anticipate will result in lowering our outbound freight costs. But we don't see currently any change in the North American consumer business whereby what we -- our freight revenue was going to turn around. We believe it's a one-way street and that does have a -- that does shave basis points off our gross margin.

How do we -- how should we think about cycling? Could you refresh my memory? I know we spoke about it before. When you cycle the lower freight?

Well, I think it's been -- this has been ongoing for a couple of years, and I think we will have the last major freight reduction was in Q4 of 2009.

Okay. So another quarter potentially.

Yes, that's -- I wish we could say it just happened in cliff events.

I understand that.

It doesn't work like that, but there are major things done in the fourth quarter for each of 2008 and 2009.

Just one more follow-up question on just PCs. Was it unit or ASP that seemed to be the bigger culprit?

It depends on really -- the total blend, of course, ASP is coming down because of the netbooks, but actually our ASP on notebooks is up year over year. Again, I don't compare that between B2B and consumer. It may be that the business buying is on a higher scale. (inaudible).

There's been generally a sense that the netbook has seen its best days. Is that a reasonable statement?

Estimates that are there are still tens of millions to be sold this year and next year. IPad's a very exciting product, but not only does netbook continue to sell significant quantities greater, we are looking into next year where we start to see competitive products on that tablet platform, which we are excited about as well.

Do you consider the tablet to be the next generation of netbook?

No. I -- I think one's more of an Internet device and -- no. I don't think so. I think we can coexist comfortably.

All right. Listen, thank you very much. I appreciate it.

Thank you, sir. Our next question is from Dorsey Gardner of Kelso Management. Your line is open.

Part of the premise of the new stores is with a smaller footprint, you are able to get a lot more sales from people coming in and ordering while they are in the store, using one of your computers and having your salespeople looking over their shoulder. And I wondered, is -- do you see signs that that is actually, in fact, happening? That you are getting the sales productivity that you expected or is it too early to say? Obviously you are opening more stores, so it's not an outright disaster -- but how does that look?

Regarding the format size, really, we have got a size that we try to concentrate on, and often there are real estate opportunities where we will give or take a few thousands of square feet, but the format size that we have is comfortable. I think you are referring to Retail 2.0, and that's very exciting because we have about -- we have more than 10,000 SKUs actively in our warehouse right now, and we are very good at shipping same day orders to our Internet customers. If you walk into a CompUSA store, there are usually 3,000 or 4,000 SKUs in that store, but remember there's the backup of the entire warehouse available. A customer can walk into the store and purchase any one of the products that he sees on the web. Often there's free freight involved and more often it's shipped the same day to the customer. So that's a very exciting area for us in using Retail 2.0 to give the customer better experience. It doesn't mean that you --

Is it happening?

-- you turn the stores into an Internet showroom. It means the stores still have inventory, but there's much more available to the customer than meets the eye inside that store.

But is he doing it? Are you getting substantial number of sales that are over and above the 3,000 or 4,000 SKUs in the store?

I wouldn't call it substantial, but if a customer walks into a store and he wants a Cisco 48 port router, which we typically don't stock in the store, but we might stock in the warehouse -- the beauty of our system is we done just send them away, we can't help you, we're sorry. Rather we can help that customer in that specific instance.

Do you keep figures on the amount of sales that you ring up on that basis?

Well, of course we keep the figures but we don't disclose that.

This is Richard. That really wasn't the intent of Retail 2.0 to sell the additional SKUs that are in the warehouse in the stores. The intent of Retail 2.0 is to bring the tremendous amount of information that we have on the web about the products into the store and to make the web experience be part of the retail experience. So that -- I mean, that was really the intent of 2.0. And from what we're seeing with both customers' feedback and our salespeople feedback, is,that the Retail 2.0 is well liked by the customers.

So what you are saying is that the inventory selection in a 2.0 store, you'll know what to put in the store because you have the information generally from your web business, your direct mail business and so on, that you are able to put just the bes selling products in the 2.0 store?

So that's where we can improve the customer's experience. We might have 150 different televisions on our website, and we'll take those best 50 and put them in the store.

Okay.

So we can actually use that experience to help the customer as well.

Okay. Okay. Good. Thank you.

Thank you, and I'm showing no further questions at this time. I would like to turn the conference over to management for any closing remarks.

I would like to thank everybody listening to our call and we look forward to speaking to you at the end of next quarter. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.