Global Industrial Co (GIC) 2010 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Systemax Incorporated third-quarter 2010 earnings teleconference call. During the presentation all participants will be in a listen-only mode. Afterward, you will be invited to participate in the question-and-answer session. (Operator Instructions) As a reminder, this conference call is being recorded today, November 9, 2010. At this time, I would like to turn the call over to Mike Smargiassi of Brainerd Communicators. Please go ahead, Mike.

Thank you, John, and welcome to the Systemax third-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, 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 than 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 for today's third-quarter 2010 earnings call. We had another strong sales quarter, as we benefited from solid performances in our business-to-business technology and industrial operations, as well as improved results in our consumer channel. However, pressure on both gross and operating margins impacted our bottom-line performance.

First, our gross margin continues to feel the effects of discounted freight in the North American technology business, which started several years ago. These discounts appear to have stabilized during 2010, and we anticipate easier comparisons during Q4 this year. Second, our gross margins reflect competitive pricing in the North American technology business, which was not sufficiently offset by vendor funding. While the first few weeks of Q4 have shown some encouraging trends, we continue to face a challenging macroeconomic environment, which is negatively impacting our industry and adds volatility to our business.

Finally, our gross margins include startup costs for our new distribution facility in Georgia. We expect this facility will significantly improve our distribution efficiency as it scales up in Q4 in 2011. At the operating margin level, as we have previously discussed, we took a special one-time charge in the third quarter related to the integration of WStore. We anticipate completing the integration of our France businesses by the end of Q4, and expect significant profitability increases next year.

As we work through these margin issues, our continued strong sales performance gives me confidence in our earnings potential as the economy improves. Our European business, which is primarily B2B, continues to deliver outstanding growth, with sales increasing more than 20% over last year and growth in every country, including Spain and Italy, both of which have seen some of the most difficult macroeconomic climates in the region. The UK had an exceptional quarter, with particular strength in the education and government segment, and we saw the benefit of the WStore UK integration that we completed in second quarter.

Within B2B, industrial sales were up 30% from the prior year and 9% over the second quarter of 2010. As we continue to outperform the overall industry, operating profit was up 121% last year, highlighting the leverage and scale of the business. Our growth continues to be driven by our web performance, as we significantly expand existing product lines and new product categories. We ended up the third quarter with 225,000 SKUs on the web, more than double our year-ago count, and have seen a 50% year-over-year increase in new web customers.

As we approach the end of the year, we're well positioned and remain optimistic. Our B2B business continue to benefit from the IT upgrade cycle. We are strategically expanding our retail footprint and our European operations are beginning to benefit from our WStore acquisition. While we continue to operate in a challenging consumer environment, we have seen some modest improvement in consumer trends as we approach the holiday season, and are pleased with the initial results of our retail co-branding strategy. We are focusing on improving our bottom-line performance, as we look to maintain cost control and capitalize on the efficiency opportunities provided by our new distribution center. We have built a diversified and multifaceted Company with a robust brand portfolio, and will continue to prudently grow our businesses.

I will now turn the call over to Gilbert.

Thanks, Richard, and good afternoon, everybody. Our worldwide technology sales increased 13% in the third quarter over last year. Results were driven by our European operations, where sales for the quarter grew 22% over last year, and our North American operations grew 10% overall. In Europe B2B sales grew 30% in the quarter over last year with a solid performance across our markets and categories. On a local currency basis we recorded a strong double-digit gains in the UK, Sweden, Italy and Ireland. We also had solid performances from Germany, Holland and even Spain, which has been our softest market. France performed well, even with the WStore integration activity distraction. In the quarter, we completed all of our key integration initiatives, including organizing our back office operations and warehouse into a single location, realigning staffing levels and implementing a single sales and financial platform across our operations. We are currently wrapping up a couple of the remaining items and look forward to completing the WStore France integration by the end of the year.

Our North American B2B operations grew 15% in the quarter over last year, as we continued to benefit from improved spending from our core, small and middle-market customers. These customers are spending more on computers and computer accessories as they continue to refresh their IP infrastructure. Our call centers and sales teams remain the key to our success, and we continue to scale the business based on the increased demand. We relocated existing -- our existing call center from Buford to -- from Buford, Georgia to a new call center in our Jefferson, Georgia facility, which is larger and has the capacity for additional B2B sales agents. Also, by year end we expect to open smaller B2B sales offices in Texas and Illinois.

North American consumer channel sales were up 7% for the quarter. In particular, sales from computers, computer accessories and consumer electronics were up year over year. On the retail front we ended the quarter with 40 retail stores. In September we soft opened and launched our Jefferson, Georgia retail store, in October we opened our Galleria store in Dallas and currently have one more additional store under construction in Illinois. We anticipate limiting the expansion of our retail footprint to strategic markets where we can leverage our existing infrastructure and advertising budgets.

As we mentioned last quarter, we are cross-promoting our core retail brands, CompUSA and TigerDirect, to their combined customer bases. CompUSA.com has added the tag line, Powered by TigerDirect, and at TigerDirect.com you are now able to find a listing for our CompUSA retail stores. The core strategy behind this initiative is to better capitalize on our multichannel platforms and efficiently utilize our advertising dollars. Initial results look encouraging, as we believe the co-branding is helping to drive our overall retail traffic and sales. In the coming months, we anticipate offering an expanded selection of wireless and other mobile devices in our retail stores.

In early September we opened our distribution center in Jefferson, Georgia and started shipping from this location. As the new distribution center scales in Q4 and next year, it will allow us to lower our cost of replenishing our brick-and-mortar stores in the eastern United States, as well as deliver web orders to our customers in the East Coast more efficiently. CompUSA.com saw stronger on-line results this quarter, which we attribute, in part, to the co-branding initiative. TigerDirect.com continues to be a market leader in the on-line retailing of computer products and consumer electronics. Catering to our tech-focused consumer TigerDirect had 1.8 million average weekly visitors to the site this quarter. CircuitCity.com have been disappointing recently, and as we enter the holiday sales period we expect to launch a number of targeted customer campaigns for CircuitCity.com to increase traffic to the site.

In summary, we are executing on our strategic plan and overall delivering solid sales growth. Our B2B channels continue to perform exceptionally well, and our European operations are poised to fully capitalize on the WStore acquisition moving forward. The consumer environment is challenging; but we remain optimistic about the holiday sales period, and are encouraged by the initial impact from our co-branding initiative. We have strategically expanded our retail footprint and are capitalizing on our multichannel strategy.

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

Thank you, Gilbert. Overall we were pleased with our sales performance, particularly in our B2B businesses, which was highlighted by our operations in Europe. However, margins remain under pressure in North America, and we faced a number of one-offs in the quarter. Third quarter consolidated sales were $862.7 million, up 14% compared to the third 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 WStore sales grew 11%. WStore, which includes operations in both France and the UK, was acquired in late September 2009, so this will be the last quarter that we exclude it from comparisons to the prior year. Third-quarter B2B channel sales increased 24% in US dollars and 18% on a constant currency basis, excluding WStore, compared to last year. Consumer channel sales increased by 6% in US dollars and 5% on a constant currency basis, excluding WStore.

Gross margin for the quarter was 13.5% versus 15.0% last year, primarily the result of continuing effects from discounted freight, strategic product pricing, costs associated with our new facility in Georgia and product mix. SG&A expense was 12.1% of sales during the quarter versus 12.4% in 2009. Sequentially, SG&A declined 20-basis points from Q2 of 2010. Operating margin was 1.4% this year versus 2.6% last year. Net income for the quarter was $8.6 million, or $0.23 per diluted share, down from $12.6 million, or $0.34 per share last year. As expected, net income was impacted by a special one-time charge of $2.9 million, or $0.05 per share after tax, for severance and other costs related to the WStore integration in France. We expect to incur minimal additional charges in the fourth quarter as we complete that integration process.

While the economic and competitive pressures on margins continued to impact results, particularly in our North American technology business, we have a number of initiatives that are ongoing and designed to improve efficiencies and better scale our operation. We recently hired a new Executive Vice President of logistics, who joins us from a major US retailer. One of his key areas of focus is in North American distribution operations, ensuring we fully realize the efficiencies from our new distribution center and minimizing our overall shipping costs. Our effective tax rate for the first nine months of 2010 was 37.3%, compared to 36.3% last year. Included in this year's tax rate is recognition of a foreign tax credit of approximately $0.5 million. Excluding this benefit, our effective tax rate for the first nine months of 2010 would have been 38.3%. The lower rate in 2009 was a result of a reversal of about $1 million in tax reserves. Excluding this reserve reversal, the Company's effective tax rate in 2009 would have been 38.7%.

Now, turning to Technology Products, net sales for the third quarter were $794.2 million, an increase of 13.2% in US dollars, and represented 93% of the Company's overall revenue. On a constant currency basis technology product sales would have increased 15.6% compared to last year. Technology products operating income in the third quarter was $8.5 million compared to $21.9 million last year. The decrease was primarily driven by lower North American consumer gross margin, as previously mentioned, as well as the reorganization costs for WStore in France of $2.9 million. Industrial products generated sales of $67.8 million, an increase of 30.4%, and represented 7% of the Company's overall revenue. Industrial operating income was $7.9 million for the quarter compared to $3.6 million last year, as revenue grew when we benefited from cost controls implemented during 2009.

Turning to our geographical breakdown, our total North American sales were $616.8 million, an increase of 11.7%, and represented 71% of our consolidated sales for the quarter. European sales were $244.9 million up 22%, and represented 29% of our total consolidated sales. Excluding exchange rate changes, European sales would have grown 32%. Looking at our revenue mix by customer channel, our total consumer channel sales, which include sales from retail stores, consumer websites, inbound call centers and television shopping were $427.5 million, an increase of 6% compared to the third quarter of last year. Consumer sales represented almost 50% of our total sales for the quarter. Business to business sales, which include sales generated from managed business relationships, including outbound call centers and business extranets and the entire industrial products and corporate segment, were $435.2 million, an increase of 24%, and represented just over 50% of our total consolidated sales.

At September 30, our balance sheet continues to remain very strong, with $279.5 million of working capital, an increase of $29.5 million from the year end, and $30.4 million in cash and cash equivalents. Our cash position, as expected, was impacted by inventory growth for additional retail stores and our new distribution center, as well as early pays to vendors to secure discounts. The current ratio at the end of the quarter was 1.6 to 1. At September 30, short-term debt totaled $31.3 million, which included about $11.2 million in revolving debt at WStore in France. At the end of October, we entered into an amended and restated credit agreement, which replaced our expiring line. The credit agreement provides for a five-year revolving credit facility of $125 million, with the opportunity to increase to $200 million. We are very pleased with the increased facility, which ensures sufficient funding for our current business operations.

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

Okay. (Operator Instructions) Okay, and we'll take our first question coming from Anthony Lebiedzinski from Sidoti & Company.

Good afternoon. Was wondering if you guys comment on the gross margin. It's been under pressure for quite some time, and I know you have this new distribution facility that just opened up. When would you expect to see some perhaps flattening of the gross margin? When do you expect this new facility to really give you the efficiencies to get some traction there?

Hi, it's Richard, I'll take the question. The facility in Jefferson is coming up for speed, and as we said in the call, we're looking at that really coming up to speed through the fourth quarter and through the beginning of the year. Strategically what it does for us is gives us presence on the East Coast for fulfilling orders to customers who are East Coast and lowers our cost of shipping then, as well as lowering our cost of having products that our store is covering the orders for us. The overall gross margin it was a competitive quarter. I think you're seeing this from pretty much everybody in the industry, but this -- one of the things that by bringing up a second DC allows us to really concentrate on our costs. The cost of the DC is in our gross margin.

And also, there were some startup costs here in the third quarter. Do you expect any startup costs to hit the fourth quarter?

Anthony, it's Larry. I think in terms of the ramp-up costs for the DC, yes, there were costs in Q3. It's still ramping up in Q4. There's going to be -- it's not going to operating at peak efficiency in Q4. Again, we really started shipping out of that facility in early -- I think it was early September. So, the startup costs again were about $1.4 million in the quarter. There will be embedded startup costs -- scaling up costs inefficiencies in Q4, but certainly no -- a few weeks from now, when the volume really starts kicking in and we're moving a lot of product to our stores and to our customers, that's when we expect to see more efficiencies than we saw in Q3, but I don't think that we expect to really see the full benefit of the efficiencies that have been designed into the facility even in Q4. I think we'll really see that in Q1 in 2011. I know that's not a particularly concrete answer to your question. It's just very hard to pick out, let's say, startup inefficiency, if you will, versus in Q4,when we're going to be using that -- that facility will be shipping a lot of product, but it will not be operating like it -- like we expect it will in 2011.

Got it, okay. And also could you comment on the vendor support. It sounds like there were some issues in the third quarter. Was this some just some temporary interruption, or can you just give us some comments as to the vendor funding?

Hi, it's Gilbert. We're always working with our vendors to try out maximize our margin and we're continuing do that in. In a particularly competitive quarter we didn't see as much support as we need and we'll continue to focus on that.

Okay, thanks.

Okay, thank you. And our next question is coming from David Kaczorowski from Wedbush Security. David, please go ahead.

Hi, folks, thank you for taking my questions. To stay on the startup costs for the Georgia facility, can you give an idea of how much of that is expense and how much is going to be added to working capital and a little more detail, please?

Not sure I totally understand your question, but let me see what I can do with it. We said that the impact of the expense on the P&L embedded in our gross margin was $1.4 million in Q3. The facility -- we signed the lease on the facility in -- I think it was in late April, worked very feverishly to get it -- a lot of work get it to the point where it could be opened, and it opened for -- started shipping out in -- like I said earlier, in earlier September and had a soft opening of the actual retail store that's in the facility in -- later in September, I think. We had the grand opening in -- sometime in October.

Do you have --

The facility -- when we issued a press release on this, we did industrial bond financing for $15 million to cover the cost of the equipment that goes into the building, which is a lot of distribution center and material handling equipment, racking, conveyor systems , et cetera, and also a lot of IT equipment that uses -- you run the business with. So we haven't fully -- we have not expended that full amount. We spend during the quarter about $9 million approximately. We have more availability to finance any remaining fixed assets that we need to acquire for the facility, so we have ample attractive financing for that. So in terms of capital, that's what the spend has been on the facility at the end of the quarter, and really not that much is expensed in Q4 so far.

Okay.

I don't know if that was exactly your question.

That gives me what I need, thank you. As far as the $2.9 million one-time charge with the restructuring for the WStore, can you go into any more detail about how -- can you divide that out at all?

The charge was -- in France the WStore -- Inmac WStore was the name of the operation in France and it had a facility in one part of Paris. We -- MISCO, our MISCO business had a facility on the other -- far away time wise. The other side -- the Inmac WStore facility was larger and more capable of handling integrated operations, so during the quarter we were able to complete the process that you go through in France, which includes a legal merger, and we did the warehouse relocation so we downsized the legacy MISCO facility to just a sales office. We consolidated the warehouse operations in the legacy WStore facility, and we consolidated the support in back office and other functions, as well as legacy WStore operations. So most of that -- almost all of that activity could not occur until Q3 until we had the legal process done. We completed the legal process and then we did that integration activity in Q3. It's -- that's limited amounts of additional things that will happen in Q4, but we don't expect that to be much. The biggest element of the $2.9 million is, as you expect, severance related.

Got it. And was that $2.9 million -- did you expect that number? Did you expect more or less than that?

No, that is -- the numbers have come in in-line with what we were anticipating, both when we made the acquisition, as well as we did the detailed planning for it earlier in 2010. So there was no surprises besides that number.

Okay. You didn't mention tablet PCs as having an effect on your business in this quarter as you did last quarter. Did you see a change in traffic in tablet sales, or was there -- did anything change from last quarter in that respect?

Yes, hi, it's Gilbert. It's pretty much stabilized. We have seen a little bit of softness in the netbook category. Throughout the channel, everybody has seen that, and the tablet PC has stabilized. We've seen some very exciting products from many vendors that we currently deal with and look forward to having the products in our stores and on our website into the beginning and the middle of next year.

So you will be selling tablets?

Yes, absolutely.

Great, great. And help me walk through my math here. So the consumer business was $427.5 million, consume electronics was $189 million. Would it be a reasonable assumption that that would leave consumer PC at $238.5 million?

It's Larry. In our press release we have a supplemental product category sales summary so the numbers are laid out right in there. You can see that by how we disclose our categories, which is really computers as one, consumer electronics is another, computer components the third, and then computer accessories and software is the fourth, industrial sep -- the fifth, and then a catch-all for other, which is fairly small.

Okay, got it.

and it's all laid out in the press release summary. .

Okay. So $222 million for computers in this quarter --

Right.

-- compared to $188 million, so that's an 18% increase. That's pretty impressive. The industry statistics I'm seeing in the third quarter are seven -- 10% increase. How did you folks get to 18%?

I guess that's -- it's Gilbert. I guess that's the secret, right? (LAUGHTER)

I would (inaudible).

It was certainly not from easy comps last year, I'll tell you that much.

No more color on that?

I don't know what to say. We have seen softness in the netbook --

This is Richard. We all worked very hard throughout the quarter. We're not pleased with our results and I think the top line shows that we tried at getting market share, we tried to stay in front of what was going on in the market, so really that's -- on that regard we succeeded what our competition does or what the market does and figure that out. But we focused on our business and we were real lucky that we were able to grow our margin share.

Okay, thank you all, I'll cede the floor. Thank you very much.

Okay, I'm showing no further questions in the queue at the moment, I'd like to turn the conference back over to your host.

This is Richard, thank you for listening to our third-quarter results call and we look forward to speaking with you again with our fourth-quarter results.

Ladies and gentlemen, this does conclude your conference. You may disconnect and have a great day.