Global Industrial Co (GIC) 2011 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Systemax, Inc's first quarter 2011 conference 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 a reminder, this conference call is being recorded today, May 10, 2011. At this time, I would like to turn the call over to Mike Smargiassi of Brainerd Communicators. Please go ahead.

Thank you, Mary. Welcome to the Systemax first quarter 2011 earnings conference call. On the phone are Richard Leeds, Chairman and Chief Executive Officer of Systemax, 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 Richard Leeds.

Good afternoon, and thank you for joining us for today's first quarter 2011 earnings call.

We had a solid start to 2011 that underscores the channel, product, and geographic diversity that define Systemax. Our business to business operations continue to perform well, especially our European operations and our Industrial Products group. Our consumer business was soft in a choppy economic environment, and while overall profit margins remain challenging, we're beginning to see encouraging signs from the strategic initiatives we have underway to improve our performance.

Our B to B technology channels continue to benefit from the IT refresh cycle. In Europe, we believe we are growing faster than the markets in which we participate. During the quarter, we added additional B to B sales agents in Europe and will continue to build our sales force, which is critical to our B to B success and ability to broaden our relationships with Pan-European companies.

In North America, we saw particularly strong results in Canada and are moving ahead in our investments in our sales teams and call center operations. Although North American consumer channel sales were soft, we are encouraged by improving trends in both our retail and web channels as we moved through the first 3 months of the year. Specifically, our brick and mortar stores were up modestly in the quarter with a nice March performance. We continue to contribute this in part to the combined impact of our Retail 2.0 initiative, and co-branding ending efforts. We are also rolling out our Retail 2.0 powered mobility centers and positioning our stores and online properties as major tablet destinations.

Our bottom line performance in Technology Products remains a key area focus as we work to improve our operating and gross margins. Gross margins for the first quarter improved on both the year ago, and sequential basis. Our Georgia distribution center is ramping up its operations, and we continue to work through the impact of discounted freight. In addition, we benefited from our first full quarter of operating a fully-integrated business in Europe. Additionally, Industrial Products are seeing strong growth, 30% in the first quarter, as we execute on our strategy centered on expanding SKU counts, and building out our web presence and site functionalities.

In summary, we're well positioned to capitalize on our diversified multi-channel strategy. Our consumer channels remain challenging, but we are focused on improving margins by controlling costs and driving efficiencies across our operations. Furthermore, we have a sound balance sheet, which provides us tremendous financial flexibility, and a deep management team that is committed to building long-term value for our shareholders.

Before I turn the call over to Larry, I would like to briefly comment on the appointment of Robert Leeds as interim CEO of our Technology Products business. Robert founded our Technology Products group in 1981, and served as it's CEO until 2004. He knows this business very well, and we are fortunate he is able to take on this role. The management transition has gone very smoothly. Our employees, vendors, and customers have been extremely professional, supportive, and focused on moving forward. In fact, same store retail sales were up nicely since the transition. A nationwide search for a permanent CEO is well on its way, and we look forward to updating you on this process in the future. Thanks, and with that I'll pass the call on to Larry.

Thank you, Richard.

First quarter consolidated sales were $929.9 million, up 1.6% compared to the first quarter of 2010, primarily driven by our B to B operations, which includes our technology B to B businesses in North America and Europe, and our entire Industrial Products segment. First quarter B to B channel sales increased nearly 8% in US dollars, and 7% on a same store and constant currency basis, compared to last year. Consumer channel sales decreased 4% in US dollars and declined 8% on the same store and constant currency basis.

Turning to our geographical breakdown. Our total North American sales were $644.3 million, an increase of 1.3%, and represented 69.3% of our consolidated sales for the quarter. European sales were $285.6 million, up 2.3%, and represented 30.7% of our total consolidated sales. Excluding exchange rate changes, European sales would have grown 2.1%.

Our Technology Product group's worldwide sales were essentially flat in the first quarter. Operating income was $17.7 million US dollars, compared to $21.8 million last year, and primarily reflects the addition of our new warehouse, expansion of our retail store footprint, and B to B call centers, as well as lower North American consumer gross margin.

In Europe, B to B sales grew versus the year ago period, driven by the continuation of the improved business environment across the European countries in which we operate. On a local currency basis, we recorded sales gains in all of our countries except Germany, which faced a challenging market environment and tough comps from the year-ago period. Our North American B to B operations continue to benefit from the IT upgrade trend of our core small and middle market customers.

Sales were led by our Canadian operations, which had another solid quarter. During the quarter, we opened a new call center in Texas, and in late April, opened a new call center in Illinois. We ended the quarter with a total store count of 42, opening our Vernon Hills, Illinois location during the first quarter. Vernon Hills is our fifth store in Illinois, and includes a tire connect mobility center.

We continue to take a very prudent approach to our retail expansion plans, with a strategic focus on markets where we can leverage our existing infrastructure and advertising budgets. Our e-commerce assets continue to operate in a very competitive environment, but we have seen some modest improvements in the overall market and our performance since the start of the year. We are moving forward with plans to functionality enhancements to our core web engines, and remain well positioned to capitalize on our strong brands and consumer relationships. Additionally, we saw some solid category performances in the quarter, with televisions and full-feature laptops up double digits.

Our computer category continues to be impacted by soft net-book demand, which we are just starting to partially offset as we build out our tablet offering. Our tablet, smart phones and lap tops are being supported by our new mobility centers within our brick and mortar stores. These centers will offer customers the ability to leave our stores with fully connected to their mobile products from plan selection to device setup. We currently have several mobile centers launched, and expect to have mobile centers in more than half of our stores by year end.

The Industrial Products group delivered another impressive performance, with sales up 30% from the first quarter of 2010. And operating income of $6.9 million, an increase of 92% from the year-ago period, demonstrating a very scalable business model. We ended the first quarter with more than 325 total industry SKUs, an increase of 70,000 new products. Sales growth was driven by both core product offerings and newer product lines such as boaters, plumbing, tools, and food services. The web continues to drive business with growth in new web customers during the quarter exceeding the growth in revenues. Moving forward, the industrial segment remains focused on the further expansion of a SKU count, as well as the continued build-out of its Canadian website and enhanced web services and functionality.

Consolidated gross margin for the quarter was 14.0%, versus 13.6% last year. The 40 basis point increase resulted primarily from changes in segment and channel mix with the Industrial Products segment, which typically has higher product margins than the Technology Products segment, contributing a larger percentage to gross profit dollars in 2011 compared to 2010. Sequentially, gross margin for the quarter improved 30 basis points.

Total SG&A expense was 12% of sales during the quarter, versus 11.4% in 2010. The 60 basis point increase resulted primarily from higher headcount in new retail stores and B to B call centers, which are in their scale-up periods.

Total operating margin was 2.0% this quarter, versus 2.2% last year. Excluding the one-time charge, operating margin was 2.1% this quarter. As of March 31, our balance sheet included $320.1 million of working capital, an increase of $19.2 million from the prior year end, and $112.3 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 $17.2 million, which included about $14.6 million in revolving debt at W Store in France.

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

(Operator Instructions)

And our first question comes from the line of Anthony Lebiedzinski from --

Lebiedzinski --

-- your line is open, sir.

Yes, good afternoon. Just wondering about the consumer channel you mentioned as the quarter progressed the trends improved. Is there any way for you to quantify the same-store sales by month during the quarter?

Well, we have it of course internally, but didn't -- have not have that prepared for the call here. They have improved substantially from January through March, and, you know, we're pleased with what's happened since then, as well.

Yes. Okay. And you mentioned that you opened the sales centers, take some time for those to scale up to, I guess, productivity. What's the typical time frame between when you open a sales center as to when you think they are fully productive?

Well, if the sales reps are working out and we don't have turnover in sales reps, it typically takes 6 months for them to get to a level where they begin to cover their costs. So, we have a -- it takes a substantial amount of time for them to ramp up.

Okay.

But it's a good investment to make if you have a good sales rep. Clearly that pays for us.

Yes. Within the industrial segment, you mentioned that you've increased the SKU count. Ultimately, where do you see that business in terms of potential SKU count at some point?

We've already identified a number of product lines that we can expand into, and, there's substantial growth in SKU count that's available to us. So, I mean, it's going to take us a while to get there as we grow, obviously, but there is a wide range of products that we could be selling.

Yes. Okay. And with your balance sheet in pretty good shape, just wondering what your appetite is for, perhaps, some share buybacks, or maybe a special dividend, as you've done in the past historically.

Well, Anthony, like we've talked many times, we continually look at our liquidity, and our cash, and, you know, the share price, and we're in business to make money and provide returns to shareholders. So, we consider it every time the board meets, and we make a decision based upon what -- where we are at that point in time, and what our outlook is for our capital needs, so --

Okay.

The balance sheet looks good.

Okay.

Okay. Thanks, Anthony.

Thank you. Our next question comes from the line of David Strasser from Janney Montgomery Scott. Your line is open, sir.

Thank you. A couple of questions. First., going back to the concept about improving sales at the retail/consumer level. Was there product in particular -- and if you said it and I missed it, I apologize, but was there anything in particular there that really drove it?

I'm -- I'm sorry, Anthony -- in terms --

This is David.

What was the your question again? There was a beep going on in my ear while you were asking it.

The improvement in sales, I know you don't want to quantify the improvement, or you can't right now, you don't have the information. I'm just getting a sense of which categories you saw that relative improvement.

You know, we saw it really across most of the categories. We don't carry all of our SKUs in our retail stores that we sell on the web, but we saw a good improvement in most of the major categories.

I guess another question. Map pricing seems, or at least Samsung as far as I know, and perhaps one of the others, added map pricing as of April 1st on-line. How has that affected your business. Is it a positive, a negative? And how do you kind of, you know, strategically react to that now?

Map pricing is something that we look at, and I think, you know, 1 of the benefits that we have certainly by having more than 1 warehouse is -- comes into play when map pricing is involved, because we can then save some of our costs by being able to ship from the multi-warehouses closer to the customer.

So, it saves us on the freight cost, number 1. Number 2, there are ways, creatively, that we -- that a customer can ask for a better price. We can't advertise a better price, but the customer can ask for a better price, and we are able to give him a better price if he asks for it. So, there are ways for us to deal with map pricing.

But, is it something you deal with, or is it something you like? I'm just trying to -- if it's hard to --

No, it's -- it's something that we deal with. I mean, it's just -- some vendors choose to have map pricing, and others don't. It's just part of the business.

Does it have an impact on the dynamics of -- will it change as -- I mean, I'm just trying to understand. It seems live it's a big change to me to have that on-line, and I'm just trying to understand if it's, you know, something to worry about or something to applaud as map goes on-line. I'm just trying to understand it, it just -- you know, kind of looking at, it I could see pluses and minuses to it.

I agree. There are pluses and minuses to it. For us, there's pluses and minuses. To the consumer, there's pluses and minuses, and to the manufacturer, there's pluses and minuses. All around.

It's not -- it's not what we would choose, certainly, but it's part of the business, and doesn't really -- you know, doesn't really affect us all that much. I mean, it's there, and something we have to deal with.

Thank you. Our next question comes from the line of Andre Gardner from Argos Management. Your line is open, sir.

Dorsey Gardner, actually. Several questions. One is, the $11 million settlement with Fiorentino. Where will that show up in the second quarter, and is it fewer shares outstanding, that's I guess question number 1.

Number 2 is, of your $112 million in cash, how much of it is overseas, and how do you treat that? Do you tax effect it as if it might be brought back, or how do you handle that? And then the third question is, on the retail sales, which, given overall consumer sales are flattish, does that mean that the retail stores are ramping up more slowly than perhaps you expected, or -- this is a tough environment, I appreciate. But could you give us some color on how those stores are doing? Sorry for all the questions. Thank you.

Okay. Let me take the first 2, and I'll let Richard handle the third. In terms of the $11 million, that reflects a number that's computed based upon value of equity, as well as value of cash. Okay? So, there's a number of shares, I think if you read the press release, you see and read the 8K, you see the details of number of shares that comprise that element, and as the press release says, the aggregate's $11 million. The benefit from that will be recorded in Q1, it will be less that $11 million.

Q2, Larry.

I'm sorry, Q2. Will be less than the $11 million because of the accounting rules for dealing with equity instruments. They're just -- you know, it's not the same as fair value rules, and there were costs of it, as well.

So, you'll see some net benefit in Q2 as a 1-timer, and most of the shares will come out of the earnings per share calculation denominator in Q2.

With respect to your second question about the cash, there's no tax effect. Our cash is -- we have a significant amount of cash in Europe, but most of it is in North America, and it's not tax affected, because it's considered to be permanently reinvested overseas. Okay, and then Richard can handle your question on retail.

Can you repeat the question on retail? I'm sorry, it's been a while.

Obviously consumer sales have been flattish, it's a tough environment, but you have also opened up, you know, a number of stores over the past year, and so -- which would indicate that, you know, consumer would be down if you hadn't opened up new retail stores.

So, what is -- what's -- what is happening? Are the retail stores not contributing very much to the top line, or are they doing well and the on-line business and the catalog business is weaker, but what's the sort of mix? If you could just give us a sense of --

Well, want to make sure I understand. So, we define our B to B sales are defined, you know, in the press release in the footnote to it, as sales from the outbound call centers, and extra nets, the entire industrial products segment. Our retail sales are comprised of, you know, the revenues we generate from people who walk in and shop in our retail stores. They buy unassisted over the web, and they call in this country an 800 number and order through an inbound sales agent, so our retail, our consumer sales were actually down 8% in the quarter.

Yes.

Okay? They weren't up, they were down, and that's in the press release. So, within that there's a number of sub channels within the consumer segment. We typically don't break out the details of them, but we -- we won't break out the details of them, but we kind of said that our brick and mortar stores, we were pleased with the performance.

We've seen same store increases in that, and we assessed that the web is sort of a challenging environment right now. We've got a number of initiatives underway. A lot of enhanced web functionalities under development to address any softness in the website.

Okay. Well, that's helpful. Thank you.

Okay.

Thank you. I show no further questions in the queue and would like to turn the conference back over to Mr. Richard Leeds for closing remarks.

Thank you, and we look forward to reporting our second quarter results and talking to you then. Good day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect at this time.