Global Industrial Co (GIC) 2011 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Systemax Inc. second-quarter 2011 results 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 3, 2011.

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

Thank you, Patrick. Welcome to the Systemax second-quarter 2011 earnings conference call.

I'm here today with 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 Mr. Richard Leeds.

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

We had a sound topline performance in the quarter as we continue to benefit from our multichannel and product diversification strategy. Revenue was up 8% year over year and up 4% on a constant currency basis.

Our business-to-business channels once again led our performance as customers continue to update their IT infrastructure. We faced strong comparables from the year ago period which makes our topline results even more impressive.

Our North American technology B2B operations continue to show growth and we're making prudent investments in our salesforce which means a critical driver of our success. Additionally in North America, the industrial products segment had another outstanding quarter with a 27% increase in sales supported by new product lines and an expanded SKU count. Our European technology businesses grew moderately during the quarter but operating income in Europe grew strongly as a result of our France integration.

Consumer channel revenues were essentially flat for the quarter compared to last year. Consumer technology remains a very competitive business particularly on the web where we believe our sound execution on a number of strategic initiatives including expanding our tablet and mobile offerings will improve our performance.

Within the consumer channels, our brick-and-mortar stores delivered solid growth in the quarter continuing the trends we saw in the first quarter of this year. Their performance reflects the evolution of our retail 2.0 initiatives and co-branding efforts. Additionally, we continue to roll out our retail 2.0 powered mobility centers and are positioning our stores and online properties as major tablet destinations.

There are a number of exciting tablet offerings now on the market and as expected, they are developing into a key product category. In fact, tablet sales surpassed total netbook sales in the quarter.

Our bottom-line performance technology products remains a key area of focus as we work to improve our margins. Our initiatives to drive additional efficiencies from our Georgia distribution center are ongoing.

We're once again able to maintain our product margins and we continue to make progress in our efforts to minimize the impact of discounted freight. In addition, during the past several months, we have undertaken an extensive review of our North American technology business.

The current management team has identified a number of operational improvements that are needed and we are in the process of implementing those changes which include product procurement, inventory management, reverse logistics and information technology initiatives. Some of these changes are expected to benefit the business in the remainder of 2011 and some will take longer to put into effect.

We feel that we have a good handle on the business overall and that we have a solid execution plan. Before I turn the call over to Larry, I would like to mention that we're making good progress on our search for a permanent CEO of our technology products business.

We have met with a number of qualified candidates and while I don't have any specific news to share with you at this time, we look forward to updating you soon. Thanks and with that, I'll pass the call on to Larry.

Thank you, Richard. Second-quarter consolidated sales were $872.2 million, up 8% compared to the second quarter of 2010 primarily driven by our B2B operations which include our technology B2B businesses in North America and Europe and our entire industrial products segment.

Second-quarter B2B channel sales increased 16% and 10% on a constant currency basis compared to last year. Second-quarter consumer channel sales were flat and declined 1% on a constant currency basis.

Looking at our geographical breakdown, our total North American sales were $606 million, an increase of 7% year over year and represented 69.5% of our consolidated sales for the quarter. On a constant currency basis, North American sales were up 7% year over year.

European sales were $266.2 million up 10% year over year representing 30.5% of our total consolidated sales. On a constant currency basis, European sales declined 1% compared to the previous year.

Our technology product groups worldwide sales were up 7% in the second quarter and up 2% on a constant currency basis. Technology products operating income was $18.9 million inclusive of a $7.1 million special gain compared to $15.5 million last year.

In our European technology business, our UK operations faced a challenging public sector market but delivered an improved operating performance on sound cost management. Germany and Spain remained soft due to macroeconomic conditions while France had a strong quarter supported by the benefits of our operational integration last fall.

Our North American technology B2B operations continue to benefit from the IT upgrade trend of our core, small and middle market customers with sales lead by our US operations. Our North American technology consumer operations continue to be challenging particularly on the web.

Our brick-and-mortar retail stores continued their relatively strong performance. Within our store footprint, we currently have 14 mobility centers launched and expect to have about 30 within our stores by the end of the year.

We have been very pleased with the rollout and initial results while trending ahead of our internal plans. We ended the quarter with a total store count of 42.

This is unchanged from the first quarter and we are currently evaluating several attractive locations. 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.

Additionally, across our technology businesses, we saw some solid category performances in the quarter. Tablets emerged as a substantial product line delivering growth that more than offset our decline in the netbook category for the quarter. Full-featured laptops remain very strong and delivered another quarter of double-digit increases while televisions were up modestly.

Turning to the industrial products group, global industrial delivered another impressive performance with sales up 27% from the second quarter of last year. Industrial operating income grew to $9 million compared to $6.1 million in the prior year, up 48%.

We ended the second quarter with more than 373,000 total SKUs, an increase of nearly 50,000 during the quarter. Sales growth was driven by both core product offerings and newer product lines. The web continues to drive business and we remain focused on the expansion of our SKU count as well as the continued buildout of our enhanced web services and functionality.

Consolidated gross margin for the quarter was 14.8% versus 14.1% last year. This increase was primarily driven by improvements in our freight margin and growing industrial product sales which typically carry a higher gross margin. In addition, we're starting to see the positive impact of our Georgia distribution center which continued to ramp up operations and move forward with its efficiency initiatives.

Recently, we entered into a new agreement with one of our largest North American shippers which will help in our efforts to mitigate the impact of discount freight. Total SG&A expense was 13.1% of sales in the quarter versus 12.0% in 2010.

This increase resulted primarily from the addition of five retail stores and investment in the B2B call centers as well as strategic investments in web and retail advertising. Total operating margin was 2.5% this quarter versus 2.0% last year.

Excluding the special gain -- net gain of $7.1 million related to the investigation and settlement with a former executive, our operating margin was 1.7% in the quarter. The effective tax rate for the quarter was 30.2%, down from 37.1% last year due primarily to having a greater proportion of our taxable income in countries with low effective tax rates.

Earnings per share were $0.42 for the quarter inclusive of a special gain of $0.13 compared to $0.25 last year. We continue to maintain a very sound balance sheet with a substantial net cash position.

As of June 30, our balance sheet included $330 million of working capital, an increase of $29 million from the prior year and almost $100 million in cash and cash equivalents. The current ratio at the end of the quarter was 1.8 to 1 and at June 30, our short-term debt totaled $5 million. With that, we would like to open the call up for questions. Operator?

(Operator Instructions) Anthony Lebiedzinski, Sidoti & Co.

Good afternoon. A couple of questions here.

On the store base that you say you have -- you're evaluating new locations, potentially how many do you think you could open in the back half of the year? Any thoughts on 2012 and also which markets do you think would make the most sense for you in terms of opening stores?

Anthony, it's Richard. As we have always said, we are opportunistic about our real estate, so we're looking at a number of locations. That doesn't necessarily mean we have a plan that says we have to have these locations.

It was just as we negotiate, then we decide whether we want them. So while we have an internal plan, we don't have a plan that we can share with half the world so we don't have to open stores. We're selective. We try to open stores that make the most sense for us at the time.

Can you go into a little bit more detail as to what the operating changes you're looking to do in terms of -- I know you gave a few things in terms of the North American technology business. Can you just give us some examples as to what are the things that you are looking to do to improve that and how long do you think it will take for these initiatives to be reflected in better performance?

Sure, you know, one of -- the good news is when we got [into it] the business is fundamentally healthy. We went through and we did a fairly extensive review of everything that's going on there. So operationally there are a number of things that we could improve. One is product procurement.

Second is inventory management. Third would be reverse logistics and fourth would be on the IT front. Our own IT, there's a lot of opportunity.

The management team is very focused on the business. We hit the ground running really quickly and I think you will begin to see the benefits of the management team there very -- in the next couple of quarters. It's really a very, very good business where with the proper management in place, it could be even more profitable.

Okay, and also as far as the sales centers that you have opened over here, do you plan to do any additions for the rest of the year or do you think you're done with those for now for this year?

Well, we significantly added to our headcount of sales reps this year. So right now we are evaluating where we are with the number of headcount and then figuring out where we're going to wind up for -- whether we -- how many we increase for the rest of the year.

We don't have any plans to open additional call centers for the rest of the year, but we are looking at the number of heads there and going to opportunistically add and grow that business. You've got to remember that the sales rep has a curve to him.

So when we hire him, he has very little sales and then over time that sales builds up. And so we lose money in the beginning of his employment or her employment, and then they become profitable. So we have to manage that process so we don't have a large amount of cost as opposed revenue.

Dorsey Gardner, Kelso Management.

Do you have the telephone sales -- I don't know what you'd call them -- desks or kiosks? Will they be in all the 2.0 stores?

The mobility centers?

Well, is that what you call them? Basically selling cell phones and (multiple speakers)

Yes, we call them the mobility centers. And yes, we expect to have them in every store that is that has the square footage that can handle that. So I think by -- we have 14 now.

We expect as I said in the earlier remarks to have 30 by the end of the year. We have 42 stores.

The remaining will come on in 2012. And we have a few stores that may be coming to the end of their lease terms and we have a couple that may be not the right size.

It wouldn't make sense to build it into a store you might be moving from. But substantially all of them we expect will have mobility (multiple speakers)

Any early returns on how they drive business?

Well, they have beaten our internal expectations.

Okay and in Georgia, the economies that you're going to get from the new warehouse, are you halfway there or most of the way there or how long does it take to break in a big warehouse like that? (multiple speakers) or are the savings on freight? Because the payoff is where? In efficiency or shipping costs or both?

All of the preceding. We opened the warehouse really substantially the beginning of Q4 last year of 2010.

So we really just completed nine months although Q4 was starting from nothing and then go right into Q4 busy season. So I think as we said, we expected the warehouse efficiencies to come on over at least a year and we're starting to see internally some of the benefits now and I think we just mentioned we just executed a new major agreement with a freight carrier and I think we have seen some benefit of that here in Q3 already. It's just a few weeks old. So, I would expect we're going to continue to see benefits all the way through the remainder of the year.

And vis-a-vis Amazon, obviously there's only one Amazon and they seem to always do everything right. My understanding is they're doing very well in the electronics area.

Do you see them as sort of a head-to-head competition for you in this space? And what are they doing that -- I guess they have name recognition and lots and lots of customers and (multiple speakers)

Look, Amazon is a terrific company and they're a very strong competitor. And we certainly know that they are in the markets that we are primarily in.

We also sell our products on Amazon as a partner. But this -- Systemax has been in business 62 years I believe and has had strong competitors from day one and we've competed successfully for that entire length of time and we expect it will continue to compete successfully in the future.

Is it your impression that they are undercutting you or that -- they obviously have this advantage I suppose with the not paying state taxes. Is their business configured sort of differently than yours? What sort of -- is there a sweet spot someplace else compared to the way you do business?

At any given moment, they're going to be low on some products and high on others. And there is a mix there that we have to manage against them and all of our competition of who's gonna be the lowest at any given moment. As Larry said, they're strong competitors and we do compete with them. You know, there's (multiple speakers)

Any sense of how you come out sort of in terms of ratings with customers and service?

I mean if you go look at our service ratings -- and we pretty much always have very good service ratings -- if you want to do it out of five stars, it's usually we're in the neighborhood of 4.5, 4.75 stars. We constantly survey our customers as do a lot of the shopping sites and we rank right up there with them.

Okay, thanks. And on the Retail 2.0 stores, do they sort of ramp up to making a contribution fairly quickly or is it a slow -- take a year or so to get there? Or how fast do they sort of mature?

Well the Retail 2.0 is a selling tool for our sales reps. One of the challenges that we have with the sales reps in a store with a product line that is constantly changing is how do we put all of the knowledge in the sales rep's head that we can possibly put.

And we obviously can't and neither can our competition. So with Retail 2.0, we give them a tool that allows them to quickly look up the information and show the customer very easily understood format of what the product specs are and what the differences are for product versus product. The sales reps love Retail 2.0 and the customers seem to love Retail 2.0.

You know I don't think that there's a tremendous gain in sales because of it but I think it's just part of the mix of the combination of the sales reps plus Retail 2.0 that contributes to the sales gain.

Does it result in good sales per square foot? I mean does it show up that -- are you getting the kick out of it that you expected?

The stores that have Retail 2.0 in it have better performance. Does that answer your question?

Yes, better performance than the ones that don't have it. Okay.

Yes.

Okay, I've been impressed. I wandered into one store and I was looking at a TV for a little while and there was a salesman who did a fabulous job in terms of saying if you're interested, we can make a deal on that. I was just curious and I was lucky to make it out without buying a TV.

Go back and buy one now (multiple speakers) well you know, that's what I'm saying. It really gives the sales reps the tools to sell the product which is what it's all about. And we want them selling you on this and maybe next time you will walk out with buying the TV set.

And they're all on incentive, I take it.

Correct. Yes.

(multiple speakers) people are. Okay, terrific, okay. Thank you very much.

Thank you, I would like to turn it back over to management for closing remarks.

I'd like to thank you for listening to our call and we look forward to reporting next quarter's results to you. Thank you.

Ladies and gentlemen, thank you for participating in today's program. This concludes the program, you may all disconnect.