Global Industrial Co (GIC) 2011 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Systemax Inc. third quarter 2011 results earnings teleconference call. During this 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, November 1, 2011.

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

Thank you. Welcome to the Systemax third 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 third quarter 2011 earnings call.

We delivered a solid performance in the quarter, with year over year consolidated revenue up 4%, and operating income up 31%, excluding one time items. We've made additional progress on our gross and operating margin improvement efforts, and significantly strengthened our cash position as we benefited from our balance sheet management initiatives.

Our B2B channels continue to be the highlight of our results. We showed growth across our worldwide B2B operations, and continued to make prudent investments in our sales force, with a focus on converting initial web sales leads into managed accounts.

Results were driven by our Industrial Products segment, which had another outstanding quarter, with a 28% increase in sales, supported by new product lines, an expanded SKU count, and additional sales reps. Our European B2B Technology businesses delivered modest growth on a local currency basis, but had another strong increase in operating income, as we continue to benefit from the expanded scale and efficiency of our operations.

In our consumer channels, our brick and mortar stores delivered another solid performance as we capitalized on a number of initiatives. Specifically, we are progressing with the rollout of our Retail 2.0 powered mobility centers, and remain on track to have about 30 centers by the end of the year.

However, our overall consumer revenues continue to reflect a very competitive consumer electronics environment, particularly on the Web. We have firmly established our stores and online properties as major tablet destinations, with these products becoming one of our top categories in the quarter. Overall, we believe we are well positioned within this key category as we approach the holiday shopping season.

I am pleased with our overall bottom line performance for the quarter. Our various initiatives resulted in a 120 basis point improvement in our consolidated gross margin, and a 40 basis point improvement in our consolidated operating margin during the quarter compared to last year, excluding the impact of one-time charges.

In the Industrial Product business, our quarterly results demonstrate the success of our business model, and Global Industrial's ability to generate double digit operating margins, while also investing in sales and marketing initiatives at a level to capture market share.

In our Technology business, our bottom line reflects modest improvements from our freight and logistics initiatives. Our efforts to improve our results are broad and ongoing, but a continued focus on driving inventory efficiencies, optimizing our distribution centers and information technology initiatives. These efforts are gaining traction, and we expect to see further improvements in our operating performance.

Overall, we have a very solid business with a web-centric model that allows us to drive efficiencies across our integrated multichannel platform. Our business is diversified by market, channel and geography, and we continue to execute on our strategic growth plan.

In closing, I would like to welcome David Sprosty to Systemax as the new Chief Executive of the North American Technology Products Group. David is a seasoned executive with extensive knowledge and experience within the consumer electronics industry. Currently, David is conducting an in-depth review of the North American operations, including visiting our stores, distribution facilities, and call centers.

David significantly strengthens our management team, and we look forward to the insights and leadership he can provide.

Thanks, and with that, I'll pass the call onto Larry.

Thank you, Richard. Third quarter consolidated sales were $901.2 million, up 4% compared to the third 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.

Third quarter B2B channel sales increased 17%, and 12% on a constant currency basis compared to last year. Third quarter consumer channel sales declined 8%, and 9% on a constant currency basis.

Looking at our geographical breakdown, our total North American sales were $634.6 million, an increase of 3% year over year, representing 70.4% of our consolidated sales for the quarter. On a constant currency basis, North American sales were up 2% year over year.

European sales were $266.5 million, up 8% year over year, representing 29.6% of our total consolidated sales. On a constant currency basis, European sales were flat compared to the previous year.

Our Technology Products Group's worldwide sales were up 2% in the third quarter, and flat compared to the previous year on a constant currency basis. Technology Products' consolidated operating income was $13.6 million.

Results in our European Technology business reflect a cautious economic environment, and the historically slow third quarter due to the summer holiday season. Our UK operations remain solid, and we had a strong bottom line performance in France as we benefited from our larger operating platform.

Our North American Technology B2B operations continue to reflect the IT upgrade trends of our core small and middle market customers, with sales growth led by our US operations. In contrast, our North American Technology consumer operations continued to reflect the challenging environment. However, web channel weakness was partially offset by a solid performance from our brick and mortar retail stores. Within our store footprint, we currently have 21 mobility centers launched, and their performance is tracking ahead of our internal expectations.

At the end of the quarter, our store count remains unchanged at 42, and we continue to actively evaluate new store locations. We signed a new lease agreement for our second store in Puerto Rico, which we anticipate we'll open in the coming months.

With a number of solid category performances in the quarter, tablets and tablet accessories were up significantly, reflecting our efforts to build out this category. Full featured laptops and desktops also remained very strong, while our core TV offering was up modestly.

Turning to the Industrial Products Group, Global Industrial continues to deliver strong results, with sales up 28% from the third quarter of last year. Industrial operating income grew to $10.2 million, an increase of 29%. We ended the quarter, the third quarter, with more than 400,000 total Industrial SKUs, an increase of over 27,000 during the quarter.

We continued to leverage our eCommerce infrastructure to expand our product and category offering, and are pleased with the performance of our Canadian website. Additionally, we added a new call center in the western United States to accommodate our growth and better serve our clients in that region.

Consolidated gross margin for the quarter was 14.6%, versus 13.4% last year. This increase was driven by our growing industrial sales, select product pricing decisions, improvements in our freight margins, and improved inventory management.

Total SG&A expense was 12.4% of sales in the quarter, versus 11.6% in 2010. This increase resulted primarily from strategic investments in B2B headcount, which requires a ramp up period, as well as increased net advertising spend.

Charges related to the investigation and settlement with a former executive in the quarter were $0.4 million on a pretax basis, or $0.01 per diluted share after tax.

Total operating margin was 2.1% this quarter, versus 1.4% last year. Excluding one-time charges, total operating margin was 2.2% this quarter, versus 1.7% last year.

The effective tax rate for the quarter was 38.0%, an increase from 37.3% last year, and an increase from 30.2% in the second quarter of the current year. This higher quarterly rate reflects the impact of our latest projection of full year taxable income. Our third quarter historical results, and our projection for the fourth quarter, indicate that the mix of our taxable income has shifted to countries that have higher tax rates than had we anticipated earlier this year.

Earnings per diluted share was $0.29 for the quarter. We continue to proactively manage our balance sheet and substantially increase our net cash position in the quarter, primarily the result of net income for the quarter, and balance sheet management.

As of September 30, our balance sheet included $335.7 million of working capital, an increase of $34.8 million from the prior year, and $126 million in cash and cash equivalents, an increase of $34 million from the prior year.

The current ratio at the end of the quarter was 1.8 to 1, and at September 30, our short-term debt totaled $2.4 million.

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

Thank you. (Operator instructions) Our first question comes from Anthony Lebiedzinski of Sidoti & Company. Your line is open.

Hi, good afternoon. The consumer channel has been weak for some time. What are your plans, say -- I would say, here, you -- here we are entering the critical holiday season. So what are your plans to try to revive that segment? And then I'll have another question after that.

Sure. Well, one thing you have to remember also about our multichannel business is, that we take the web customers and mine them for our B2B sales reps to use. So there is a migration, as we take those customers, those B2B customers from the Web, and put them into B2B, where we are managing the account, experienced growth in the account. So there's that first piece of it.

The second thing is, it's obviously, you know, it's a competitive environment on the Web, and we have to respond to that. And we've identified some initiatives, as we've talked about in the past, on -- that will allow us to be more competitive on the Web going forward. But it is a competitive market out there.

Okay, and on previous calls, you talked about the sales centers, how you have ramped up your headcount, and you said that typically takes about six months for sales reps to become productive. So now that we've gone a couple of quarters already with that, I mean, what are your plans going forward? Are you looking to -- sort of stop the hiring of additional sales reps, or do you feel comfortable where you are, sort of -- what are your strategic thinking on regards to that?

Well, you also have to remember that seasonality -- there is a seasonality to wanting to hire sales reps. So if you can imagine why, you really don't want to hire sales reps in the fourth quarter, as the landscape changes.

But we did ramp up, and we are seeing the productivity out of these sales reps, as we previously discussed about the ramp up period, so we are seeing the productivity on them increase. And we will be growing our headcount going forward. I mean, it's the part of our business that's doing very well, and we're going to continue to invest in it.

Okay, and at the end of the quarter, your balance sheet is in good shape over here. You had the net cash of about $118 million. I just was wondering if you could just comment on the -- what you expect to be using that cash for, and obviously, are you looking at a potential buyback, or perhaps a special dividend?

You know, it's something that the Board discusses pretty much every Board meeting, about the cash and what we're going to do with it. And right now, we're discussing it again as we meet. And we have no particular plans at this point, but we like having the cash on hand, especially in a competitive environment like this, for opportunistic buys of inventory, acquisitions of competitors, and such.

So there is a lot of advantage to having a very strong balance sheet in this type of economy.

Okay, thank you.

Thank you. (Operator instructions) Our next question comes from [Andre Gardner] of Argos Management. Your line is open.

Thank you. Did you say in the prepared remarks that you have a total of 42 stores now?

Yes, that's correct.

Okay, and is the plan to put these mobility centers in all of the stores?

All of the stores that the store footprint is logical, that they can fit in there. You know, we have stores that average about 22,000 square feet, and that's an average, so we have some that are larger, some that are smaller. We have some leases that are later in their life, so there's a handful of stores that we might not ever put them in.

But on an ongoing basis, other than those kind of considerations, the plan is to put the centers in all the stores.

Okay. And can you comment a little bit on what the results have been, or what you've seen with the 21 mobility centers you have so far?

We don't specifically break down that level. We did say that we do -- have found that they're meeting -- exceeding our internal expectations on the ramp up. But like any new store or any one of those kind of initiatives, there is a ramp up period. They don't -- you know, they're not profitable on the first day you -- you know, you open them up.

Right, okay. And I just was looking at the holders of the stock, and it appears that Bruce and Robert Leeds have sold a combined 3 million shares over the -- I guess, over the last, what six months? Can you comment on that?

I think you're probably misinterpreting that. The Leeds have not sold shares for -- longer than I've been here, so I think based on their personal financial planning, shares get moved in and out of various trusts and things like that, but there's been no stock sales.

That's not a sale? Okay. I'm just looking on Bloomberg, it -- okay. Thanks.

Okay.

Thank you. Our next question comes from David Strasser of Janney Capital Markets. Your line is open.

Hi, good afternoon, Richard and Larry. This is (inaudible) from David's team.

Hi, how are you?

Hi. Good, good. My first question is about weakness in consumer Web sales. Just wanted to check or ask if the decline is entirely from the Company websites, or are you guys seeing a bigger decline in sales by a third party, which is like -- you know, you still buy at Amazon and Sears Marketplace?

And my second question is about third party selling, which is, is it still profitable, or other -- how profitable it is to sell by a third party after paying like 6% commissions on PC, like 8% on TV, and the shipping expense related to it? Thank you.

Well, looking at the third party marketplaces, one nice thing is that we constantly analyze is the profitability of being on there. And sometimes we have the same questions that you have, whether it makes sense for us. But as we monitor it, as of this moment, we think that it continues to make sense.

The -- you asked for whether the weakness is on the -- our own Company websites, or on these third party marketplaces. It actually is, across the board, a smattering of yes and no, because the -- there's some categories that do well on the marketplaces and vice versa. And so it's really a hard answer to -- because they give you in totality. But in totality, we're continuing on the marketplaces. So, I mean, I guess that's really the -- to let you know what we're thinking.

Oh, great. I just have one more follow up. Like if you look at product categories, consumer electronics was down in sales dollars, and I thought TVs were up in the prepared remarks. What was the main driver, if TVs were (inaudible)?

The categories that were down were GPSs and cameras, as you could imagine, with everybody starting to get smartphones, where the camera -- the quality of the camera in the smartphone has improved so much, and the GPS being built into the smartphone is there. These categories are going to suffer, so it's not unexpected. But it just is what it is.

And as we look at certain of these categories, like cameras is a good example, part of the camera category that really suffered was the point and shoot cameras. And so, we need to move into more higher end type cameras, as an example of our strategy.

Got it. Thank you very much.

Thank you. I'm showing no further questions in the queue at this time.

All right, well, thank you, everybody, and we look forward to announcing our fourth quarter and end of the year results. Thank you.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect, and have a wonderful day.