Global Industrial Co (GIC) 2012 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Systemax Inc.'s Third Quarter 2012 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. (Operator Instructions) As a reminder, this conference call is being recorded today, November 1, 2012.

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

Thank you, operator. Welcome to the Systemax third quarter 2012 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 and Quarterly Reports on Form 10-Q. 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 2012 earnings call. Overall, our third quarter performance was similar to the trends we witnessed in the first half of the year with a solid performance from our B2B operations, which are more than offset by continued softness in the consumer environment. Across the Company, our management teams are focused on making operational improvements with an eye on both our top and bottom line performance.

In addition, we continue to review our operations from a strategic standpoint to ensure that we are optimizing our performance and competitive position. In this regard, today we announced three initiatives, which I'll talk about in a moment. Our operating loss for the quarter was $1.9 million, including special charges of $2 million. Most of these charges were patent litigation settlements with patent controls.

Excluding these special charges, we delivered breakeven operating income for the third quarter, as we did for the second quarter. Our B2B channel continues to deliver strong results led by our Industrial Products Group, which recorded second consecutive $100 million plus revenue quarter and tenth consecutive quarter of 25% plus organic growth.

Industrial is seeing rapid growth as we expand our products and category offerings, which are fueling sales increases across the business. To support our product expansion, we oftentimes drop ship product as we evaluate demand, which tend to lower our consolidated product launch in the short term. However, our new distribution center significantly expands our capacity to support our growth and should over time drive improved margins as we bring these products into inventory and capitalizing our supply chain model.

Industrial's bottom line also reflected operational challenges around freight where we did not optimize our performance. We've already identified and are executing on a number of opportunities to improve freight margins going forward and do not anticipate an erosion of freight margin that has impacted our technology business. Further, we'll continue to make prudent investments in our distribution and call centers to drive our growth and long-term profitability.

Moving to B2B Tech, Europe once again outperformed the market with 11% revenue growth on a constant currency basis, while in North America we had a low single-digit revenue decline. On the consumer front, the environment remains challenging. Demand for consumer electronics and PCs remains tepid across the industry. In addition, buying patterns during the quarter were impacted by anticipation of the recently launched Windows 8 Operating System, a trend we have seen in the past with other operating system releases.

Turning to the operational announcements we made today, first, we'll be consolidating our United States consumer technology brands under the TigerDirect banner. For the past several years, we have operated under three distinct brands; TigerDirect, CompUSA and Circuit City. Our CompUSA and Circuit City acquisitions were attractive transactions that provide a tremendous value to the Company.

We were able to acquire these brands with minimal capital investment. They significantly expanded our customer base with addition of customer lists and transaction histories and the case of CompUSA were an integral part of our initial retail store expansion strategy as we selected 16 of old CompUSA's better performing stores to be part of the transaction.

We expect to record one-time non-cash impairment charges related to intangible assets of CompUSA and Circuit City of approximately $34 million in the fourth quarter of 2012. Having harvested the value provided by these acquisitions, we'll be consolidating these brands on the TigerDirect, our largest and leading brand in the United States.

We firmly believe this is the right approach given the evolution of the consumer electronics market, and creates a single, unified consumer platform that will drive efficiencies in advertising and customer acquisition going forward. This will be a smooth transition of the CompUSA website, and many of our retail stores are already co-branded with TigerDirect. Our web infrastructure is well integrated and our logistics and distribution platform already serves all our brands. This will enable us to focus our advertising efforts around the TigerDirect brand.

Second, after an extensive evaluation of our PC manufacturing operations, we'll exit this business and wind down production in the fourth quarter of 2012. This business had been impacted by competitive pressures and recent market shifts, which necessitate this change. We will continue to support and service our previously sold private-label PCs. We expect revenues from this business [to be replaced] by sales from other leading PC vendor partners. The opportunity and benefit of strengthening our strategic vendor relations within the sub-categories will provide improved profitability of between $1 million and $2 million pre-tax annually.

Third, we've taken a number of steps to support the expansion of our European technology business and position us to capitalize in the growth opportunities we see in the region. We've already centralized many of our operations, strengthened our country managers and built out a senior pan-European management team.

We will be opening a new shared services center in Eastern Europe next year, which will provide certain administrative and back office services. This new facility will help drive operational efficiencies and better serve our growing pan-European operating strategy. We expect that one-time exit, severance and start-up cost for the shared services center, as well as other cost reduction initiatives in Europe will aggregate between $14 million and $16 million pre-tax. After implementation, we expect to realize a reduction in our cost structure between $9 million and $11 million pre-tax on an annual basis.

In conclusion, in a tough environment, we delivered a breakeven quarter at the operating income line, excluding special charges. We continue to make progress on our efforts to improve our operations across multiple fronts, from our IT initiatives to expanding our private label, [buying], improving our service offerings and capitalizing on our new industrial distribution center.

We're actively working to address that challenges and strengthen our competitive position, which allow us to drive our performance as the current environment improves. We have a solid core business that is diversified by market, channel and customer.

We're capitalizing on our growth opportunities in Industrial and Europe and look forward to the holiday shopping season. We have an extremely strong cash position and are well positioned to continue to invest in our B2B businesses, which are seeing solid growth.

Thank you. And with that, I will pass the call to Larry.

Thank you, Richard. Our third quarter 2012 consolidated sales were $846.3 million, a decline of 6% and off 3% on a constant currency basis compared to the third quarter of 2011. Results for the quarter were driven by strong growth in our B2B operations, which was more than offset by softness in our consumer business.

Turning first to our reported sales channels. Third quarter B2B channel sales were $526.8 million, an increase of 4% or 9% on a constant currency and same-store basis. Our consumer channel sales were $319.5 million, a decrease of 19%. Consumer sales were off 20% on a constant currency and same-store basis.

Turning now to our public reporting segments, the Technology Products Group sales declined 10% year-over-year to $734.7 million, which was a 7% decline on a constant currency basis. Operating loss was $3.9 million, including special charges of approximately $2 million. Excluding the special charges, the Technology Products Group's operating income declined by $15.9 million. This decline is due primarily to weak consumer sales in North America.

Our Industrial Products Group sales increased to $110.4 million, up 27% compared to the prior year. Industrial's operating income was $7.6 million, a decline of $2.8 million or 27%. The decline was primarily due to an increased volume of lower-margin drop ship products in support of our expanded SKU count, a reduction in freight margins and costs related to the second quarter 2012 opening of an additional warehouse and B2B call center.

Looking in more detail at each of our reporting segments' performance during the quarter, the European Technology Products Group delivered strong revenue growth on a constant currency basis with our three largest markets, the UK, France and the Netherlands, driving the increase. The majority of our European operations recorded top line gains on a local currency basis, and overall we believe we continue to outperform most of our markets.

SG&A has increased as we have recruited a new leadership team to support our pan-European structure, which has directly impacted operating income in the quarter. However, we expect to realize cost savings as these investments begin to pay off. We continue to make investments to improve operating efficiencies and drive growth, while evaluating expansion opportunities in the region.

Our North America Technology Product Group's revenues reflect a soft consumer business performance and a modest single-digit decline in our B2B operations. On the bottom line, operating income declined significantly, primarily driven by the consumer business. Consumer revenue was impacted by weakness across all channels and product categories. In the brick-and-mortar channel, we chose not to renew a lease on an underperforming store in Texas. And our store count now stands at 41.

Within the North American B2B business, we experienced low single-digit declines in revenue. We saw weaker demand in our PC category, which had shown solid B2B growth in previous quarters. The Industrial Products Group had another record quarter with growth across product categories.

Our performance was highlighted by a web outbound in Canadian operations. At the end of the quarter, industrial SKUs totaled 612,000, up 6% sequentially and up 26% compared to the prior year-end. Industrial continues to deliver innovation and enhanced functionality to its website and mobile capabilities. Its website recently won the coveted B2B Standard of Excellence Award from the Web Marketing Association and we are seeing rapid growth in mobile traffic.

Consolidated gross margin was up slightly on a sequential basis, but declined 50 basis points to 14.1% from 14.6% in the prior year, as a result of an increase in promotional freight campaigns, increased price competition, and geographic and category mix shift within our businesses.

Overall, SG&A reflects planned investments to support our strategic initiatives, partially offset by spending cuts in the North American Technology business. As a percentage of sales, SG&A increased by 170 basis points from the year-ago period, which was primarily the result of investment in new leadership team to support our pan-European structure, decreased cooperative funding by vendors in North America and increased web advertising expenditures. Consolidated operating margin was essentially breakeven compared to 2.1% in the prior year.

Special charges incurred during the quarter were $2 million on a pre-tax basis, or $0.03 per diluted share on an after-tax basis. Operating loss was $1.9 million, compared to operating income of $19.3 million in the third quarter of 2011.

Pre-tax loss of $2.1 million compares to income of $17.3 million in the third quarter of last year. The effective tax rate for the third quarter of 2012 was not meaningful due to the reversal of a valuation allowance of approximately $15.1 million in the Company's French subsidiary. Demonstrated and projected profitable results in the Company's French operation caused the valuation allowance to be deemed no longer necessary.

Net income totaled $13.9 million or $0.38 per diluted share for the quarter, inclusive of a $0.41 per diluted share benefit from the reversal of valuation allowances. As of September 30, our balance sheet included $368.3 million of working capital and $133.5 million in cash, an increase of $36.2 million from December 31, 2011 reflecting our efforts to proactively manage our balance sheet. The current ratio at September 30 was 1.9 to 1 and total debt was $8.8 million.

With that, we'd like to open the call to questions.

Thank you. (Operator Instructions) Anthony Lebiedzinski, Sidoti & Company.

First, when looking at the initiatives that you have outlined, you have provided benefits for the PC manufacturing business exit and also the European shared services center. Could you perhaps give us a sense of the expected benefit from the consolidating of the US technology brands? I think, Richard, you mentioned advertising efficiencies, so if you could give us perhaps some color about expected benefit, that'd be great?

So right now we're managing these three brands and what we've decided to do is basically put all of our efforts behind one brand. And so any of the expenses that we -- of the advertising expenses that were going towards the other two brands, we're going to swing over and put them towards Tiger and under the belief that that's going to help us grow the Tiger sales.

Okay.

So we're not really doing that. Second is, we're going to gain efficiencies from having everybody focus on one brand as opposed to working on the three brands. We don't expect to have any reduction of head count from that focus. We're just going to take everybody and swing them over to again growing the one brand.

Okay. That's helpful. And could you give us a sense as to the annual revenue run rate of the PC manufacturing business?

We haven't disclosed historically the specific revenues associated with any brand or a line product category. So the Systemax brand, it certainly is one that we sold primarily through our own sales channels. I would tell you that revenue is certainly well under 2% of total revenues and we anticipate that it will -- by switching our effort to focusing on primarily Tier 1 vendor partners that will be more profitable and we are certainly going to make every attempt to keep all of that revenue, but just shifted to our partner programs.

Okay. And any sense as to the expected timing of opening the new European shared service center?

So we're looking at a time frame that's going to evolve between the first half of the year. [We have] not identified the country that we're going to be locating it in. So we're somewhat in our preliminary stages, but we will be updating you guys each quarter as we go through this.

Okay. And you did mention that the third quarter was impacted by some consumers waiting for Windows 8. So now that it's here, can you give us -- I know it's still kind of perhaps maybe early, but if you could provide any comment as to whether you expect some of those sales that you lost perhaps that to come back to a certain extent in the fourth quarter?

Well, we do. I mean Windows 8 is -- well, I can't say Windows 8, but any new operating system when it's been released it's always been a slowdown in advance of it, and then once it gets released there's been pent-up demand, the biggest one obviously was the switch from Vista, but we're not expecting in order we have that same type of bump. But as the new laptops and new desktops come out with -- especially the ones with touch, we expect that we'll see customers buying those products and they are coming to market almost daily now between now and Black Friday and/or the end of the year.

Okay, that's helpful. Last question, as far as the larger distribution center for the Industrial Products, have you already seen some benefits from actually carrying more inventory in-house?

Yes, so this has always actually been our model of where we -- than we talked about this in the past where we start up with drop ship, low-margin and see how the product sells. Once it starts to sell, we go and we negotiate a better price for stocking it, we bring it into stock and that's the cycle that we're going through now. And we're continuing to go through those as we continue to add more and more products. It's actually a really nice business model because you're taking the risk out of it and then you get to see and have your power of going to negotiate with a vendor based upon the sales [that you have] some drop ship.

Okay. Thank you.

Thanks.

Dorsey Gardner, Kelso Management.

Yes. Any thoughts on the retail stores that you've opened, are you adding to the stores toward the numbers? And you were starting some kiosks or some ways of selling telephones and what you call iPads or tablet computers. Has that been successful or it's been a tough business for people like RadioShack and just wondered what your thoughts were?

Yes. So we added sales of telephone and mobility items to most of our stores, not to all of them because it's mostly the United States first. And we've had relatively slow start in this business and it is continuing to build. We still think that's a growth area for us because we started from zero and are working our way up as opposed to kind of the competitor that you mentioned who had a very strong business and is now having some issues with that. But that seems -- that still is an opportunity for us to grow that business.

And how about adding new stores?

I'm sorry, adding new stores, we are continuing to evaluate the right number of stores for us to have. As we mentioned, we closed one store and as our leases come up, we're going to evaluate whether those store -- some of our stores are in the right location and are they the right mix for us and [we pretty all] might increase the number of stores if we have the right opportunity with lease values and location, but we typically don't disclose that.

Thank you.

Gentlemen, at this time we have no further questions in queue.

Okay. Thank you. We look forward to talking to you next quarter. Bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Good day.