Global Industrial Co (GIC) 2013 Q4 法說會逐字稿

Good day ladies and gentlemen and thank you for standing by. Welcome to the Systemax Incorporated's fourth quarter full year 2013 earnings teleconference call.

During the presentation all participants will be in a listen only mode. Afterwards you'll be invited to participate in a question-and-answer session.

(Operator instructions)

As a reminder this conference call is been recorded today March 4, 2014. At this, like to turn the call over to Mike Smargiassi, Brainerd Communicators. Sir, you may begin when ready.

Thank you.

And welcome to the Systemax fourth-quarter and full-year 2013 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.

I would like to highlight the non-GAAP metrics that are included in today's press release. The Company believes that by excluding certain recurring and nonrecurring adjustments from comparable GAAP measures, investors have an additional meaningful measurement of the Company's performance.

As a result, this call will include a discussion of certain non-GAAP financial measures. The Company has provided a reconciliation of these non-GAAP financial measures to their most Directly comparable GAAP measures in today's press release.

The press release is available on the Company's website and will be filed with the SEC in a form 8-K. This call is the property of and is copyrighted by Systemax Inc.

I'll now turn the call over to Mr. Richard Leeds.

Good afternoon and thank you for joining us today.

In the fourth quarter on a consolidated basis, we delivered solid improvements in both our gross margin and our adjusted operating margin. We benefited from the outstanding performance of our industrial products group, a strategic decision to focus more of our efforts on B-to-B channels, a tactical decision to not chase promotional pricing in our consumer technology business in the holiday selling season and the continued execution of our long-term initiatives across all of our businesses.

The industrial products group delivered another outstanding quarter with strong revenue growth, expanded operating margin and leverage of the bottom line. Our revenue performance was driven by new categories, solid results from our core offerings, as well as the expansion of our private-label and brand-name selections.

The utilization of our New Jersey distribution center continues to ramp and is delivering improving leverage. We recently launched a Mexican e-commerce website which follows on the success of our Canadian site which launched in 2011. This new global industrial site provides the Mexican market with a dedicated Spanish-language and local currency interface, providing for a much easier and convenient shopping experience.

Our technology products business performance remains disappointing. But we did continue to narrow the adjusted operating loss in the quarter from the year ago period.

Our B-to-B businesses in both North America and Europe saw improved revenue trends from the third quarter and made further progress on strengthening our performance. However, our consumer business remains challenged. Our immediate technology business improved it's quarterly revenue trends on a sequential basis and we delivered the modest increase in our gross profit from last year.

Certain geographies performed well. On an overall basis, our EMEA a business was soft in the quarter. Last year, we made significant progress in the transformation of our operations to a pan-European organizational structure. We opened our shared service center in Budapest and started the process of centralizing our back-office and support functions. This new center is ramping and today we have more than 250 employees.

The scaling of this center will continue through 2015. We will incur additional costs due to duplication in Hungary of certain local functions and other redundancies until completion of the transition. We expect these efforts will ultimately significantly improve our operating structure by lowering our costs and strengthening our ability to broaden our customer and vendor relationships.

We're also looking at opportunities to leverage our EMEA footprint and strengthen our position as a single source value-added IT reseller. In this regard, in December we entered into an agreement with a cloud service aggregator to provide our customers with access to the integrated cloud offering of communications and collaboration, back up and security and infrastructure solutions.

North American technology, our revenue performance was disappointing and reflects the very competitive and promotional consumer environment that was seen across the industry. That said, our focus on profitability continues to show results as we improved our gross margin, strengthened our freight performance, lowered SG&A and reduced our operating loss in the quarter.

North American B-to-B technology had a strong bottom line performance as we delivered significant improvement in gross margin and gross and operating profit, despite a small decline in revenue. Our results reflect the early success of our initiatives and we are encouraged by the improvements we are seeing in our B-to-B operations.

Consumer technology revenue declined significantly on a same-store basis in the quarter. Similar to many in the industry, our top-line performance was challenged.

The holiday season was highly competitive and we made a decision not to chase promotional product pricing. While this did result in some additional top-line softness, it allowed us to drive improvement in gross margin.

Our efforts to improve our results are ongoing. From expanding our category and SKU offerings to strengthening our IT infrastructure. We also continue to look for opportunities to expand and broaden the reach of our brand on a cost-effective basis, and recently started selling in a number of industry marketplaces to reach new customers and capture incremental sales.

In summary, we made significant progress in 2013 in strengthening our competitive position, enhancing our operating performance, and improving our operations as we work towards sustained profitability. We still have more to do and we are focused on expanding our B-to-B business, while operating a consumer business that is profitable. Our balance sheet remains very strong with $181 million of cash which provides us with significant flexibility to execute on a strategic plan.

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

Thank you, Richard.

Turning to our consolidated revenue, fourth-quarter 2013 total sales were $874.2 million, a decline of 6.5%, and off 7.1% on a constant currency basis compared to the fourth quarter of 2012. Sales for the quarter were led by continued growth in our industrial products group, which was offset by weakness in our North American technology businesses.

Looking at our revenue by channel, fourth-quarter B-to-B channel sales were $559.0 million, an increase of 6.1%, or an increase of 4.9% on a constant currency and same-store basis. Our consumer sales were $315.2 million, a decrease of 22.7%, or 21.4% on a constant currency and same-store basis.

Turning to our reporting segments, the industrial products group delivered a revenue increase of 26.0% year-over-year, to $123.9 million with growth in new product categories and a solid performance in core offerings. Gross profit increased in the quarter and we delivered gross margin gains as we continue to benefit from the further utilization and ramp-up of our New Jersey distribution center.

During the quarter, we expanded our stock SKUs, improved inventory turns, and grew our private-label offerings. We continued to deliver strong improvements in operating leverage with non-GAAP operating income growing over 30% to $9.5 million.

At the end of the quarter, global industrial SKUs totaled $880,000, up 5.4% sequentially and up 31.2% compared to a year ago. Sales for our technology products segment, which includes our European and North American operations, declined 10.4% to $748.9 million and 11.1% on a constant currency basis, while non-GAAP operating loss was $0.2 million, a significant reduction in the loss from last year.

In the quarter special charges totaled $5.9 million, including additional cost associated the transition to our European shared services center. Additional lease accruals associated with the closure of underperforming retail stores earlier in the year and additional charges related to the write off of our remaining CompUSA assets following the disposition of the brand.

Looking at our technology group segment on a geographic basis, in Europe revenue grew 1.6% in the quarter and on a constant currency basis declined 1.5%. SG&A increases reflect a temporary overlap in costs as we continue the transition of functions to our shared service center. One-time charges in the quarter equaled $1.7 million including severance charges, as well as other recruitment costs in Hungary.

In North America our technology products group's revenue declined 16.7% for the quarter. This decline was primarily in our consumer channels, particularly online, and in the consumer electronics product category. We believe this decline is attributable to increased price competition and a highly promotional atmosphere in Q4 that we decided to avoid.

We are executing on a number of improvement initiatives across our North American operations and significantly expanded our gross margin, improved our freight performance, and reduced our as G&A spending by almost 16%. These efforts resulted in our adjusted operating loss being cut by more than 60%.

In retail we ended the year with 36 stores, unchanged from the third quarter. We continue to review and evaluate our stores when they come up for renewal, and in Q1 of 2014 we closed two stores which were at the end of their lease terms, bringing our current store count to 34. We remain focused on continuing to improve our online performance and capitalizing on our efforts to optimize freight and manage SG&A.

Consolidated gross margin improved to 14.8% from 12.9% last year. Key drivers of the increase included the growth of our industrial products group and the higher gross margin within this business unit, as well as our decision to focus on gross margin in North America technology and not chase low-margin consumer sales.

Overall, consolidated SG&A declined modestly, and reflects reduced expenses in North American technology, partially offset by investments in industrial products in Europe. As a percentage of sales, SG&A increased by approximately 70 basis points over last year, and includes planned investments to support our strategic initiatives, as well a reflection of the larger contribution from our industrial products group, whose business model mandates higher SG&, particularly in advertising.

Consolidated non-GAAP operating margin improved to be 0.7% compared to negative 0.6% last year. Nonrecurring and recurring adjustments during the quarter were $7.2 million on a pretax basis, or $0.13 per diluted share on an after-tax basis, using assumed tax rate of 35% for the quarter.

Non-GAAP operating income was $5.9 million, an improvement of $11.5 million from last year. GAAP operating results were a loss of $1.3 million compared to a loss of $46.8 million last year. GAAP net loss was $19.8 million, or $0.54 per diluted share, compared to a loss of $27.1 million, or $0.73 per diluted share in Q4 of 2012.

Current year GAAP net loss includes $20.5 million in one-time non-cash tax expense related to applying a valuation allowance to our US federal deferred tax assets. As a reminder, last year's GAAP results included approximately $39.9 million of special charges for the write off of the intangible assets associated with discontinued brands and the write-down of US computer manufacturing operations.

As of December 31, our balance sheet included over $345 million of working capital and over $180 million in cash. The current ratio at December 31, 2013 was 1.7 to 1, and total debt was $5.4 million.

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

Yes, sir.

(Operator instructions)

Our first question will come from Anthony Lebiedzinski with Sidoti & Company.

Good afternoon. First, the Industrial Products segment; that certainly was much better than what we had expected, looking at the revenue increase of 26%. I know you guys mentioned the increased SKU count. Other than that -- when you look at that segment, how should we think about that particular segment going forward?

Hi Anthony, it's Richard. We are actually feeling pretty good about that business. We have some good plans for it, as we mentioned on the call, we recently launched the Mexican site which is a very soft launch. We continue to grow our SKU count, and we have some other good growth plans in place. So we're feeling pretty comfortable about that business.

Okay. And then on the Technology side, I know you chose to be less promotional. It looks like that certainly resulted in the Company being able to minimize the losses there. But at some point -- at what point should we expect that to be profitable? There is certainly a lot of competition in the online electronics space. I'm not asking for a precise answer, but how should we think about the progress, and far as a couple of the things that you guys mentioned in the press release was that you are seeing some initial progress with some initiatives that you have in place in North America. Maybe you could talk about that?

Sure. The consumer business in the US remains to be a tough business. We have some very strong competitors that aren't necessarily concerned with making money, so that remains a challenge for us, and for the people in the industry. But, we are putting our emphasis on B-to-B and getting our consumer business to profitability.

That does not necessarily mean that we're going to be growing the consumer business, but it does mean that we're going to strive towards profitability in that. The consumer business though, is an excellent acquisition vehicle for our B-to-B business. As we find that small businesses like to buy from our sites and they like to come into our stores.

So those customers that are coming in through those two consumer channels, wind up being very good B-to-B customers for us as small businesses, and as they grow we get the service their needs. So that's really our strategy going forward is, continue to use the two consumer channels as acquisition vehicles for our B-to-B, and get the consumer business to profitability.

Okay. And Europe, still sounds like the ongoing consolidation into the service center in Hungary will continue through next year. Can you talk about what other things that you plan to do for the next year or so?

In Europe? Okay. So as you said we're going to continue to consolidate the back-office functions into Budapest. We're going to continue to be putting our ERP platform throughout Europe, so that gives some additional operational efficiencies from that. We are looking at increasing our sales rep count in selected markets.

Some of the countries that are lesser-performing countries, we have a motto where as we shift the back-office to Budapest, where we could become profitable in these smaller countries where we have struggled in the past, so there's a lot of benefits from us doing this consolidation. And then, we are putting an increased emphasis on selling services in Europe to our B-to-B customers over there. Remember that our B-to-B business in Europe -- or remember that our Tech business in Europe is primarily B-to-B business.

Okay. Then also just a couple of housekeeping items. As far as the tax rate, what do expect it to be 2014?

This is Larry. So it depends on the results. In the US, we have written up off deferred tax assets so you see, obviously, a very large charge in the quarter.

European businesses for the most part were in the low to mid-30%s in effective tax rate there. To the extent that we have earnings in the United States, we see a very low -- a low federal tax rate to zero, and then state taxes. So I think to be conservative you could certainly be looking in the 30% range.

Okay, that's helpful. And do you have what the CapEx was in 2013 and rough estimate for 2014?

I have the former. The latter, we don't. The former in 2013 was, I think, $13.7 million for the year. In formal guidance, I would expect that CapEx for next year would be in the same vicinity.

Okay great. All right, thank you very much.

Thank you, sir.

(Operator Instructions)

And it does look like we have an additional questioner in the phone queue, and it will come from the line of Andrew Fleming with Heartland Funds.

Hi guys, congrats on a good quarter.

Thank you.

As I look at the Company, it really looks like it is a tale of two cities here, with the Tech product and Industrial. Can you give us a sense of what reasonable growth rates for the two segments would be, as you think about 2014 and beyond?

Yes, certainly we have three different parts to the business. The Industrial business has grown organically very significantly over the past four years. I don't know what the CAGR is, but that's been somewhere around 20% of CAGR over the last four years.

As the Company has gotten bigger, the law of bigger numbers means it's difficult to keep things up. We have increased our channels. We have the marketplace that we opened up midway through last year, the new Mexican site.

Obviously all the expanded SKUs and some other initiatives. So we are certainly looking at double-digit plus kinds of growth in the future. I think that's what our longer-term expectation is.

In terms of our B-to-B business in the Tech segment, that business, as we have shifted it, at least on the top line to focus on more services as some of the products -- the PC industry is not as strong as it was, but we are adding services. So I think we would certainly look that growth in that business should certainly be in the high single digits and hopefully we'll do better than that.

In terms of the consumer business, as Richard said earlier, we want that business to operate profitably, again the business is here in North America and not so much anywhere else, and we want that to be a profitable business, serving consumers with the products that they want and to serve as an acquisition vehicle for our B-to-B sales agents.

Okay and if I just think in terms of the reportable segments, just Tech products and Industrial products, just to make sure I'm understanding you correctly, so plus double digits in Industrial products, and you're saying low single digits in Tech products, in aggregate?

In that B-to-B part of the Tech business. We can do better than low single digits, and we certainly have internal plans for that. And the consumer business will be wherever it shakes out via profitable business. But in Tech, B-to-B is much larger across our Tech segment than the consumer channels. Again, because Europe is literally almost all B-to-B and in North America Tech, B-to-B and consumer are similar sized.

Again, I'm trying to take a look at the Tech Product segment. It looks like you are very close to being breakeven on an adjusted operating income basis this past quarter. And I know you said you expect to be, or hope to be breakeven in that segment in 2014. Would that be coming first half of the year or second half of the year?

The earlier the better.

Are your expectations that could happen as soon as first quarter?

We are obviously thinking -- it all depends on performance. In Europe, we have -- certain countries have public sector year ends at the end of Q1, so if we do very well, we can have a very strong Q1 in some of our larger countries in Europe. We certainly hold our management teams to a high standard and we expect a lot out of them.

Then, if you think about nonrecurring charges in the Tech Products segment? What would be reasonable to expect for 2014?

Well again, we don't give specific forward guidance, but I think we will continue to have restructuring charges in Europe as we continue the consolidation effort of back-office functions in our shared service center in Hungary. And in terms of our North American business, we will -- we evaluate our stores, etc. as they come up. But right now, we are not anticipating large one-time charges in that business this year. We've already -- between Q4 of last year, when we took large non-cash write-offs of the intangible assets for Circuit City and CompUSA.

And then with the write-down of the PC manufacturing operation when we exited that. And this year, we had left the CompUSA and our Puerto Rico stores, and this year we changed those also to Tiger Direct so we had a further $3 million write-down on that. Those brand names are completely written off, so there is nothing left to take. I think that that's about as much color as I can give you on what we expect for the year.

Okay, so a big step down in one-time charges in the Tech Products segment in 2014 versus 2013?

The large write-offs last year were for those brands.

They're now in the rear view mirror?

Yes.

Okay. Okay great, thanks for the update.

Thank you, sir. And at this time, that does conclude our questions in the queue. I would like to turn the program back over to Mr. Leeds for any additional closing remarks.

Thank you everybody. We look forward to talking to you when we announce our next quarter's results.

Thank you, gentlemen, and thank you ladies and gentlemen. This does conclude today's call. Thank you for your participation and have a wonderful day. Attendees, you may log off at this time.