Global Industrial Co (GIC) 2014 Q2 法說會逐字稿

Presentation

Good Day, ladies and gentlemen, and welcome to the Systemax Inc. Second Quarter 2014 Financial Results Conference Call. (Operator instructions.) As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Mr. Mike Smargiassi. Please go ahead.

Thank you, Operator. Welcome to the Systemax Second Quarter 2014 Earnings Conference Call. I'm here today with Richard Leeds, Chairman and CEO of Systemax, and Larry Reinhold, EVP and CFO.

Today's 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 will now turn the call over to Mr. Richard Leeds.

Good afternoon, and thank you for joining us today. In the second quarter, all three of our B2B channels delivered top line growth and an improved bottom line on an adjusted basis. We also made additional progress on reducing the losses of our consumer business. On a consolidated basis, we posted modest revenue gains, improved our gross margin, and generated positive adjusted operating income for the second consecutive quarter.

The industrial products group delivered another quarter of outstanding performance as we continue to execute on our growth initiatives and strengthen our position in the market. Revenue increased 20% and adjusted operating income grew 16% as we continued to invest in our new and emerging categories, which typically generate lower gross margins until volume purchasing benefits are obtained.

Industrial is benefiting from growth across all product lines as we continue to expand our SKU count to enter new product categories. In the quarter, we launched a number of improvements of our primary global industrial dotcom website, which has been well received by customers. These changes significantly enhance the user experience with improved search and recommendation capabilities, streamlined navigation, and more robust account management tools. In addition, we have hired additional sales and support personnel, including subject matter experts in selected product categories which provide additional value to our customers.

In our technology product segment, both our EMEA and North American B2B channels delivered improvements in revenue and in adjusted operating income as we showed progress on a number of initiatives. Now, our EMEA technology business's performance was mixed across both large and small markets.

As previously announced, we further strengthened our operations with the acquisition of SCC Services in the Netherlands. The addition of SCC is a strategic and highly complementary fit that expands our presence in existing markets and improves our position as a single-source value-added IT reseller. We believe that our combined operations make us the number one player in the Dutch market.

SCC brings an impressive customer list, enhanced vendor accreditation, and a suite of service offerings including remote network monitoring, logistics and assembly, customer data center network design and implementation, and diagnostic and help desk services. This provides us with new and expanded service offerings that we can provide to existing customers and [that hopefully will] serve as a foundation for the expansion of similar services in other markets. We welcome our new SCC colleagues and customers to the Systemax family.

Our North American B2B technology channel increased its revenue and expanded both gross and operating margins as we improved leverage in the business. We're pleased with the traction we have seen in the first half of the year as we continue to execute on initiatives across our operations, including improvements of our IT platforms, an increased focus on targeted marketing, as well expansion of enterprise product offerings.

In our North American consumer technology channel, we saw improvement in the rate of decline in the quarter. However, our performance remains weak and the operating environment is challenging. We remain very focused on bringing this business back to sustained profitability, and efforts to optimize our performance are ongoing.

In summary, our combined B2B businesses are performing very well, with revenue growth over 10% in the second quarter. Industrial is on pace to generate more than $500 million in revenue in 2014 and continues to successfully execute on its growth opportunities. In our B2B technology channel, we are encouraged by the recent trends in North America, and in Europe we are strengthening our value-added solutions offering and building a pan-European infrastructure to more efficiently support our operations and drive future growth. We continue to maintain a healthy balance sheet and, across the Company, we are working hard to bring additional value to our customers and improve our consolidated performance.

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

Thank you, Richard. Looking at our results on a consolidated basis, second quarter 2014 total sales were $831.1 million, an increase of 3.2% and up 1.4% on a constant currency basis compared to the second quarter of 2013. Our performance was led by strong growth in our industrial products group and solid performance from our North America B2B technology business, which was partially offset by softness in consumer technology.

Looking at our revenue by channel, second quarter B2B channel sales were $626.1 million, an increase of 10.1%, or an increase of 7.4% on a constant currency basis as we once again delivered growth in all of our B2B businesses. Our consumer sales were $205.0 million, a decrease of 13.5%, or 12.9% on a constant currency basis, an improvement from the rate of decline we have recorded in recent quarters.

Turning to our reporting segments, the industrial products group increased revenue 19.8% year-over-year to $142.1 million as we benefited from solid performance in most core product line. Gross and operating profit showed strong double-digit increases, highlighting the leverage of the business even as we continued investments to support our growth, strengthen our sales teams, and enhance our technology. At the end of the quarter, global industrial SKUs totaled almost $1.1 million.

Sales for our technology product segment, which includes our European and North American operations, increased 0.3% to $687.6 million and decreased 1.8% on a constant currency basis, while non-GAAP operating loss was $6.9 million, a 12% improvement from last year. In the quarter, special charges totaled $6.0 million, primarily costs associated with our transition to our European shared services center.

Looking at our technology group segment on a geographic basis, in Europe, revenue grew 9.1% in the quarter. Revenues were significantly impacted by the strengthening of European currencies against the dollar in the quarter. On a constant currency basis, revenue grew 2.4%. The SCC acquisition accounted for about 1.6% of this sales growth. Gross margin expanded on a consolidated basis and adjusted operating loss narrowed over the prior year.

SG&A increased in absolute dollars but was flat as a percentage of sales as we continue to see a temporarily -- overlap in costs due to the transition of functions to our shared service center. We remain on track to complete this transition next year and currently have almost 400 employees at the Center. We have established all core operating functions in Hungary and, moving forward, we expect additional hiring will be much lower than it has been in recent quarters. Special charges in the quarter were $5.2 million comprised of severance, as well as other recruitment costs in our shared service center.

In North America, our technology product group's revenue declined 4.9% for the quarter, or 4.3% on a constant currency basis, driven by weakness in our consumer channels. Our North American technology B2B channels delivered 5.5% revenue growth in the quarter, which was sequentially improved over the 1.6% growth in the first quarter. We expanded gross and operating profit as we were able to grow our product margin and lower our cost basis as a percentage of sales.

In our North American consumer technology channel, sales remain weak but we did see an improvement in the rate of decline on both a year-over-year and sequential basis. In retail, we ended the quarter with 34 stores, unchanged from the end of the first quarter and compared to 39 stores in Q2 last year. In total, this store count reduction accounted for over a third of the 13.5% overall decline in consumer sale. We continue to review and evaluate the performance of our retail stores on an ongoing basis and as their leases come up for renewal.

Looking at our consolidated North American technology operations, gross margin was flat, SG&A was reduced, and we further narrowed our operating loss. We remain focused on the execution of our improvement efforts with a goal of returning to profitability.

Consolidated gross margin improved to 14.8% from 14.4% 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 moderate improvement in gross margin in both our North American and EMEA technology businesses. Consolidated SG&A increased 2.9% in the quarter and was roughly flat as a percentage of sales. Our SG&A spend reflects planned investments in our industrial products group in support of its growth efforts and in Europe as we continue our transition to a pan-Europe operating model. This was offset by reduced expenses in North American technology.

Consolidated non-GAAP operating margin improved to 0.2% compared to negative 0.3% last year. Non-GAAP operating income was $1.6 million, an improvement of $3.8 million from the loss of $2.2 million last year. As of June 30, our balance sheet included over $338 million of working capital and approximately $153 million in cash. The current ratio at June 30, 2014 was 1.7 to one and total debt was $4.1 million.

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

(Operator instructions.) Anthony Lebiedzinski from Sidoti & Company.

Good afternoon, gentlemen. First, as far as the industrial product segment, [there's] clearly another strong quarter there. Can you talk about what you expect for your SKU count at the end of the year? And also, previously you've talked about improving sales rep productivity. Did you already see that in the quarter, and what are your thoughts on that?

Sure. Hi, Anthony, it's Richard. We continue to grow the SKU count. Obviously it's like -- kind of almost like the lure of high numbers, but we have identified a number of SKUs that'll get us through another million SKUs that -- let me rephrase that -- we've identified another million SKUs that we could put up on the site. Hopefully we'll be able to get them up this year. Sometimes it's based upon how long it takes, might be a little bit longer, might be a little bit less, but we have clearly identified those.

Rep productivity is [the] ongoing project for us in trying to get that up. We have a number of initiatives both on the account basis and on the rep basis to get that to grow, as well as we've identified a whole other world of accounts that we could go after. So, there's still a lot of opportunity there.

Okay, great. And just as a follow-up to the SKU count, so are you looking towards more categories, or is it just deepening the product assortment within the product categories that you have?

So, it's a combination of both, okay? So, we have -- in the emerging categories that we have, there's still a tremendous amount of opportunity to add items. In our legacy categories, we pretty much have reached the saturation point, and we only have a small amount of fill-in to do, as well as we have -- as well as having additional categories that we could add.

I just got handed a note that I miss-spoke on the million -- when I said a million that we've identified, it's highly unlikely that we'll have a million up this year, okay? It's a million over time.

Yes, Anthony, this is Larry. Historically, we've -- over the past couple years, I think we said we've been adding 4,000 or 5,000 a week. We added 250,000 -- works out to be about 250,000 a year. That's what we've done. We'd like -- our industrial team can certainly deliver that pace, and higher, okay?

Okay, got it. And As far as the tech business is concerned, within the specifically North American consumer segment, I know you have reduced losses. I imagine part of that is store closings, and can you talk about where you are with your store count now versus a year ago, and what other steps did you take to reduce your losses in the consumer tech segment?

Yes. We didn't close any stores in the quarter, as we said. Our store count stands at 34 currently. It was 39 a year ago. But, in terms of the -- we've [had] a lot of attention to reducing the costs and losses in our consumer businesses, and I think that's paying off. It's not where it needs to be, but we've substantially reduced the losses. And of the declines in that business, a substantial portion of them came from these stores that we did close, the five stores over the past year.

Okay, that's helpful. And also looking at the acquisition environment, I know you just made what sounds like a nice acquisition in the Netherlands. Is it safe to say that you're looking for additional acquisitions in Europe? What's your appetite for additional deals?

So, yes, I mean, we're always looking for strategic and the right fit of acquisitions, and we're always -- I mean, depends upon the deal, but we're always keeping our eyes open for the right deal.

And Anthony, that's part of -- we try to maintain [hard] a healthy cash position in the Company for all those reasons.

Right. And so, speaking of cash position, you've been -- with this acquisition, you still have a sizable cash position, and I think in the past you've talked about having a cushion of around $100 million in cash. So, you're well in excess of that as of the end of the second quarter. So, are you looking at potentially doing a special cash dividend as you have done periodically in the past? I mean, what are your thoughts on that?

As in the past, we look at it every quarter. We look at where we stand with our vendors and with our potential acquisitions. And currently, we like our cash position right where it is, and we'll continue looking at it on an ongoing basis.

Okay. Well, thank you very much.

Thank you.

Thanks, Anthony.

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Richard Leeds for any further remarks.

Thank you for listening to our call, and we look forward to speaking to you next quarter.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.