Global Industrial Co (GIC) 2014 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Systemax Inc. third-quarter 2014 earnings conference call. (Operator Instructions). As a reminder, this conference call is being recorded today, November 4, 2014.

At this time, I'd like to turn the call over to Mike Smargiassi of Brainerd Communications. Please go ahead.

Thank you, and welcome to the Systemax third-quarter 2014 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.

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 reoccurring and non-reoccurring 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. Our third-quarter results highlight the focus on growing our B2B channels. Our industrial products business delivered another strong quarter, and our North American technology B2B operations had a solid performance. This was partially offset by a disappointing quarter in Europe, on both a local currency, and excluding SCC Services.

On the consumer side, we reduced our rate of decline on the top line and improved our bottom-line performance. Our industrial products group has been a tremendous success story for Systemax the past several years, as we have organically expanded this business into a sizable and valuable asset for the Company and our shareholders.

That success continued into the third quarter, as we increased revenue nearly 14% despite an unusually cool summer in the Northeast, which impacted sales of certain seasonal products. While this growth is slightly lower than in recent quarters, Global Industrial is still growing much faster than the markets in which we participate, and we expect that to continue.

During the first nine months of the year, IPG has generated more than $400 million in revenue and $34 million in adjusted operating income. We continue to make significant investments in our industrial business as we look to capitalize on our growth opportunities and leverage our award-winning e-commerce platform.

On the product side, we are aggressively expanding our SKU count as we deepen our product assortment in certain categories, and add new categories to our offering. We are also investing in technology to enhance our demand forecasting, the search capability on our website, and solutions for managing our supply chain logistics and our customers' inventories.

We are also continuing to invest in our salesforce. We have hired additional subject matter experts who bring significant technical knowledge in specific categories, and are actively assisting our customers in their selection of Global Industrial products and services. We are also improving the productivity of our salesforce, as we drive customer engagement and broaden relationships with key accounts.

And we are prudently building out our infrastructure. We recently opened a warehouse in Ontario, Canada, to support our growth in this market. This new facility, which will stock our most popular SKUs, places us closer to most of our Canadian customers, resulting in quicker shipping and improved service levels.

In our technology products group, our North American B2B channel delivered another solid quarter, with increased revenues and expanded margin. This channel has delivered topline growth every quarter this year, and we remain pleased with the momentum we are seeing this business.

We recently launched a new B2B website, built on the same Web platform that has driven the success of our industrial business. The new website improves the customer experience through site optimization for all digital devices, customized portals, and enhanced capabilities specifically designed to meet the unique needs of our SMB and public sector customers.

We are also excited to be hosting our first B2B symposium, the TigerDirect Innovation: IT Conference and Expo, later this week at Marlins Park in Miami. This full-day event, which is part of our third annual TigerDirect Tech Bash, will focus on the latest technology trends and solutions in the B2B market, and include breakout sessions and demonstrations. This event will highlight the size, reach, and service offerings of our B2B businesses, our relationships with top manufacturers, and our 25-plus years of serving the SMB market.

In our EMEA technology B2B business, sales were up 10%. On a constant currency basis and excluding SCC Services, revenue declined modestly. We have seen weakness across most of our European markets, and particularly in the UK, where we've taken a number of actions to improve our performance, including the replacement of certain of its senior management team. The highlight of the quarter continues to come from our French operations, where we had solid performance, with double-digit increases at the top and bottom line on a constant currency basis.

In the quarter, we made additional progress on our efforts to expand our service and solutions offerings, and our MISCO UK operations achieved Cisco Gold certification. This achievement, coupled with the acquisition of SCC Services in the Netherlands, furthers our strategy of expanding our product and service solutions we bring to our customers, beyond the traditional products we've offered for decades. The service solutions typically have higher margins than traditional products, and have longer sales cycles, typically 3 to 6 months, and we've built a solid pipeline of business through these teams.

The ramping of our shared service center in Hungary continues as we build out its capabilities. While this initiative, coupled with the ERP implementations, have been challenging, with one-time costs in business impact exceeding our initial expectation, we're beginning to see the fruits of our labor. We remain confident that the shared service center and harmonized ERP solution will ultimately result in a lower EMEA cost structure and improved operating efficiencies in the long-term.

In our North American consumer technology channel, we continued to slow the rate of decline in the quarter, on both the top and bottom line. We remain focused on reducing the operating losses in this business, and building a profitable and sustainable operation.

In summary, our industrial products group is a valuable and expanding business. We will continue to make prudent investments to strengthen our market position and capitalize on our growth opportunities. Our North American technology B2B operations are performing well, having delivered revenue growth every quarter this year. And in Europe, we are strengthening our offering with the addition of new solutions capabilities, and building an infrastructure that will support our pan-European footprint and drive efficiencies in the long-term.

With a strong cash position, we are well positioned to continue to invest in our operations and capitalize on the opportunities we see in our markets.

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

Thank you, Richard. Looking at our results on a consolidated basis, third-quarter 2014 total sales were $825.4 million, an increase of 4.2% compared to the third quarter of 2013. On a constant currency basis, and excluding the acquisition of SCC Services, sales increased 0.3%. Our consolidated performance was led by strong growth in our industrial products group, and solid performance from our B2B North America and EMEA technology businesses, which was partially offset by softnesses in consumer technology.

Looking at our revenue by channel, third-quarter B2B channel sales were $624.2 million, an increase of 9.2%, or 3.5% on a constant currency basis, and excluding the acquisition of SCC Services. Our consumer sales were $201.2 million, a decrease of 8.6%, or 8.0% 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 13.5% year-over-year to $142.7 million, as we benefited from strength across both our core and new product lines. Margins declined slightly, and reflect continued investments to support our growth, including strengthening our sales teams and enhancements to our infrastructure and technology. At the end of the quarter, total SKUs offered on the globalindustrial.com website totaled almost 1.3 million.

Sales for our technology products segment, which includes our European and North American operations, increased 2.4% to $681.2 million, as reported, but decreased 2.2% on a constant currency basis, and excluding SCC Services. The non-GAAP operating loss was $7.8 million, and primarily reflects the soft performance of our EMEA and consumer operations.

Looking at our technology group's segment on a geographic basis, in Europe revenue grew 10.5% in the quarter. Revenues were significantly impacted by the year-over-year strength of European currencies against the dollar in the quarter, and also reflect the acquisition of SCC Services. On a constant currency basis, and excluding the impact of this acquisition, revenue decreased 2.6%.

Operating losses expanded in the quarter, as we continue to see a temporary overlap in costs due to the transition of functions to our Hungary shared service center. We remain on track to complete this transition by the end of this year, and drive long-term operating efficiencies. Special charges in the quarter were $1.9 million, primarily comprised of severance, as well as other recruitment costs in our shared service center.

In North America, our technology products group's revenue declined 2.5% for the quarter, or 2.0% on a constant currency basis, driven by weakness in our consumer channels, which more than offset the growth in our B2B channel. Our North American technology B2B channels delivered 4.5% revenue growth in the quarter, our third consecutive quarter of topline growth, while modestly expanding both gross and operating margins.

Our North American consumer technology channel's sales remained soft, but we continued to slow 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 second quarter, and compared to 36 stores in Q3 last year. We continue to review and evaluate the performance of our retail stores on an ongoing basis and as the leases come up for renewal.

Looking at our consolidated North American technology operations, gross margin was relatively flat. SG&A was reduced, both on an absolute basis and as a percentage of sales, and we continue to narrow our operating loss.

Consolidated gross margin declined to 14.2% from 14.8% last year. The key driver of this decline was reduced selling margins in Europe, particularly in the UK and Germany, which more than offset the positive impact on consolidated gross margins from the higher portion of consolidated sales represented by the industrial business. We continue to receive positive vendor support across Europe, and anticipate improved margins as we continue to roll out our enhanced solutions offerings in the coming months.

Consolidated SG&A increased 3.2% in the quarter, and decreased slightly as a percentage of sales. Our SG&A spend reflects planned marketing expansion and sales team growth in our industrial products group, in support of its growth efforts; and in Europe, as we continue our transition to a pan-European operating model. This was offset by reduced expenses in North America technology.

Non-GAAP operating loss was $0.1 million compared to income of $3.0 million last year. As of September 30, our balance sheet included over $328 million of working capital, and approximately $134 million in cash. We continue to have a very strong and liquid balance sheet. This allows us to maintain healthy relationships with our vendors to take advantage of payment discounts offered; to take positions in special inventory purchase deals; to execute on M&A opportunities, such as SCC Services; and to declare special dividends when circumstances warrant.

The current ratio at September 30, 2014, was 1.7 to 1. And total debt was $3.5 million.

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

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

A couple questions here. So, looking at the industrial segment, the growth in sales in that segment slowed versus what we've seen the last few quarters. And, Richard, I know you mentioned something about the weather. Other than weather, was there anything else that slowed that segment down?

Well, we do have a little bit of law of large numbers, but it was primarily due to seasonal items. So, that's part of the problem of having some reliance on seasonable items. But some years, you're going to have a hot summer; some years, you're going to have a cool summer. It's actually not a bad product line to play in, because when it is a hot summer, then you really have amazing sales, and you sell through the product.

Okay. Now, as far as the SKU count expansion, are you still on target to do over 1 million SKUs? Where does that stand right now?

I don't think actually that our pipeline has changed all that much of SKUs. We continue to add them at a relatively steady pace. And we keep identifying new SKUs for us to add into the pipeline. So I don't think you're going to see much of a change on the rate.

Okay. And as far as the operating margin in industrial products, if you look at the non-GAAP operating income, it was 7.8% versus 8.7% the year before. So, what's the reason for the decline in the op margin in that segment?

So, yes, we make investments in sales reps; we make investments in the products; and we make investments in Web advertising, as we collect customers. So as we try to keep the pedal to the metal, if you want to use that phrase, you'll see that go up and down. But sometimes it is -- we bring on the reps faster than we have the sales for them. And sometimes, based upon the time of the year, we're a little slower in bringing them.

Anthony, it's Larry. In addition to what Richard just outlined, there is also the continued impact of the increase in sales, and the increase in products that we drop-ship. I know you well know our operating model of -- we have products we bring on the marketplace, then we go to drop-ship them, then we bring them into our warehouse, and then we take something and private-label them. So, there is also an impact of the slightly lower margin drop-ship products, as that's growing quite -- becoming a bigger piece of the pie.

Okay. And as far as -- I think you guys mentioned about the shared services center -- so is that still on track to be completed fully by next year?

Well, it's on track to be completed by the end of this year. In terms of the moves of positions from one location to another -- so, that's on track to be done by the end of the year. The stabilizing and the efficiency, et cetera -- that's going to take a while longer to set in and get all the practices consistent, and as efficient as they were in other locations. At the end of the year, I think we'll be in a position to summarize the impact of all the moves to Hungary.

And I think, as you know, we also -- in addition to moving positions, we've done this -- a lot of ERP implementation, which complicates things. It's all investment in the future, and we're not done with that. But a lot of the position moves are done, or will be done, by the end of the year. The ERP implementations, we've gotten a lot of the big ones behind us. There's a few small ones to come. And there have been some ins and outs of functions that we have moved, versus what we originally thought.

But we're pleased with what we have there. And I think our biggest challenge in front of us is to just get the facility operating as smoothly as we know it will -- as it can; and it will.

Okay. All right. And lastly, just looking at the income statement, the interest and other expense line item, the increase there -- is that mostly because of the impact of foreign currency exchange?

Yes. I think the biggest piece is foreign currency. There was significant movement during the quarter in European currencies against the dollar.

Okay. All right. Thanks very much.

(Operator Instructions). I'm not showing any further questions in queue.

I'd like to turn the call back over to management for any further remarks.

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

Have a good night, everybody.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.