Global Industrial Co (GIC) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Systemax Incorporated fourth quarter 2014 financial results conference call.

(Operator Instructions)

As a, today's conference is being recorded.

I would now like to turn the call over to Mike Smargiassi.

Thank you Jamie.

Welcome to the Systemax fourth 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.

Overall, our fourth quarter performance was similar to the trend we witnessed throughout 2014, with our B2B channels delivering topline growth, offset by continuing difficulties in our consumer business. Our results highlight the focus we have placed on our B2B channels during the past several years and our opportunities for growth in these businesses.

Across the Company, we have taken steps to optimize our operating performance and competitive position. Today, we are announcing the strategic decision to accelerate our B2B and public sector customer focus by substantially exiting our brick-and-mortar retail stores.

This decision is driven as much by the excitement we have for our B2B operations, as well as a reflection on the realities of the consumer and retail businesses over the past few years. Exiting retail will allow us to place additional resources behind our B2B growth initiatives and will generate an immediate improvement of our overall financial performance, excluding the one-time exit cost we will incur. I will provide additional details in a moment.

First, let's review our B2B industrial products and EMEA businesses. Industrial products group delivered another quarter of terrific performance with revenue increasing 15% over last year. Full-year revenue increased 17% to $556 million, and adjusted operating income was $43 million.

Global industrial continues to gain market share, and we're making prudent investments in the business that will further strengthen our competitive position and enhance our ability to execute on our operating plan. Our efforts have focused on bringing additional value to customers by adding customized expertise throughout our sales force and expand our productive SKU count, both of which are helping us meet the specific needs of our customers.

Over the past few years, we have grown industrial SKUs count dramatically. Some of those SKUs have been productive and some not. In the future, our growth will be more targeted as we look to optimize our SKU offering and pay more favorable vendor pricing and reduce the number of nonproductive SKUs.

In January, we acquired the Plant Equipment Group from TAKKT America, which includes a C&H distributors brand in the US and the Avenue brand encounter among others and which further strengthens our operations and positions industrial for further growth. PEG is a great addition to the industrial family that provides us with an experienced and dedicated employee base, expands our ability to serve the MRO market and broadens our geographic footprint.

It brings logistics capabilities in the Midwest, which allow us to improve service levels in that region, established operations in Canada which are a great fit with Global's existing operations, and a physical presence in Mexico which will be key as we look to expand in that market. Integration efforts are well underway, and we look forward to another year of strong performance in industrial in 2015.

In our EMEA technology business, fourth-quarter sales were 5.5%. On a constant currency basis and excluding SCC Services, sales were up 0.5%.

The highlight of our performance continues to be France, where we posted our fourth consecutive quarter of organic double digit growth. We also had solid performance in Sweden and Spain, which is offset by weakness across our other markets.

Our results in the UK remain disappointing. The market environment is challenging, but our new local management team which was put in place in October is focused on improving our performance.

Efforts to provide additional value to our customers through expanded services offerings continue. In Holland, we've rebranded SCC services as Misco Solutions, have been pleased with its recent performance as it delivered a solid quarter and secured a number of long-term service agreement wins.

The expansion of our service offerings across our EMEA operations remains a key strategic initiative for the future. In Hungary, the transition of functions from their legacy country locations is complete, and we will continue our efforts to optimize performance in supporting our in-country operations. We expect to see a more normalized cost structure moving forward and to reach some of the benefits we anticipated when we began this restructuring over two years ago.

Turning to our North American technology business on a consolidated constant currency basis, revenue grew about 2% in the quarter but was off 4% for the whole year. We continued our cost reduction efforts and reduced our non-GAAP operating loss in both periods.

As a result of the disappointing consolidated North American tech performance this past several years, accounting rules require us to record a one-time non-cash impairment of $10 million in the fourth-quarter to write down the long-lived assets to net realizable value and to write off certain intangible assets. I will review this in more detail in a moment.

Better than our consolidated North American tech group is a strong B2B business that delivered solid growth in 2014, with revenue up over 4% in the quarter and full year. In contrast, the performance of our consumer business remains soft, which led us to the strategic and operational announcements we made today.

Part of our accelerated B2B marketplace focus will be targeting lifetime value customers with an expanded offering of product and solutions. We believe this approach will deepen and strengthen our relationships and position us to provide additional value to our customers.

As part of this transition, we've made the decision to primarily serve the consumer market through our e-commerce platform and will exit substantially all of our brick-and-mortar consumer retail stores. We have engaged Gordon Brothers to assist us with this process, which will include the closure of 31 of our 34 stores.

We expect the closings to be completed by the end of the second quarter. Upon completion, we plan to continue and operate three retail locations, one in the technology products distribution center, one located in Puerto Rico which has a significant B2B operations in that market, and the well-known flag Miami location which is adjacent to our North American tech headquarters.

Second, as a result of our retail exit, we are taking a number of steps across our North American tech operations to optimize our cost structure in line with our focused B2B approach. We are closing one of our two technology products distribution centers, which we be expect to be completed by the end of Q2. We are consolidating and restructuring our operations at our Miami headquarters. This will include a general reduction in force across most functions.

These are difficult decisions to make, but the dynamics of the consumer market make them necessary, and we're moving forward with them after an extensive review and planning process. I'd like to personally thank all of our employees for their efforts and specifically those directly impacted by these difficult decisions.

We expect the majority of these actions to be completed in the second quarter of the year, and we will emerge from this process as focused B2B IT products and solutions provider with a streamlined operating structure that will place greater resources and investment in our growing B2B business. In fact, once complete, all of our operations across Europe and North America will be B2B centric. The market we have served continuously since Systemax's founding over 65 years ago, and one where we see continued growth opportunities across all geographies.

We also believe these steps will be accretive to our financial performance once the one-time costs are incurred. While we see lower consumer and retail sales going forward, we will have a substantial reduction in our cost structure that we believe will drive significant improvement in our bottom line.

In summary, our B2B businesses in Europe and North America grew in 2014, and we're making investments to strengthen our market position and capitalize on our opportunities. We are bringing more value to our customers with improved service levels, an expanded product offering and a deepening of our relationships through new solutions capabilities.

In Europe, we have infrastructure in place that is designed to support our growth and North American technology we are optimizing our operations to match our focus and will increase our level of investments in the B2B channel. With a strong cash position, we are well-positioned to execute on our strategic plan.

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

Thank you, Richard.

Looking at our results on a consolidated basis, the fourth quarter 2014 total sales were $912.9 million, an increase of 4.4% compared to the fourth quarter of 2013. On a constant currency basis and excluding the acquisition of SCC Services which we have rebranded as Misco Solutions, sales increased 3.2%. Our consolidated sales performance was led by strong growth in our industrial products group and supported by solid performance from our B2B North America and EMEA technology businesses, which was partially offset by softness in consumer and retail.

Looking at our revenue by channel, fourth-quarter B2B channel sales were $652.5 million, an increase of 7.0%, or 4.9% on a constant currency basis and excluding Misco Solutions. Our consumer sales were $260.4 million, a decrease of 1.6%, or 0.7% on a constant currency basis.

Turning to our reporting segments, the industrial products group increased fourth-quarter revenue 15% year-over-year to $142.1 million as we benefited from strength across both our core and new product lines. Margins declined slightly and reflect increased marketing spend year-over-year to drive traffic and a slight decline in gross product margins as the growth rate of industrial's domestically sourced products is greater than the growth rate of its imported private label products.

At the end of the quarter, total SKUs offered on global industrial.com website totaled almost 1.4 million, an increase of 30% from a year ago. Sales for our technology products segment, which includes our European and North American operations, increased 2.7% to $769.3 million as reported and increased 1.3% on a constant currency basis and excluding Misco Solutions. The non-GAAP operating loss was $7.3 million and primarily reflects the soft performance in certain EMEA countries and our North American consumer operations.

Looking at our technology group segment on a geographic basis, in Europe revenue grew 5.5% in the quarter. Reported revenues were significantly impacted by the year-over-year strengthening of the dollar against European currencies in the quarter and also reflect the acquisition of Misco Solutions. On a constant currency basis and excluding the impact of the acquisition, revenue increased 0.5%.

Operating losses expanded in the quarter, primarily related to volume and margin decline in the UK. Special charges in the quarter were $3.4 million, primarily comprised of severance related to shifts in position from country locations to Hungary.

In North America, our technology products group's revenue increased 0.9% for the quarter, or 1.7% on a constant currency basis, driven by solid B2B channel performance, which was partially offset by consumer weakness. Our North American technology B2B channels delivered 4.4% revenue growth in the quarter, as we improved our topline performance every quarter in the year.

We also expanded operating margins in this channel as we streamlined SG&A and maintained gross margins during the year. Our North American consumer technology channel sales declined 1.6% in the quarter.

Looking at our consolidated North American technology operations, gross margins declined primarily due to freight margin deterioration within our consumer business. However, SG&A was reduced both on an absolute basis and as a percentage of sales as we continue to narrow our non-GAAP operating loss.

Consolidated gross margin declined to 13.6% from 14.7% last year. The key driver of this decline was reduced selling margins in Europe, particularly in the UK, which more than offset the positive impact on consolidated gross margins from the higher portion of consolidated sales represented by the industrial business.

Consolidated SG&A increased 2.3% in the quarter and decreased slightly as a percentage of sales. Our SG&A spend reflects planned marketing and sales team expansion in our industrial products group in support of its growth efforts and in Europe from the inclusion of Misco Solutions this year. These were offset by reduced expenses in North American technology.

The non-GAAP operating loss was $1.4 million compared to income of $5.9 million last year. In the fourth quarter, we recorded a non-cash impairment charge of $10.0 million resulting from the required impairment testing of our long-lived assets in accordance with US accounting rules. The impairment is related solely to our North American technology business and will not impact the Company's overall liquidity or cash flows.

In regards to our planned exit of our retail business and the restructuring at our North American tech operations, we expect one-time exit and severance costs will aggregate between $50 million and $55 million. This charge will be incurred for financial reporting purposes during Q1 and Q2 of 2015, and we expect its cash flow will be incurred over the remainder of 2015 and in subsequent years. After a completion of these actions, we expect to realize improved operating results of between $18 million and $22 million annually.

Now let me turn to the balance sheet. As of December 31, our balance sheet included over $312 million of working capital and approximately $165 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, stake positions in special inventory purchase deals to execute on M&A opportunities, such Misco Solutions and the Plant Equipment Group of TAKKT, and to declare special dividends when circumstances warrant. The current ratio as of December 31, 2014 was 1.6 to 1, and total debt was $3.6 million.

I would also like to update you on our 2011 internal whistle blower investigation, which resulted in subsequent investigations by the SEC and the US Attorney's office into the conduct of Gilbert and Carl Fiorentino, former executives of the Company's North American technology business. This has been a very long process for the Company, and one in which we have invested significant time and money to see it to its conclusion. Earlier this month, both Gilbert and Carl were sentenced to 60 and 80 months in prison respectively for their actions while they were part of our North American technology business.

We have received some initial restitution in the form of gold bullion worth approximately $120,000 that was seized by the government from Gilbert. There will be a restitution hearing in early April that will start the process to determine the amount of final restitution that the Fiorentinos will owe Systemax.

Given the ongoing legal actions in this matter, we will not be commenting further or taking any questions on this today. Thank you for joining us today, and at this time we would like to open the call to questions. Operator?

(Operator Instructions)

The first question comes from Anthony Lebiedzinski from Sidoti & Company.

Hi, good afternoon gentlemen. A few questions here.

First I just want to clarify as far as the exit of the retail store operations, it looks like from what I glanced that you're 8-K looks like you are keeping the online piece of TigerDirect. I just want to clarify that first?

Yes, that is correct, Anthony.

And is that going to be a drag on your bottom-line performance as far as you keeping the online piece of TigerDirect?

We expect the restructuring actions will improve the financial operations over NA tech business significantly and that again after the one-time costs, we expect the losses will be eliminated.

Okay. Can you just tell us the stores that you are closing,, how much revenue did they do in 2014?

About $400 million.

Okay. $400 million, okay, got it. All right, that's helpful. Also, when I look at the press release commentary, on a GAAP basis -- I'm sorry a non-GAAP basis -- the tech segment had an operating loss of $25.6 million in 2014.

So if I were to exclude the drag from the retail operations of $20 million if you take the mid point of the $18 million to $22 million, is it fair to say the rest of the tech B2B business had a negative $5.6 million impact in 2014? I just wanted to see if it's the right way to think about the business on a go forward basis.

I'm sorry, as we said, there will be a savings from the retail store exit, there will be a savings from the distribution center exit, and there will be savings from the back office restructuring as well. It's a bigger pot than what you were looking at there.

I just wanted to get a better understanding of the profitability of the tech B2B segment because the way you report now, you do provide revenue numbers for the tech businesses in both Europe and North America. When I look at the operating income results, you have technology all lumped into one, so I just wanted to get a better understanding of the profitability of the business on a go forward basis.

Again, there's a combination of cost structure reductions that we've outlined in there. We expect that the business performance will be enhanced by more than the cost structure reductions.

We talked about the ability to focus our investments on B2B growth in the number of other actions. Again, we expect that the business, the losses in North America tech will be curtailed, and it will be a significant improvement to the bottom line of our tech operations, and the consolidated operations.

Got it. Just switching gears to the industrial segment, the margin was down for the quarter and for the year. And I think from what I heard from Richard, it sounds like going forward there will be a little bit more focus or discipline as far as which products to allocate to that segment?

Well, no. What I was talking about was the SKU count and expectations of the SKU count growth going forward. We are looking at the productivity of all those SKUs we have added over the last few years when we grew the SKU count by a million SKUs or whatever.

And we are going to be calling a bunch of them out of the nonproductive SKUs because one is there's a cost to maintain them, and two is they clutter up the site. And three, they might be from some vendors that are not willing to give us better prices or terms, and so those vendors we might have to cease doing business with if they don't give us better pricing and terms.

There is going to be some culling of SKUs, and that is what I was referring to. The overall SKU count might not increase as high as it has in the past or as high as we talked about in the past as well. The growth might be less than we talked about in the past.

Anthony, they looked at the industrial business as Richard said, it is integrating the C&H acquisition. That's a significant change to the business and a significant project to integrate it. The results reflect increased headcount to support sales operations. They reflect increased spending in marketing.

And again there is a mix shift as we alluded to related to import at our highest margin imported products versus the growth of other domestically sourced products that has come from all the SKU counts. There is a lot of things going on, but the business is performing very well, and we expect to continue and accelerate with the integration of C&H.

Okay.

I would consider these high-class problems, not real problems. These are just operational decisions we are making as we go along.

Okay. Just to couple of quick housekeeping items, Larry, do you have the cash from operations for 2014 and your CapEx and any thoughts on 2015?

I've got papers all over my desk. Cash for the full year, operating cash was about flat. In the quarter, it was $37.3 million of cash from operations.

Got it, thank you very much.

(Operator Instructions)

And I show no further questions. I would now like to turn the call back over to Richard Leeds.

Well thank you for listing to our call, and we look forward to speaking to you next quarter. Bye.

Ladies and gentlemen, that does include the conference for today. Again, thank you for your participation. You may all disconnect.