Systemax Inc.
Q3 2014 Earnings Call Transcript

Published: 5 Nov 2014

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to Systemax Inc. Third Quarter 2014 Earnings Conference Call. During the presentation all participants will be in a listen-only mode. After you will be invited to participate in the question-and-answer session. (Operator Instructions) As a reminder, this conference call is being recorded today November 4, 2014. At this time, I like to turn the call over to Mike Smargiassi of Brainerd Communicators. Please go ahead.

[Mike Smargiassi:]

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 recurring and non-recurring adjustments of 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.

[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 in both the local currency and excluding SCC Services. On the consumer side we reduced our rate of decline in the top line and improved our bottom line performance. Our industrial products group has been a tremendous success story for Systemax for past several years, as we have organically expanded this business into a sizable and weighable asset for the company and our shareholders. That success continued in the third quarter as we increased revenue nearly 14% despite an unusually cool summer in the Northeast, which impacted the sales of certain seasonal products. While this growth is slightly lower than the recent quarters Global Industrial still growing much faster in 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 these kinds of investments on 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’re also investing in technology to enhance our demand forecasting

[Lawrence Reinhold:]

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 softness 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. And improving 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 product 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 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 continued to see a temporary overlap in costs due to the transition of functions to our Hungary shared services 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 services 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 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 top line growth, while modestly expanding both gross and operating margins. Our North American consumer technology channels remains – sales remains soft. But we continue 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 continued 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 rollout 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 pan-European operating model, which 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 continued to have a very strong and liquid balance sheet. This allows us to maintain healthy relationships with our vendors and take – 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:]

Thank you. (Operator Instructions) Our first question comes from Anthony Lebiedzinski of Sidoti & Company. Your line is open.

[Anthony Lebiedzinski:]

Yes, good afternoon. Couple of questions here, so looking at the industrial segment – the growth in sales in that segment is slowed versus what we’ve seen last few quarters, and Richard I know you mentioned something about weather, other than weather was there anything else that slow that segment down?

[Richard Leeds:]

Well, we do have a little bit of – more of large numbers, but when it was – I mean, it was primarily due to seasonal items. So, I mean, part of problem is relying on – 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. So, not – 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.

[Anthony Lebiedzinski:]

Okay. Now as far as the SKU count expansion, are you still on target to do over $1 million SKUs or like a – where is that stand right now?

[Richard Leeds:]

I don’t think actually that our pipeline has changed all that much or SKUs. We continue to add at a relatively steady pace and weekly by identifying new SKUs for us to add into the pipeline. So I don’t think you guys see much of a change on the rate.

[Anthony Lebiedzinski:]

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?

[Richard Leeds:]

So, we make investments in sales reps, we make investments in the products, we – and we make investments in web advertisings we collect customers. So, as we try to keep the pedal to the metal if you want to use that phrase, you will see that go up and down, but it sometimes it’s we bring on the reps faster than we have the sales for them and sometimes based upon the time of the year were a little slower in bringing them.

[Lawrence Reinhold:]

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. So, I know, you well know, our operating model of – we have product sweeping in the marketplace then we go to drop ship them, then we bring him into our warehouse, and then we take some 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.

[Anthony Lebiedzinski:]

Okay. Yes, 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?

[Richard Leeds:]

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 will be in a position to summarize the impact of all the moves to Hungary. And I think, as you know, we also was, in addition to moving positions, we've done this a lot of ERP implementation, which is complicates things, it’s all investment in the future, and we are not done with that. So the – lot of the position moves are done, or will be done by the end of the year. The ERP implementations we've gotten the big ones behind us, there is 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 the 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.

[Anthony Lebiedzinski:]

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?

[Richard Leeds:]

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

[Anthony Lebiedzinski:]

Okay. All right. Thanks very much.

[Lawrence Reinhold:]

Thank you.

[Richard Leeds:]

Thank you, Anthony.

[Operator:]

Thank you. (Operator Instructions) I'm not showing any further questions in queue. I would like to turn the call back over to management for any further remarks.

[Richard Leeds:]

Okay. Thank you for listening to our call, and we look forward to speaking to you next quarter. Have a good night everybody.

[Operator:]

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