Earnings Labs

Global Industrial Company (GIC)

Q2 2014 Earnings Call· Tue, Jul 29, 2014

$33.73

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Transcript

Operator

Operator

Good day, ladies and gentlemen, and welcome to Systemax Inc Second Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (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.

Mike Smargiassi

Management

Thank you, operator. Welcome to the Systemax second 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 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.

Richard Leeds

Management

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 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 continue 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 with our primary global industrial dot com website, which has been well received by customers. These changes significantly enhance the user experience with improved search and recommendation capabilities, streamline 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 in adjusted operating income as we showed progress on a number of initiatives. Our EMEA technology businesses performance was mixed across both, larger and small markets. As previously announced, we further strengthened our operations with the acquisition of SCC Services in Netherlands. The addition of SCC is a strategic and highly complementary fit that expands our presence in existing market and improves our position in…

Larry Reinhold

Management

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 by the 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 drove 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…

Operator

Operator

(Operator Instructions) And our first question comes from the line of Anthony Lebiedzinski from Sidoti & Company. Your question please. Anthony Lebiedzinski – Sidoti & Company: Hi good afternoon gentlemen. First, as far as the Industrial Product segment, there is clearly another strong quarter there. Can you talk about what’s your expense 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?

Richard Leeds

Management

Sure. Hi Anthony, it’s Richard. Yes, we continue to grow the SKU count obviously it’s kind of almost like the more of high numbers, but we have identified a number of SKUs that will get us to another million SKUs that – we’ve identified another million SKUs that we could put up on the site. Also we will be able to get them up this year, sometimes based upon how long it takes. It might be a little bit longer, it might be a little bit less, but we have clearly identified those. The rep productivity is an ongoing project for us in trying to get that up. We have a number of initiatives on both, on the account basis and on the rep basis, to get that to grow, as well as we’ve identified a whole another world of accounts that we could go after. There is still a lot of opportunity there. Anthony Lebiedzinski – Sidoti & Company: 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?

Richard Leeds

Management

So it’s a combination of both, okay. So we have – in the emerging categories that we have, there is still a tremendous amount of opportunity that add items. In our legacy categories, we’ve pretty much have reached a saturation point and we only have a small amount of fill in, as well as having additional categories that we could add. I just got handed a note that I misspoke 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.

Larry Reinhold

Management

Okay. Anthony, it’s Larry. Historically, we over the past couple of years like we said we’re adding 4,000 or 5,000 a week. We added a quarter a million, exactly about a quarter a million a year that’s what we’ve done. We like our Industrial team can certainly deliver that pace and higher. Okay? Anthony Lebiedzinski – Sidoti & Company: Okay. Got it. And as far as the tech business is concerned, within specifically the 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?

Larry Reinhold

Management

Yes, we didn’t close any stores in the quarter as we said. Our store counts 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 have substantially reduced the losses. And of the declines in that business, a substantial portion of them came from these closed stores that we did close, the five stores over the past year. Anthony Lebiedzinski – Sidoti & Company: 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 are looking for additional acquisitions in Europe, what’s your appetite for additional deals?

Richard Leeds

Management

So yes, I mean we’re always looking for strategic and the right fit of acquisitions. And we’re always aiming – it depends upon the deal, but we’re always keeping our eyes open for the right deal.

Larry Reinhold

Management

And Anthony that’s part of we try to maintain hard and healthy cash position in the company for all those reasons. Anthony Lebiedzinski – Sidoti & Company: Right. And as we’re speaking of cash position, even 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? What are your thoughts on that?

Larry Reinhold

Management

As in the past, we look at it every quarter. We look at where we stand with our vendors and with our potential acquisitions currently. We like our cash position right where it is, and we’ll continue looking at it on an ongoing basis. Anthony Lebiedzinski – Sidoti & Company: Okay. Well, thank you very much.

Larry Reinhold

Management

Thank you.

Richard Leeds

Management

Thank you, Anthony.

Operator

Operator

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.

Richard Leeds

Management

Thank you for listening to our call. We look forward to speaking to you next quarter.