Earnings Labs

Global Industrial Company (GIC)

Q2 2015 Earnings Call· Tue, Aug 4, 2015

$33.73

-0.90%

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Transcript

Operator

Operator

Good afternoon and welcome to the Systemax second quarter 2015 earnings call. All participants will be in listen-only mode. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Mike Smargiassi of Brainerd Communications. Please go ahead.

Mike Smargiassi

Analyst

Thank you, Laura. Welcome to the Systemax second quarter 2015 earnings call. Today's call has been prerecorded and will include formal remarks from Richard Leeds, Chairman and Chief Executive Officer of Systemax and Larry Reinhold, Executive Vice President and Chief Financial Officer. We will not be hosting a live Q&A session at the end of today's call. If you should have any questions on second quarter results, please contact Brainerd Communicators or Systemax. Contact details can be found on the press release issued today and at www.systemax.com. 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 Forward-looking Statements caption 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 the 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 would now like to turn the call over to Mr. Richard Leeds.

Richard Leeds

Analyst

Good afternoon and thank you for joining us today. Our results reflect another quarter of strong performance from our industrial products group, modest improvement in the media technology online and the challenges we are experiencing during the ongoing realignment of our North American technology business to serve the B2B and public sector marketplace. Industrial had another solid quarter, as revenue increased 27% highlighted by continued organic growth that outpaced the general MRO industry and the addition of the plant equipment group or PEG which we acquired during January. On a constant currency basis and excluding PEG, revenue grew 10%. We continue to move forward with our PEG integration activities. Our sales teams are proactively engaging PEG customers with product offerings that PEG did not have available. We bring our sales and marketing efforts under a single, unified and best practice approach, which we believe will maximize our inbound and outbound marketing initiatives. The integration of IT systems continues to move forward and remains on schedule. This effort is designed to improve efficiencies, lower cost and allow us to service every customer from any distribution center in North America. The buildout of our new 465,000 square feet Las Vegas distribution center, which is replacing a much smaller facility is nearing completion. We are excited to bring this new facility online as once it is fully operational, it will improve service levels to customers in the West Coast and we expect the operations to ramp throughout the rest of the year. We are also capitalizing on the addition of PEG's Canada distribution network, as we broaden our product offering and reduce both the cost and time to ship to the customers in this market. Near-term, we remain focused on the execution of our integration plan while continuing to make prudent investments in…

Larry Reinhold

Analyst

Thank you, Richard. Looking at our results on a consolidated basis, second quarter 2015 total sales were $740.0 million, down 11.0% compared to the second quarter of 2014. Currency movements had a significant negative effect in the quarter. Excluding the impact of currency changes, the closed retail stores and the acquisitions of Misco Solutions and PEG, sales declined 2.9%. Our consolidated sales performance was led by solid growth in our industrial products group, which was more than offset by declines in our North America technology businesses. Turning to our reporting segments. The industrial product group's second quarter revenue grew 27.3% to $180.9 million as we benefited from solid growth across most product lines and the addition of PEG. On a constant currency basis and excluding PEG, industrial revenues increased 10.0%. GAAP operating margin declined 100 basis points driven by a 60 basis point reduction in gross margin as well as an increase in operating expense as a percentage of sales. Gross margin was negatively impacted by increased distribution costs associated with the new Las Vegas facility startup efforts and reduced freight margin. Product margin improved slightly in the quarter, driven by selling channel mix and growth of certain higher-margin categories. Our new Las Vegas distribution center is just commencing its operations and we anticipate industrial's overall reported gross margins will be negatively impacted until this facility is scaled to an efficient level over the next year. Longer-term, we expect this facility will result in modestly improved gross margins from freight cost reductions to West Coast customers and improve efficiency at the other distribution centers. While SG&A leverage improved within the existing industrial group, combined operating leverage declined slightly due to a higher cost structure within the acquired PEG business. When we finish integrating the businesses, we believe that we will…

Operator

Operator