Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Denise Roche – SVP, Brainerd Communicators

Richard Leeds – Chairman and CEO

Gilbert Fiorentino – Chief Executive, Technology Products Group

Larry Reinhold – CFO

Analysts

Steven Fisher [ph] – Trust Company [ph]

Dorsey Gardner – Kelso Management

Systemax Inc. (SYX) Q4 2008 Earnings Call Transcript March 3, 2009 5:00 PM ET

Operator

Good afternoon ladies and gentlemen, and welcome to Systemax Inc. fourth quarter and full-year 2008 earnings conference call. During the presentation all participants will be in a listen-only mode. Afterwards you will be invited to participate in the question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded today, March 3, 2009. Now at this time for opening remarks and introductions, I would like to turn the call over to Ms. Denise Roche of Brainerd Communicators. Please go ahead.

Denise Roche

Thank you, operator. Welcome to Systemax fourth quarter and year-end 2008 earnings conference call. I'm here today with Richard Leeds, Chairman and Chief Executive Officer of Systemax; Gilbert Fiorentino, Chief Executive of Systemax Technology Products Segment, which includes TigerDirect, CompUSA and Misco; and Larry Reinhold, Executive Vice President and Chief Financial Officer.

This 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. 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. Thank you for joining us on today's call. I'm pleased to report that Systemax delivered record sales in both the fourth quarter and full year of 2008. We did very well considering the economic climate, which is the toughest of our generation and deteriorated throughout the quarter, significantly impacting consumer and B2B spending of both IT and industrial products. We delivered these fourth quarter results with a number of macro items that both went against us and in our favor.

Let me highlight a few of these. First, we saw the US dollar significantly strengthen against most foreign currencies. This adversely affected both our top line sales as well as our bottom line earnings. We delineated the impact of exchange rate differences on our sales in our press release.

Second, we made a decision to aggressively grow market share given the expected ultra-competitive fourth quarter. We delivered exceptional value to our customers through lower prices and discounted freight. In the long run, we expect this decision to grow our customer base will pay off when the economy improves. Third, we have 18 more brick and mortar retail stores opened during the fourth quarter of 2008 than in 2007. The performance of these new stores will improve over time as we roll out our Retail 2.0 strategy, which Gilbert will discuss in more detail later in the call. And fourth, we took steps to lower our core structure in all our businesses to reflect the difficult economic environment.

We are closely watching all of our businesses. We have a strong cash position and no long-term debt other than minor capital leases, which we believe will allow us to not only weather the current storm but to build market shares as weaker competitors struggle or exit the market. We believe we are very well positioned to prosper again when the economy improves. I will now turn the call over to Gilbert to discuss highlights for our Technology Products group, which include our TigerDirect, CompUSA, Global Computer and Misco businesses. Gilbert?

Gilbert Fiorentino

Thanks, Richard and hello, everybody. The Technology Products group once again produced solid results driving sales to record levels. This is a result of our unique strategy that emphasizes finding and delivering value to our customers. Our direct purchasing relationships with Tier 1 consumer electronics manufacturers allows us both better pricing than buying from distributors, but also to obtain special one-off deals for our customers. Our nimble structure enables us to purchase merchandise and get it to our warehouse and retail stores and websites very quickly. These special deals offer our customers great pricing and many times sell out in two or three days.

This strategy contributed to fourth quarter net sales growth of 6% in US dollars. Excluding the effect of exchange rate changes, sales would have grown 12%. Revenue growth in the quarter was driven by our North American operations, where sales grew to $540.7 million in the US, up 17.6% over the prior year and up 19.4% excluding exchange rate changes. North America represented 71.4 of our Technology Products total revenue for the fourth quarter. European sales declined about 14.2% in US dollars. However, excluding the effect of the exchange rate changes, the decline was only about 2.1%, which is disappointing to us, but given the poor European economic environment, we performed reasonably well.

Operating income for the worldwide Technology Products business in the fourth quarter was $21 million. Gross margin in the fourth quarter was impacted as a result of our decision to aggressively grow market share given the super competitive fourth quarter. We delivered exceptional value to our customers through lower prices and discounted freight. In the long run, this decision to grow our customer base and acquire market share will allow us to prosper again when the economy improves.

In our North American TigerDirect business, web traffic was up 19% to 149 million visitors compared to Q4 2007. And during the quarter, there were 1.8 million average weekly unique visitors. Our TigerDirect total store count was 12 with seven stores in the United States and five stores in Canada.

Looking at customer satisfaction levels, TigerDirect was recognized recently by three prestigious rankings from Computer Shopper Magazine, American Express and the National Retail Federation and BizRate. TigerDirect is among the top five in Computer Shopper Magazine’s 2009 Shoppers’ Choice Awards for several categories. The company also ranked number 12 in a recent American Express/National Retail Federation survey, which asked, “Which retailer across all formats and all channels consistently provides the best customer service?” In addition, TigerDirect has been honored with a Circle of Excellence award from BizRate for the eighth consecutive quarter, and is now a two-time BizRate Platinum Award Winner.

Turning to CompUSA, our total store count was 17, all in the United States and Puerto Rico. We are progressing with our plan to open one more retail store in South Florida in early 2009. Web traffic for the CompUSA website was up 15% compared to the third quarter of 2008 to 12 million visitors during the quarter. There were over 600,000 average weekly unique visitors.

We have nearly completed our initiative of moving to one brand retail strategy in the next few months. We expect to have transformed all seven US TigerDirect retail stores from TigerDirect to CompUSA within that time. This will allow us to maximize our marketing initiatives and allow us to differentiate between our two strong brands in the United States. TigerDirect as our primary web commerce and e-Commerce business, and CompUSA primarily as our brick and mortar retail business, of course with the CompUSA.com website to support the retail business. Both in terms of customers we target and in terms of our business model.

Other changes are underway in our retail operations. As we briefly discussed last quarter, we are altering the way our brick and mortar customers shop with the launch of Retail 2.0, which combines advantages of online shopping with the ability to see and test products firsthand as well as talk to a salesperson if needed.

With Retail 2.0, our stores are fast becoming more than just a venue to make purchases and are now a destination for customers to test products, research and compare prices and make educated buying decisions right there in the store. Every computer, monitor, big screen TV in our converted stores now have online access, providing detailed product information, capabilities and specifications.

All the things customers love about seeing on our website, they now can see in our store when they are there in person. Customers can also find out if the product is in stock and find information on recommended accessories, delivery options, and things like that. In addition, all computers offer customers unlimited web access, so that they can visit other sites for price comparisons or even check their e-mail, while they are shopping in our store. We have currently completed the rollout in our Miami-Dadeland and Raleigh-Durham stores, and we estimate nearly all our stores will be completed by the first half of 2009.

On a product category basis, we saw larger than average growth from laptops primarily driven by netbooks, hard drives and of course, high-definition televisions. In Europe, while this quarter was certainly challenging, we did see sales pick up in December, and both our UK and Netherlands business saw growth in the fourth quarter on a local currency basis. In this environment, managing costs is imperative. Our SG&A expense declined almost 50 basis points due to strong measures we put in place to cut costs.

In summary, we are pleased with the results of our Technology Products group and the many accomplishments that we have received – achieved in 2008, differentiating the computer retail experience through our Retail 2.0 initiative, successfully integrating the CompUSA and gaining customer appraisal and loyalty.

With that I will pass the call back to Richard.

Richard Leeds

Thanks Gilbert. Despite the slowdown in the US industrial and manufacturing sectors, our Industrial Product division, which includes Global Industrial and Nextel Industries, delivered solid results relative to these difficult economic times. In the fourth quarter, the Industrial Products group revenues were down $1.7 million to $54.9 million, and for the full year revenues increased over 5% to $237 million, driven by the addition of 100,000 new customers and 17,000 products to our revamped website.

While storage and office furniture remain our core product focus, we have successfully expanded our product lines to now include janitorial, maintenance, lighting, safety and packaging and have started to see traction in these new categories. During the fourth quarter we rolled out an entirely new website, which provides the ability to display an increased number of products in a more user-friendly browsing environment. Our customer base continues to grow, driven predominantly by web customers, which represented approximately 74% of the new buyers in 2008. In addition to new business, we continue to see high levels of customer retention and an increase in levels of satisfaction with our low-priced, top quality product selection.

In regard to our Software Solutions business, we took actions to lower operating costs. We reduced headcount by 32%, and consolidated three locations into one. These actions resulted in a one-time charge to earnings during the fourth quarter of $1.7 million. We will continue to rationalize for us and refocus this division throughout 2009, the goal of significantly decreasing losses as we work to launch new customer sites with our ProfitCenter software.

Before I turn the call over to Larry Reinhold, who will discuss more detailed financial results for the quarter, I like to congratulate him on his appointment to the Company's Board of Directors. Larry has been a valuable addition to our senior management team, since he joined us two years ago. We look forward to working closely with him on the Board level.

With that I will turn the call over to Larry.

Larry Reinhold

Thank you, Richard. The Company posted record consolidated sales for the fourth quarter of $812.7 million, up 5.6% from the $769.3 million in the fourth quarter of 2007. The fourth quarter of '08 included 14 weeks versus 13 weeks in 2007.

Average sales per calendar day during the quarter were $8.3 million compared to about $8.5 million last year. Gross margin in the fourth quarter was 14.4% compared to 15.6% in the fourth quarter of last year. Gross margin declined as a result of competitive pricing pressures we faced in the quarter as well as special freight incentives offered during the peak holiday season to attract new customers. Net income for the quarter was $10 million or $0.27 per diluted share down 58.8% versus the same period last year.

As Richard mentioned, during the fourth quarter the Company restructured its software business resulting in a charge to earnings of about $1.7 million. Interest income for the quarter was down due to lower interest rates and lower cash balances, as a result of the cash we used during the year to acquire and build out our CompUSA operation, pay our special dividend and repurchase common shares.

Income tax expense in the quarter was about $5.4 million. For the full year, consolidated sales grew over 9%, to $3.0 billion, a record level for the Company. Again, 2008 includes the 53 weeks versus 52 weeks last year. Gross margin was 15.3%, essentially flat compared to 2007. Net income for the year was $52.8 million or $1.41 per diluted share, down about 23.9% versus last year.

I would like to take some time to give you some additional details on our two largest business segments. Technology Products net sales were $757.7 million, an increase of 6.3% versus the fourth quarter of 2007, and represented 93.2% of the Company's overall sales revenue. Excluding exchange rate changes, Technology Product sales would have increased 11.8% compared to last year.

Operating income in the fourth quarter was $21.1 million. Industrial product sales in the fourth quarter of 2008 were $54.9 million, a decrease of 2.9% over the fourth quarter of last year. Operating income for the quarter was $5.1 million, an increase of 32% over the fourth quarter of last year.

Turning to our geographical breakdown, our total North American sales were $595.8 million for all segments in US dollars, an increase of 15.3% from the fourth quarter of last year and represented 73.3% of our total sales for the quarter. Our total European sales were $216.9 million in US dollars, down 14.2% [ph] on a year-over-year basis, and represented 26.7% of our total consolidated sales in the quarter. Again, excluding exchange rate effects, our European sales would have decreased by about 2.1% in the fourth quarter compared to last year.

During the fourth quarter, our SG&A expense increased about 6 basis points to 12.4% of revenue versus last year. This increase is mostly attributable to additional employee costs associated with the reopening of the CompUSA stores, related expenses and growth in the business.

The Company continues to maintain a strong financial position. During the quarter, we generated $51.1 million in operating cash flow, and we ended the quarter with $282.2 million of inventory. As of December 31, 2008, our balance sheet reflected $250.6 million of working capital and $116 million in cash and cash equivalents. Cash balances for the quarter increased by $42.6 million or 58% versus last quarter and our current ratio at the end of December was 1.7 to 1. Additionally, our $120 million credit facility remains undrawn, and we have over $219 million of cash and available liquidity at the end of the quarter.

During the fourth quarter, we purchased about 247,000 shares of the Company's common stock at an average price of $9.67 per share, pursuant to our stock repurchase plan approved by the Board of Directors in May of 2008. For the full year, we repurchased about 475,000 shares for $5.8 million for an average price of $12.25 per share.

Our effective tax rate for the full year was 36.9%, up from 30.5% in 2000 due principally to higher taxable income in the UK in 2008, and an unusually low effective tax rate last year from reversing a net operating loss valuation allowance. With that, we'd like to open up the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you sir. (Operator instructions) We will take our first question from Steven Fisher [ph] with Trust Company [ph].

Steven Fisher – Trust Company

Hi, guys. Nice quarter given all that's going on.

Richard Leeds

Thank you.

Steven Fisher – Trust Company

Just on the gross margin, what percent of that 1% decrease, what part of it was you guys doing it and what part was other stuff?

Richard Leeds

Thanks, Steve. Appreciate it. This is Richard. Well, I mean, what – I would like to say we did it all, but we responded to a very difficult, competitive marketplace in the most competitive quarter of the year and we just made sure that we had the sales that we had – that we thought was necessary to have the business. It was a combination of us responding to the marketplace on pricing, and us responding to what our customers wanted by going out there with reduced freight rate.

Steven Fisher – Trust Company

Okay.

Richard Leeds

And I think at the end of the day it is going to be a successful strategy because we invested in our customers, and when this economy does turn around, I think having a strong customer base like we are creating will really pay off in spades.

Steven Fisher – Trust Company

Okay. And just in switching to the software segment, how much did you spend in the quarter on ProfitCenter?

Richard Leeds

Hold on one second.

Larry Reinhold

We are looking for that number right now, Steve. So about $5.5 million was the operating cost, which included as we said, the $1.7 million restructuring efforts that we did in the quarter.

Steven Fisher – Trust Company

Okay, and then DSO was about the other, whatever, $3.5 million was expenses for regular headcount and stuff like that?

Larry Reinhold

Regular headcount again, the business still has – revenues are not a significant part of the equation there yet, due to its hosted business model.

Steven Fisher – Trust Company

Okay. That's all. Again, great quarter given what's going on and keep buying back shares, because we think it is good value, especially now.

Larry Reinhold

Okay.

Richard Leeds

Thank you, Steve.

Steven Fisher – Trust Company

Thanks, guys.

Operator

(Operator instructions) We will go next to Dorsey Gardner with Kelso Management.

Dorsey Gardner – Kelso Management

Just to clarify one thing. The operating loss in the software business, was that 5.5 in the fourth quarter or for the year?

Larry Reinhold

No, that's for the quarter.

Dorsey Gardner – Kelso Management

Just for the quarter. And for the year?

Larry Reinhold

For the year, about 18.

Dorsey Gardner – Kelso Management

About 18. So almost, what, $0.50 a share pretax?

Larry Reinhold

Yes.

Dorsey Gardner – Kelso Management

And I think over the years – I forget what the number is, but you spent close to, what, $100 million in this business building it up?

Larry Reinhold

There has been – that number is not quite that large but it's been a very significant investment in the software business over a number of years. We took certain actions in the quarter again to refocus the business on a more narrow set of customers that were the product is really designed for. We – again, we consolidated facilities, and we reduced some other costs in the quarter with the goal of focusing the business more narrowly and dramatically shortening its time to profitability. It is important to know that we used the product internally in some of our business units. Quite a – a very good product for us, and for the customers who are live on it. We also had one customer who went live during the fourth quarter. And there are a number of additional customers that we anticipate going live in Q1 and Q2.

Dorsey Gardner – Kelso Management

Okay. So clearly this is something that you think has a future, and I have been a shareholder for a long time. I just take it as then – it has just taken longer to get some large customers to sign on, and it's a little bit like a snowball. Once you get them on, they pay per terminal I understand, and they pay for the set up and everything, but until you start getting some numbers, and you know, the snowball gets big enough it's a drain. Do I understand the business correctly?

Larry Reinhold

Pretty good description of it, yes.

Dorsey Gardner – Kelso Management

Okay, but you are clearly still think it has a future, and albeit you have been able to cut back on expenses. And then on the retail stores, I have been – I am in Florida, and I go to, I guess Dadeland and so on, and the 2.0 rollout you say will be completed sort of mid-year and do you have – have you broken out a number for the retail part of your business for the CompUSA stores? About 17 stores that you have now, but what are you doing in retail?

Gilbert Fiorentino

Hi, it is Gilbert. We don't break out those segments of the business.

Dorsey Gardner – Kelso Management

Okay. And – but have you had enough time working with the 2.0 configuration to say that it is a – you get a mild increase in business, you get a quantum jump in business, it's – how far down the experience curve are you in terms of do you think you have a winner?

Gilbert Fiorentino

We first installed Retail 2.0 in our Dadeland concept store on October 22, and it is kind of a moving development, because we installed it with certain features and then watched the customers and the salespeople use it live, and have been adding features to it ever since. We installed it in our second store in Raleigh, Durham about a month or month and a half ago. Our third store, the plantation store and the Northlake store, and we have plans to install it in our three Chicago land stores.

So obviously, with an aggressive rollout strategy where we're moving as quickly as we can, I can talk about how exciting it is, but you can see that we are rolling it out rapidly. We have seen an improvement in performance in our Dadeland store, not only with happiness in our customers and customers spending more time in the store but also in absolute numbers. So it is a very promising and very exciting move for us. I think Retail 2.0 is going to redefine where the retail market goes and redefine the landscape for retail in the next couple of years.

Dorsey Gardner – Kelso Management

Because you can only cram so much merchandise into a single store?

Gilbert Fiorentino

It's not just that. It's exciting because we have 10,000 different items in stock in our Naperville warehouse and about 100,000 more items available for our customers through our drop ship partners. We only carry about 3000 different products in each store because number one, that's how many products will fit in the store format that we have, and number two, that's about how many will sell well in a store.

But if a customer comes into a store and they want to buy say a Cisco 48-port managed switch well, we have that in stock in our warehouse, and we are really good at shipping things everyday out of our warehouse 95%, 96% same day fill rate. So, we will be able to take that customer's order for a product that's not typically in stock in any retail store, and ship it to him that day and we have a free shipping policy in the store as well. So, if it is an item that we don't have in stock, we will ship it to them for free under certain conditions.

Dorsey Gardner – Kelso Management

Is this potentially a format that you could go national with or you have to take one step at a time I guess.

Gilbert Fiorentino

You know, there is an interesting dynamic in the market right now. The real estate – the cost of real estate has dropped dramatically, and so we are looking at all of the possibilities of capitalizing on that, and not only converting our existing stores but looking at sites that make sense for the Company in the future.

Dorsey Gardner – Kelso Management

Okay. I would think it would go very well in a mall environment where people – you know, you have a lot of walk-by traffic. I was in Mall of America and the Best Buy just seems to be where people normally go. They like to watch the TVs, I think, but then they start playing with the computers and so on. But whether or not –?

Gilbert Fiorentino

Our flagship store is at the Mall of the Americas, and of course that's our greatest grossing store. We also have another store in our Raleigh, Durham store. Our Durham store is also in a mall. So we are looking at all of the possibilities.

Dorsey Gardner – Kelso Management

Okay. And profitability of the retail stores would be in line with the total business or higher or I guess, in both – I guess you have to look at it in two ways, profitability in terms of return on investment, invested capital, and margin but do you think return on invested capital will be quite high or any way to compare it to the traditional business?

Richard Leeds

Well, I mean – this is Richard – we look at all of the different measures in our business. Some of the issues that we have is, are we cannibalizing our web business by opening a store in an area, and to what extent does that affect the profitability of that area. So, we think we have a pretty decent formula for opening these stores. Our worst performing store versus our best performing store obviously has a fair amount of difference in profitability.

So, as we open our stores, we look at the worst performing store and say, okay, is that our worst-case scenario for the next store that we open and so on? But we have to make sure that we make our investments prudently, and look at the capital that we put into stores and make sure that we are going to get a good return on investment.

And I think, we have ourselves up to a nice volume of stores now, and we are going to be rolling these out as the opportunities for a good real estate prices as Gilbert said, come across and as we see capital making sense.

Dorsey Gardner – Kelso Management

And what is the cost to open a store? I mean actual cost?

Richard Leeds

The typical inventory in a store is about $1 million, and then the build out of that store can range anywhere from the landlord paying for it, to us paying for it. So it's really hard to say. It's not huge numbers.

Dorsey Gardner – Kelso Management

Okay. Thank you very much. Good quarter.

Richard Leeds

Thank you.

Operator

And there appear to be no further questions at this time. I like to turn the call back to Mr. Richard Leeds for any additional or closing comments.

Richard Leeds

I'd like to thank everybody for listening to our call, and we look forward to speaking to you when we announce our first quarter results.

Operator

That does conclude today's conference call. Again, we thank you for your participation and you may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Systemax Inc. Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts