Systemax's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar. 4.14 | About: Systemax Inc. (SYX)

Systemax Inc. (NYSE:SYX)

Q4 2013 Earnings Conference Call

March 4, 2014 5:00 PM ET

Executives

Michael Smargiassi – Managing Director-Brainerd Communicators, Inc.

Richard Leeds – Chairman and Chief Executive Officer

Larry Reinhold – Executive Vice President and Chief Financial Officer

Analysts

Anthony C. Lebiedzinski – Sidoti & Company, LLC

Andrew J. Fleming – Heartland Funds

Operator

Good day ladies and gentlemen, and thank you for standing by and welcome to the Systemax, Inc. Fourth Quarter and Full Year 2013 Earnings Teleconference Call. During the presentation, all participants will be in the listen-only mode. Afterwards you will be invited to participate in a question-and-answer session. (Operator Instructions) As a reminder, this conference call is being recorded today March 4, 2014.

At this time, I like to turn the call over to Mike Smargiassi, Brainerd Communicators. Sir, you may begin when ready.

Michael Smargiassi

Thank you. And welcome to the Systemax Fourth Quarter and Full Year 2013 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.

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 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

Good afternoon, and thank you for joining us today. In the fourth quarter on a consolidated basis, we delivered solid improvements in both our gross margin and our adjusted operating margin. We benefited from the outstanding performance of our industrial products group and strategic decision to focus more of our efforts on B2B channels, and tactical decision to not chase commercial pricing in our consumer technology business in the holiday selling season and the continued execution with our long-term initiatives across all of our businesses.

The industrial products we delivered another outstanding quarter with strong revenue growth expanded operating margin and leverage on the bottom line. Our revenue performance was driven by new categories, solid results from our core offerings, as well as the expansion of our private label and brand name selection. The utilization of our New Jersey distribution center continues to ramp and it is delivering and improving leverage. We’ve recently launched a Mexican ecommerce website, which follows on the success of our Canadian site which launched in 2011.

This new global industrial site provides the Mexican market with a dedicated Spanish language and local currency interface, providing for a much easier and convenient shopping experience. Our technology products business performs remain disciplined but we did continue to narrow the adjusted operating loss in the quarter from the year-ago period. Our B2B business is both in North America and Europe, so are improved revenue trends from the third quarter made for other progress and strengthening our performance.

However, our consumer business remains challenged. Our EMEA technology business improved this quarterly revenue trend on a sequential basis, and we delivered the modest increase in our gross profit from last year. Certain geographies performed well, on an overall basis our EMEA business were soft in the quarter. Last year we made significant progress in the transformation of our operations through a pan European organizational structure.

We opened our share service center. In Budapest and start the process of centralizing our back office and support function. This new center is ramping and today we have more than 215 employees. The scaling of this center will continue through 2015, and we will encourage additional course to duplication in hungry of certain local function and other identities until completion of the transition. We expect these efforts will ultimately significantly improve our operating structure by lowering our cost and strengthening our ability to broaden our customer and vendor relationships.

We are also looking at opportunities to leverage our EMEA footprint and strengthen our position as a single source, value-added IT reseller. In this regard, in December we entered into an agreement with the cloud service, aggregator to provide our customers with access to integrated cloud offering of communications and collaboration, back up and security and infrastructure solution. In North American technology, our revenue performs was disappointing and reflects the very competitive and promotional consumer environment that was seen across the industry.

That said, our focus on profitability continues to show results as we improved our gross margin, strengthened operating performance, lowered SG&A, and reduced our operating loss in the quarter. North American B2B technology had a strong bottom-line performance as we delivered significant improvement in gross margin and growth in operating profit despite a small decline in revenue. Our results reflect the early success of our initiatives and we are encouraged by the improvements we are seeing in our B2B operation.

Consumer technology revenue declined significantly on a same-store basis in the quarter. Similar to many in the industry our top-line performance was challenged. The holiday season was highly competitive and we made a decision not to chase promotional product pricing. While this then results in some additional top-line softness, it allowed us to drive improvement in gross margin.

Our efforts to improve our results are on-going in expanding our category in SKU offerings, to strengthening our IT infrastructure. We also continue to look for opportunities to expand and go in the reach of our brand on a cost effective basis. And recently start selling on a number of industry market places to which new customers captured incremental sales.

In summary, we made significant progress in 2013 in strengthening our competitive position, enhancing our operating performance, and improving our operations as we worked towards sustained profitability. We still have more to do and we are focused on expanding our B2B business, while operating on consumer business that is profitable. Our balance sheet remains very strong with $181 million of cash that provides us with significant flexibility to execute on a strategic plan.

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

Larry Reinhold

Thank you, Richard. Turning to our consolidated revenue, fourth quarter 2013 total sales were $874.2 million, a decline of 6.5% and off 7.1% on a constant currency basis compared to the fourth quarter of 2012.

Sales for the quarter were led by continued growth in our Industrial Products group, which was offset by weakness in our North American technology businesses.

Looking at our revenue by channel; fourth quarter B2B channel sales were $559.0 million, an increase of 6.1% or an increase of 4.9% on a constant currency and same-store basis. Our consumer sales were $315.2 million, a decrease of 22.7% or 21.4% on a constant currency and same-store basis.

Turning to our reporting segments; the Industrial Products group delivered a revenue increase of 26.0% year-over-year to $123.9 million with growth in new product categories and a solid performance and core offerings. Gross profit increased in the quarter and we delivered gross margin gains as we continue to benefit from the further utilization and ramp up of our New Jersey distribution center. During the quarter we expanded our ops SKUs, improved inventory turns and grew our private label offerings.

We continue to deliver strong improvements in operating leverage with non-GAAP operating income growing over 30% to $9.5 million. At the end of the quarter Global industrial SKUs totaled 880,000 up 5.4% sequentially and up 31.2% compared to a year ago.

Sales for our Technology Products segment, which includes our European and North American operations, declined 10.4% to $748.9 million and 11.1% on a constant-currency basis, while non-GAAP operating loss was $0.2 million, a significant reduction in the loss from last year.

In the quarter, special charges totaled $5.9 million including additional cost associated with the transition to our European Shared Services Center, additional lease accruals associated with the closure of underperforming retail stores earlier in the year and additional charges related to the write off of our remaining CompUSA assets following the disposition of the brand.

Looking at our Technology Group segment on a geographical basis. In Europe revenue grew 1.6% in the quarter and on a constant-currency basis declined 1.5%. SG&A increases reflect a temporarily overlap in cost, as we continued the transition of functions to our Shared Service Center. One time charges in the quarter equaled $1.7 million including severance charges as well as other recruitment costs in Hungary.

In North America, our Technology Product group’s revenue declined 16.7% for the quarter. This decline was primarily in our consumer channels particularly online and in the consumer electronics product category.

We believe this decline is attributed both to increased price competition and highly promotional atmosphere in Q4 that we decided to avoid. We are executing on a number of improvement initiatives across our North American operations and significantly expanded our gross margin, improved our freight performance and reduced our SG&A spending by almost 16%. These efforts resulted in our adjusted operating loss and cut by more than 60%.

In retail, we ended the year with 36 stores unchanged from the third quarter. We continue to review and evaluate our stores when they come up for renewal and then Q1 in the 2014, we close two stores which was the end of their lease terms, bringing our current store count to 34. We remain focused on continuing to improve our bottom line performance and capitalizing on our efforts to optimize freight and manage SG&A.

Consolidated gross margin improved to 14.8% from 12.9% last year. Key drivers of the increase included the growth of our Industrial Products Group and the higher gross margin within this business unit, as well as our decision to focus on gross margin in North America technology and not to chase low margin consumer sales.

Overall, consolidated SG&A declined modestly and reflects reduced expenses in North American technology partially offset by investments in industrial products in Europe. As a percentage of sales, SG&A decreased by approximately 70 basis points over last year and includes planned investments to support our strategic initiatives as well a reflection of the larger contribution from our industrial products group who business model mandates higher SG&A particularly in advertising.

Consolidated non-GAAP operating margin improved to 0.7% compared to negative 0.6% last year. Nonrecurring and recurring adjustments during the quarter were $7.2 million on a pretax basis or $0.13 per diluted share on an after-tax basis, using an assumed tax rate of 35% for the quarter.

Non-GAAP operating income was $5.9 million, an improvement of $11.5 million from last year. GAAP operating results were a loss of $1.3 million compared to a loss of $46.8 million last year. GAAP net loss was $19.8 million or $0.54 per diluted share compared to a loss of $27.1 million or $0.73 per diluted share in Q4 of 2012. Current year GAAP net loss includes $20.5 million in one time non-cash tax expense related to applying evaluation allowance to our U.S. federal deferred tax assets.

As a remainder last years GAAP results included approximately $39.9 million of special charges with a write off of the intangible assets associated with discontinued brands and the write down of U.S. computer manufacturing operations.

As of December 31, our balance sheet included over $345 million of working capital and over $180 million in cash. The current ratio at December 31, 2013 was 1.7:1 and total debt was $5.4 million.

With that we would like to open the call to questions. Operator?

Question-and-Answer Session

Operator

Yes sir. (Operator Instructions) And it looks like our first question will come from Anthony Lebiedzinski with Sidoti & Company. Please go ahead, your line is now open.

Anthony C. Lebiedzinski – Sidoti & Company, LLC

Good afternoon. First the industrial product segments sales from the US was much better than what we expected looking at the revenue increases to 26%. I know you guys have mentioned the increase SKU account other than that how many when you look at that segment, how should we think about that particular segment going forward?

Richard Leeds

Hi Anthony, it’s Richard. We’re actually feeling pretty good about that business. We have some good plans for it. As we mentioned on the call, we’ve recently launched Mexican site which is a very soft one. And we continued to grow our SKU account, and some other good growth plans in place and we are feeling pretty comfortable about that business.

Anthony C. Lebiedzinski – Sidoti & Company, LLC

Okay. And on the technology side, I know you choose to be less promotional or it looks like that certainly resulted in the company being able to minimize the losses there, but at what point should we expect that to be profitable, I mean, there is certainly lot of competition in the online electronic space. So I’m not asking for a precise answer but how should we think about the progress and as far as couple of things that you guys mentioned in the press release was that you are seeing some initial product risk with some initiatives that you haven’t placed in North-America. So maybe could you just talk about that?

Richard Leeds

Sure, the consumer business in the U.S. remains to be a tough business. We have some very strong competitors that are necessarily concerned with making money. And so that remain as a challenge for us and for other people in the industry. But we are putting our emphasis on B2B and getting our consumer business the profitability. Other necessarily mean that we going to be growing the consumer business, but does mean that we are going to strive for its profitability in that.

The consumer business, there was an excellent acquisition vehicle for our B2B business. As we find that small businesses like to buy from our sites. They like to come into our stores. And so those customers that are coming to us in consumer channel wind up being very good B2B customers for us as smaller business, as they grew we get the service they need.

So that’s really our strategy going forward as it continue to use the two consumer channels, and the acquisition vehicles for our B2B and get the consumer business the profitability.

Anthony C. Lebiedzinski – Sidoti & Company, LLC

Okay. And in Europe, it still sounds like to be ongoing consolidation into the service center and Hungary will continue through next year. So can you just talk about like what other things that you are planned to do for the next year or so?

Richard Leeds

In Europe, okay. So as we said we are going to continue to consolidate the back-office functions into Budapest, we’re going to continue to be putting our ERP platforms for our Europe so that it gets some additional operational efficiencies from that. We are looking at increasing our sales rep count in some selected markets. Some of the countries that are lesser performing countries, we have a model were as we shift the back-office to Budapest, where we could become profitable in these small countries where we’re struggling in the past. So there is a lot of benefits for us doing this consolidation. And then we are putting an increased emphasis on selling services in Europe to our B2B customers over there. Remember that our tech business in Europe is primarily a B2B business.

Anthony C. Lebiedzinski – Sidoti & Company, LLC

Okay. And then just a couple of housekeeping items, as far as the tax rate what do you expect that to be in 2014?

Larry Reinhold

Yes, this is Larry. So it depends on the results in the U.S. and we have written off our deferred tax assets. You can see a very large charge in the quarter. Our European businesses for the most part was low to expected tax rate and to the extent that we have earnings in the United States. We have seen very low federal tax rate and then state taxes. So I think in order to be conservative you could certainly be looking at 30% range.

Anthony C. Lebiedzinski – Sidoti & Company, LLC

Okay, that’s helpful. And do you – how about the CapEx was in 2013 and what’s the estimate for 2014?

Larry Reinhold

I have the former as to the latter. We don’t the former 2013 was I think $13.7 million for the year. And I would [indiscernible] former guidance that would expect that CapEx for next year to be in the same rate.

Anthony C. Lebiedzinski – Sidoti & Company, LLC

Okay, great. Thank you very much.

Operator

Thank you, sir. (Operator Instructions) And it does look like we have an additional questioner in the phone queue and it will come from the line of Andrew Fleming with Heartland Funds. Please go ahead with your question please.

Andrew J. Fleming – Heartland Funds

Hi guys, congrats on a good quarter.

Richard Leeds

Thank you.

Andrew J. Fleming – Heartland Funds

As I look at the company, it really looks likes it’s a tale of two cities here with the tech products and industrial. Can you just give us a sense of what regional growth rates for two segments would be as you think about 2014 and beyond?

Larry Reinhold

Yes, certainly we have that really three different parts of the business. The industrial business has grown organically very significantly over the past four years. I know the CAGR is, but that’s been somewhere around 20% CAGR of the last four years. We’ve talked – the company has done bigger, a lot bigger numbers and it’s difficult to keep this up, but we raised our channels, we have a market place that we opened up midway through last year in the Mexican side, all the expense SKUs, and other initiatives. So we are certainly looking at double-digit plus kind of growth in the future that’s what our longer-term expectation is.

In terms of our B2B business and the tech segment, that business as we have shifted it, it is on the top-line to focus on more services that some of the products, the PC industry is strong as it was but we are adding services. So I think we would certainly look at growth in that business should certainly be in the high single-digits and hopefully we’ll do better than the past.

In terms of the consumer business, as Richard said earlier we want that business to operate profitability. Again that business is here in North America and so much anywhere else and we think that’s would be a profitable business servicing consumers, the products that they want and to serve as an acquisition vehicle for our B2B sales agents.

Andrew J. Fleming – Heartland Funds

Okay. And if I just think in terms of the reportable segments, just tech products and industrial products, just to make sure I’m understanding it correctly, the plus double-digits in industrial products and you are saying low single digits in tech product in aggregate?

Larry Reinhold

In the B2B part of the tech business. I know there is a lot of – I said, I think we can do than low single-digits. We certainly have fine internal plans for that and the consumer business will be I know wherever it shakes out, we have profitable business in tech, B2B is much larger across our tech segment and the consumer channel. And because Europe is little over almost all of B2B and in North-America it is had B2B and consumer are [indiscernible]?

Andrew J. Fleming – Heartland Funds

Okay, good. I’m just trying to look at the Tech products segment, it looks like you are very close to being breakeven on an adjusted operating income basis this past quarter. I know you said you expect to be or hope to be break-even in that segment, I mean 2014. Will that be coming first-half of the year or second-half of the year?

Larry Reinhold

The earlier the better.

Andrew J. Fleming – Heartland Funds

Yes. Are your expectations that could happen as soon as first quarter?

Larry Reinhold

Well, we’re obviously thinking that it all depends on performance in Europe. We have certain countries have year-end – excuse me public sector year-end at the end of Q1. So we can have or we do very well, we’re going to have a very strong Q1 and some large countries in Europe. We certainly hold our management teams to a high standard and we expect a lot out of them.

Andrew J. Fleming – Heartland Funds

And then if you think about non-recurring charges, in the tech product segment, what would be reasonable to expect for 2014?

Larry Reinhold

Well, we don’t give specific forward guidance but I think, we will continue to have restructuring charges in Europe as we continue consolidation efforts plus our back office functions, share service center. And in terms of our North American business we will, we evaluate our stores et cetera as they come up, but right now I’m not anticipating large onetime charges in that business this year. And we’ve already between Q4 of last year, when we took large about non-cash write offs of the intangible assets for certain cities from USA and for the write down of the PC manufacturing operation. And this year, we have less the CompUSA and reported retail stores, and this year we changed those also and it’s hard to correct, so again a further $3 million write down on that. I think those brand names are completely written off and there is nothing left to take. So I think that that was much closer as I can give.

Andrew J. Fleming – Heartland Funds

Okay. So the big step down in one time charges in the tech product segment in 2014 versus 2015?

Larry Reinhold

The large write offs last year were for those brands.

Andrew J. Fleming – Heartland Funds

Yes, fair now and then rear view mirror.

Larry Reinhold

Yes.

Andrew J. Fleming – Heartland Funds

Okay, great. Well, thanks for the update.

Larry Reinhold

You’re welcome.

Operator

Thank you sir. And at this time that does conclude our questions in the queue. I like to turn the program back over to Mr. Leeds for any additional closing remarks.

Richard Leeds

Okay, thank you everybody. We look forward to talking to you when we announce our next quarter results.

Operator

Thank you gentlemen and thank you ladies and gentlemen. This does conclude today’s call. Thank you for your participation and have a wonderful day. Attendees, you may log off at this time.

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