Systemax's (SYX) CEO Richard Leeds on Q2 2014 Results - Earnings Call Transcript

| About: Systemax Inc. (SYX)

Systemax Inc. (NYSE:SYX)

Q2 2014 Earnings Conference Call

July 29, 2014 5:00 PM ET


Mike Smargiassi – IR

Richard Leeds – Chairman and CEO

Larry Reinhold – EVP and CFO


Anthony Lebiedzinski – Sidoti & Company


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

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

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 the single stores value-added IT reseller. We believe that our combined operations make us the number one player in the Dutch markets. SCC brings an impressive customer list, enhanced vendor accreditations and a suite of service offerings including remote network monitoring, logistics and assembly, customer data center network design and implementation and diagnostic and help desk services.

This provides us with new and expanded service offerings that we can provide to existing customers and they will hopefully serve to the foundation for the expansion of similar services in other markets. We welcome our new SCC colleagues and customers to the Systemax family.

Our North American B2B technology channel increased its revenue and expanded both gross and operating margins as we improve leverage in the business. We’re pleased with the traction we have seen in the first half of the year as we continue to execute on initiatives across our operations, including improvements for IT platforms and increased focus on targeted marketing, as well as expansion of enterprise product offerings.

In our North American consumer technology channel, we saw improvement in the rate of decline in the quarter. However, our performance remains weak and the operating environment is challenging. We remain very focused on bringing this business back to sustained profitability and the efforts to optimize our performance are ongoing.

In summary, our combined B2B businesses are growing very well with revenue growth of over 10% in the second quarter. Industrial is on pace to generate more than $500 million in revenue in 2014. It continues to successfully execute on its growth opportunity.

In our B2B technology channel, we are encouraged by the recent trends in North America, and in Europe we are strengthening our value-added solutions offering and building a pan European infrastructure to more efficiently support our operations and drive future growth. We continue to maintain a healthy balance sheet, and across the company we are working hard to bring additional value to our customers and improve our consolidated performance.

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

Larry Reinhold

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 dollar in the quarter. On a constant currency basis, revenue grew 2.4%.

The SCC acquisition accounted for about 1.6% of the sales growth. Gross margin expanded on a consolidated basis, and adjusted operating loss narrowed over the prior year.

SG&A increased in absolute dollars, but was flat as a percentage of sales as we continue to see a temporarily overlap in costs due to the transition of functions to our shared service center. We remain on track to complete this transition next year and currently have almost 400 employees at the center. We have established all core operating functions in Hungary, and moving forward we expect additional hiring will be much lower than it has been in recent quarters.

Special charges in the quarter were $5.2 million, comprised of severance as well as other recruitment costs in our shared service center.

In North America, our Technology Product Group’s revenue declined 4.9% for the quarter or 4.3% on a constant currency basis, driven by weakness in our consumer channels.

Our North American technology B2B channels delivered 5.5% revenue growth in the quarter, which was sequentially improved over the 1.6% growth in the first quarter. We expanded growth and operating profit as we were able to grow our product margin and lower our cost basis as a percentage of sales.

In our North American Consumer Technology channel, sales remained weak but we did see an improvement in 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 first quarter and compared to 39 stores in Q2 last year.

In total, the store count reduction accounted for over a third of the 13.5% overall decline in consumer sales. We continue to review and evaluate the performance of our retail stores on an ongoing basis and as their leases come up for renewal.

Looking at our consolidated North American technology operations, gross margin was flat. SG&A was reduced, and we further narrowed our operating loss. We remain focused on the execution of our improvement efforts with a goal of returning to profitability.

Consolidated gross margin improved to 14.8% from 14.4% 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 moderate improvement in gross margin in both our North American and EMEA technology businesses.

Consolidated SG&A increased 2.9% in the quarter, and was roughly flat as a percentage of sales. Our SG&A spend reflects planned investments in our Industrial Products Group in support of its growth efforts and in Europe as we continued our transition to a pan European operating model. This was offset by reduced expenses in North America technology.

Consolidated non-GAAP operating margin improved to 0.2% compared to negative 0.3% last year. Non-GAAP operating income was $1.6 million, an improvement of $3.8 million from the loss of $2.2 million last year.

As of June 30, our balance sheet included over $338 million of working capital and approximately $153 million cash. The current ratio at June 30, 2014 was 1.7 to 1 and total debt was $4.1 million.

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

Question-and-Answer Session


(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

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

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

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

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

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

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

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

Thank you.

Richard Leeds

Thank you, Anthony.


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

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


Thank you ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.

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