Systemax Inc. (NYSE:SYX) Q2 2016 Earnings Conference Call August 2, 2016 5:00 PM ET
Mike Smargiassi - IR
Larry Reinhold - President and CEO
Thank you and welcome to the Systemax second quarter 2016 earnings call. Today's call has been prerecorded and will include formal remarks from Larry Reinhold, President and Chief Executive 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 in 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 that non-GAAP metrics are included in today's press release. The company believes that by presenting the entire North American technology products group as a discontinued operation, and 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. Larry Reinhold.
Thanks, Mike, and good afternoon. Thank you for joining us today. In the quarter, we continued to streamline our business, optimize our operations, and we took additional steps to improve our long-term profitability.
Industrial extended its revenue growth streak to 26 consecutive quarters despite a soft North American MRO market, improved efficiencies in its distribution network, and implemented a cost reduction initiative, which will lower its annual cost structure by about $4 million per year. Its quarterly results include approximately $2.9 million in one-time costs associated with the cost reduction initiative and an inventory adjustment caused by an IT system issue. We have identified the root cause of the error and have implemented controls to prevent its recurrence.
Industrial continues to make investments in its sales capabilities as we increased our customer facing representatives, which included hiring a number of experienced sales professionals. We also continued to make progress on the optimization of our distribution network. We went live with our new warehouse management system in our New Jersey facility. We increased efficiencies in our larger Las Vegas warehouse, and we expanded our ability to handle small parcel shipments in several facilities.
This year, we've launched a series of customer and vendor shows in a number of locations. These shows have been very well received by customers and provide a global branded event that highlights our vendor relationships, the breadth of our product offering, and the value we bring, particularly in more advanced and technical product lines as well as our own private label brands. We recently completed our third show in Port Washington, New York, and will hold shows in Pleasant Prairie, Wisconsin this week, and in Las Vegas during October.
Finally, we recently kicked off a long-term strategic planning project for industrial. With the acquisition of PEG and the significant growth we have seen over the past several years, we felt this was an opportune time to take a step back, look at our organization, the markets we participate in, and the opportunities we have in front of us. While we're not prepared to provide any specifics at this time, it's clear we have numerous operational enhancement and growth opportunities ahead. We have a lot of work to do and it will take time to fully capture the fruits of our initiatives. Today, industrial is a great business and we believe it has the potential to be even better.
In EMEA technology, France delivered its 10th consecutive quarter of double digit growth, despite a soft IT market. This business has been an incredible success story and our team there continues to do an outstanding job.
In the Netherlands, our Misco Solutions business generated its second consecutive quarter of double digit revenue growth. We also consolidated our solutions and reseller operations into a single new shared facility in Amstelveen, which will reduce overhead costs and further our integration efforts.
In the UK, our efforts to turn around the business are moving forward. We opened a new sales office in North London, and recruited a number of experienced sales members to our team, which we view as a key win for the business. While Brexit has received significant headlines, we have not seen any significant direct impact on our business yet. We booked a number of recent enterprise level account wins, and the strengthening of our sales organization remains an area of focus.
During the quarter, we initiated a strategic review of our German business, and in late July announced the sale of our operations and our exit from this market. Our Germany operations have struggled for a number of years and the transaction allowed for a cost effective exit, found a home for all our German employees and customers, and will positively impact our future financial performance.
As a result of the strategic initiatives we have accomplished over the past year, the company has significantly simplified its structure, reported non-GAAP operating profits, and maintained a strong balance sheet. Accordingly, our board of directors has declared a cash dividend of $0.05 per share of common stock, and anticipates continuing a regular quarterly dividend in the future. With a strong balance sheet, we have the flexibility to return capital to our shareholders, execute on our business plans, and continue investing in our growth opportunities.
Looking at our second quarter consolidated non-GAAP performance, consolidated revenue reflects topline growth in industrial, offset by modest declines in EMEA. Consolidated gross margin declined slightly, driven by improved margins in EMEA, offset by the lower gross margin in the industrial business that resulted from the one-time costs recorded in cost of goods sold. Consolidated SG&A increased modestly on an absolute basis, and consolidated operating margin was 0.5%, flat to last year.
Turning to industrial's financial performance, industrial's second quarter revenue grew 0.5% overall. On a constant currency basis, revenues grew 0.8%. Our US revenue was up 1.5% in the quarter, while Canada was down about 10% on a constant currency basis. Both 2016 and 2015 quarters included the same number of selling days. Industrial's gross profit for the quarter declined to $49.8 million from $51.7 million last year. Gross margin was off 120 basis points on a net basis, but was essentially flat after accounting for the impact of the one-time costs.
SG&A spending for the quarter was $41.2 million, and reflects increased healthcare, salary, IT and severance costs. Industrial's operating income for the quarter was $8.8 million, and operating margin declined from 7.4% to 4.8%. Excluding the impact of the one-time costs, operating margin would have been 6.4%. We remain focused on improving efficiencies and identifying other cost reduction opportunities.
Turning to EMEA's financial performance, EMEA's second quarter revenue declined 5.7% overall. On a constant currency basis, revenues declined 5.6%. As mentioned previously, France and Netherlands Solutions had strong quarters which were offset by declines in our other markets. EMEA gross profit for the quarter declined about 3.7% to $31.3 million. However, gross margin improved 20 basis points to 13.1%, primarily the result of changes in sales mix with a higher margin France business comprising a larger portion of the total gross profit.
SG&A spending in absolute dollars for the quarter was up modestly by about $0.4 million, primarily from increased advertising. EMEA's operating loss for the quarter increased to $2.2 million compared to $0.8 million last year, driven by the UK and Italy businesses.
For the quarter, the discontinued North American tech business incurred losses of $6.0 million, primarily related to the closing of the Miami headquarters building. We have now completed most of the wind down and anticipate future activities to relate primarily to collecting accounts receivable and settling leases and other contingencies.
Let me turn to our balance sheet. As of June 30th our balance sheet included approximately $165 million of cash, and approximately $199 million in working capital. We continue to have a very strong and liquid balance sheet. The current ratio at June 30th was 1.6 to 1, and total debt was $0.3 million, with about $39 million of availability under our line of credit.
In summary, we're focused on improving our businesses, both the offering we provide our customers and the efficiencies of our operations. Our team is committed to driving our profitability and the value of our businesses, we have a strong cash position, are returning cash to shareholders through our dividend, enough flexibility to execute our business plan and pursue strategic M&A.
This concludes our prepared remarks. If you have any questions about second quarter 2016 earnings, please contact Brainerd Communicators, our investor and media relations advisor, or Systemax directly. Contact information can be found on the earnings release issued earlier today. Thank you for your interest in Systemax.
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