Global Industrial Company (GIC) Q4 2012 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to Systemax Fourth Quarter and Full Year 2012 Earnings Teleconference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, March 5, 2013. At this time, I would like to turn the call over to Mike Smargiassi of Brainerd Communicators. Please go ahead.

Thank you, operator. Welcome to the Systemax Fourth Quarter and Full Year 2012 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 report on Form 10-Q. I would like to highlight the non-GAAP metrics that are included in today's press release. Given the impact of recent strategic activities, the company has expanded its disclosure to include non-GAAP metrics. The company believes that by excluding certain recurring and nonrecurring 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 in the company's website and will be filed with the SEC in a Form 8-K. This call is a property of and is copyrighted by Systemax Inc. I will now turn the call over to Mr. Richard Leeds.

Good afternoon, and thank you for joining us today. For the quarter and full year, we had a solid performance from our B2B operations, specifically our Industrial Products Group and our European business. However, this was more than offset by continued weakness in our consumer focused operations. Overall, we remain pleased with the performance of our B2B operations with consolidated sales up moderately for the quarter and full year. Our Industrial Products Group delivered strong results, posting its third consecutive year with more than 25% revenue growth. Since 2009, we've doubled the size of this business in both revenue and profitability. And that is all organically driven as we gain market share in core categories and have significantly expanded our products and category offerings. Industrial Products revenue in the quarter was up 18% and was historically our slowest quarter of the year. Industrial's bottom line performance continue to reflect increased drop shipping in support of our rapid SKU expansion and the need to further optimize our freight performance where we are just starting to recognize some of the benefits from recent initiatives. Our outlook for Industrial remains strong, and we are focused on aggressively driving the growth of this business in the year ahead, continuing to take steps to improve our distribution operation and strengthening our sales team. Looking at B2B tech on a constant currency basis, our European B2B tech business grew revenue 6% in the quarter and 10% for the full year as we continue to gain market share in our largest markets. We have made a number of investments in this business as we position ourselves to better capitalize on the opportunities we see in existing markets and the region overall. We have built out our European team to support our growth and pursue a broader and more cohesive pan-European strategy. In this regard, we recently announced we will open our shared service center in Budapest, Hungary later this spring. This new lease facility, our first in Central Europe, will drive operational efficiencies, support our continued growth and eventually serve as the hub of our Central and Eastern European sales and marketing operations. In North America, our B2B tech revenue declined 6% for the quarter and 2% for the full year on a constant currency basis. Results reflect a softening demand environment as we move through the year, a tepid PC market overall and a temporary sales disruption related to our transition from private label to third-party branded PCs. We also saw a soft demand in December from our core SMB customers, which we believe was in part due to the fiscal cliff and ongoing U.S. budget discussions. However, our operations remain solid and we have a strong position within our SMB target market. We continue to make investments to grow and improve our performance and remain confident in the long-term potential of this business. On the consumer side, substantially all of which is in North American tech, revenue declined 12% for the quarter and 14% for the full year on a constant currency basis. Buying patterns remain challenged and we've seen eroding demand and pricing environments across the industry, including key categories such as TVs and PCs. Industry data show that each of these categories experienced 9% sales decline in the quarter, driven by both volume and average selling price erosion. Similar to the business market, the ongoing fiscal discussions in Washington have added an overhang in the market, one that consumers are only just starting to understand and feel. Moving forward, the North American tech business is under our previously announced new leadership. We are focusing on driving the growth strategy and improving the operational performance of this business as we look to meet our industry's challenges and strengthen our competitive position. While it remains a tough environment and the challenges facing the consumer electronics industry are real, we're focused on the items under our control: taking proactive steps to strengthen our businesses and make improvements to our position that will drive our long-term performance. In 2012, we executed a number of initiatives. We consolidated our U.S. consumer technology brands under TigerDirect, exited our private label PC manufacturing business, opened a new distribution center for Industrial Products and realigned our European operations, including established our new shared services center in Hungary. Our work is not complete. The review of our operations from a strategic and execution standpoint is ongoing as we continue to seek ways to optimize our performance. We're focusing on driving our top and bottom line performances. In Industrial in Europe, we're making investments to strengthen our operations and our competitive position, which will allow us to continue to build on our success and drive additional growth. And in North American tech, a new leadership team is committed to taking the necessary steps to improve our performance. With a growing B2B business and a strong cash position, we have a solid foundation upon which to build. We have a business that is diversified by market, channel and customer. We're capitalizing on our opportunities in industrial in Europe, and we'll continue to make prudent investments in our business. Thank you. And with that, I'll pass the call to Larry.

Thank you, Richard. Before turning to our results, I would note again that we have begun incorporating non-GAAP performance measures in this press release. The narrative that follows includes non-GAAP results as we believe these are very relevant to understanding the underlying performance of the business. Nonrecurring and recurring items that have been excluded in determining non-GAAP results include asset impairments, reorganization of severance, new facility start-ups, litigation settlements, intangible asset amortization and stock-based compensation, which, in aggregate, impacted results by $41.2 million and $51.9 million for the quarter and full year, respectively. Turning first to our consolidated revenue. The fourth quarter 2012 consolidated sales were $935.2 million, a decline of 4.4% and off 3.6% on a constant currency basis compared to the fourth quarter of 2011. Sales for the quarter reflect solid growth in our B2B operations, which was more than offset by weakness in our consumer business. Looking at our revenue by channel. Fourth quarter B2B channel sales were $526.7 million, an increase of 2.5% or 3.4% on a constant currency and same-store basis. Our consumer sales are $408.5 million, a decrease of 12.1% or 11.3% on a constant currency and same-store basis. Turning to our reporting segments. The Industrial Products Group had another outstanding quarter, with revenue increasing 18.0% year-over-year to $98.3 million with growth across most product categories in all channels. Gross profit increased during the quarter, however, gross margin as a percent of sales decreased due to greater volume of drop ship products, freight pressure and incremental cost related to our new distribution center in New Jersey. We feel confident that each of these items can be effectively mitigated and will not have a long-term effect on our operating results. On the bottom line, Industrial's non-GAAP operating income declined by $1.6 million to $7.0 million. This decline was primarily due to increased SG&A spend in web advertising and on sales compensation, which outpaced our growth in gross profit dollars. At the end of the quarter, industrial SKUs totaled 670,000, up 9.3% sequentially and up 37.9% compared to 2011. Industrial continues to make operational adjustments to fully capitalize on its new distribution center, including the rebalancing of inventory between its 3 distribution centers, and it continues to make investments in its sales team to support its growth. Sales for our Technology Products segment, which includes our European and North American operations, declined 6.6% year-over-year to $835.5 million and 5.8% on a constant currency basis, while non-GAAP operating loss was $8.1 million. Looking at our combined technology group segment on a geographical basis. In Europe, we delivered solid revenue growth of 6% in the quarter on a constant currency basis. Our 2 largest markets, the U.K. and France, generated double-digit increases and continued to gain market share as we capitalize on sales staff investments and attracted new customers in both markets. SG&A increases reflect investments in new sales agents, as well as the build-out of our leadership team to support our pan-European structure plans. We continue to make investments to improve operating efficiencies and drive growth. In the quarter, we booked $4.5 million in restructuring charges primarily associated with our Hungary shared services center. The center is currently being built out and we expect to incur additional onetime costs in the first half of 2013 totaling between $9 million and $11 million. In North America, our Technology Product Group's revenue declined 10% for the quarter on a constant currency basis and reflects a 12% decline in our consumer business and a 6% decline in our B2B operations. Consumer revenue was weak across all of our consumer channels, web, retail and TV shopping. On the Web, we have recently implemented new target marketing efforts and have seen some modest increases in our conversion rates. In retail, our total store count at December 31, was 41, unchanged from the third quarter. We closed an underperforming store in North Carolina last week so our current store count is 40. In TV shopping, we're beginning to diversify our vendor and category offerings, which should allow the channel to grow over a disappointing 2012 performance. On the product side, we recorded a modest increase in our computer components category, while declines were led by TVs and PCs. Consolidated gross margin declined 140 basis points to 12.9% from 14.3% last year. Key drivers of the decline included increased promotional freight campaigns, competitive pricing pressures within our North America technology segment and products mix shifts within our industrial segment. This decline was partially offset by an overall shift in our consolidated gross margin towards the Industrial Products Group as its revenue growth continues to outpace our technology business unit. Overall, SG&A reflects planned investments to support our strategic initiatives. As a percentage of sales, SG&A increased by approximately 100 basis points over last year, which was primarily the result of increased advertising expenditures in our North American operations, continued investment in headcount within our sales teams and cost associated with our expanded leadership team to support our planned pan-European structure. Consolidated non-GAAP operating margin was negative 0.6% compared to 2.3% positive in the prior year. Nonrecurring and recurring adjustments during the quarter were $41.2 million on a pretax basis or $0.67 per diluted share on an after-tax basis, using a normalized 40% effective tax rate. Non-GAAP operating results were a loss of $5.6 million compared to income of $22.8 million last year. GAAP pretax loss of $46.7 million compares to income of $19.8 million last year. The GAAP effective tax rate for the fourth quarter of 2012 was a benefit of 42.2% compared to a provision of 25.4% last year, and reflects the result of reversals of valuation allowances in France and operating losses in the U.S. including impact of the asset impairment charges recorded. Non-GAAP net income totaled a loss of $2.4 million or $0.06 per diluted share. As of December 31, our balance sheet included $360.8 million of working capital and a $150.7 million in cash, an increase of $53.4 million from December 31, 2011, reflecting our efforts to proactively manage our balance sheet. Our cash position reflects the special $9.1 million dividend we paid in December. That dividend was $0.25 per share. The current ratio at December 31, 2012, was 1.7:1 and total debt was $8.1 million. With that, we would like to open the call to questions. Operator?

[Operator Instructions] Our first question comes from Anthony Lebiedzinski from Sidoti & Company. Anthony C. Lebiedzinski - Sidoti & Company, LLC: Wanted to get a little bit more insight on the 2 different segments, the Technology and Industrial Product segments. So looking at the operating incomes, clearly, I can see those metrics. I was wondering if you could provide the gross margin numbers by each segment.

Well, Anthony, we don't typically disclose the specific gross margin rate segment but what we saw is a continuation of what we have forever, which is the tech business is much lower gross margin than the industrial business. The industrial business gross margin in the quarter did -- was lower than it was in the fourth quarter of last year due to the items that we mentioned a moment ago. The tech business also have recorded a lower gross margin in the quarter due primarily to -- in the North American -- performance of our North American part of the business. Anthony C. Lebiedzinski - Sidoti & Company, LLC: Okay. And as far as the factors affecting the Industrial Product segment profitability, we've seen 3 quarters in a row where you've been able to increase your sales in that segment be at the operating income is down, at what point do you think we can start to see actually a profitability improvement in that segment?

This is Richard. We continue to invest in that business. We have a lot of exciting things that's going on with that. One is we're continuing to grow our headcount of our sales reps so we invested in them as that takes place. Two, we're investing in personnel for increasing the SKU count that we support on the Web. As we mentioned -- as I mentioned in my prepared remarks, SKU count is up dramatically in the year. It was huge numbers in 2, 3 years. And we are quite focused on the bottom line and getting that growing as well, but we like to invest in that business. It's a great business. So I would like to say, shortly, but we're continuing to invest in that. Anthony C. Lebiedzinski - Sidoti & Company, LLC: As far as your retail store base, you mentioned that you recently closed 1 store. Going forward, do you anticipate any additional store closings?

So like any retailer, we're constantly evaluating our footprint of stores and seeing which ones are underperforming. And as we make those decisions, we'll be letting you guys know. But right now, we have not made any decisions for -- regarding those. Anthony C. Lebiedzinski - Sidoti & Company, LLC: Okay. And I think, Larry, you mentioned that you recently did some changes to your website. You have seen some increased conversion just recently so I was wondering if you could just give us a little bit more insight as to what you've done.

We've got different partners who were helping us with e-mail campaigns, third parties and so we've got -- done a number of initiatives and recent changes, and I think we're seeing the beginning of some, hopefully, very positive long-term results. Anthony C. Lebiedzinski - Sidoti & Company, LLC: Got it. Okay. And lastly, just a housekeeping question. Do you have the CapEx number for 2012? And any projection for 2013?

I have the former, not the latter. The CapEx for the year is a little over $12 million. In 2013, I think we -- it will be a substantial -- you have substantial CapEx, the result of mostly the changes that we're making in Europe, so to say that our Hungary shared service center and a number of IT initiatives that will be ongoing there. But it was $12 million for 2012, which I think was around the same number as last year's 2011 for the full year.

[Operator Instructions] I'm showing no questions. I'd like to hand the conference back over to management for any closing remarks.

Thank you, everybody. We look forward to announcing our next quarter's results with you. Goodbye.