Global Industrial Company (GIC) Q2 2015 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Systemax second quarter 2015 earnings call. All participants will be in listen-only mode. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Mike Smargiassi of Brainerd Communications. Please go ahead.

Thank you, Laura. Welcome to the Systemax second quarter 2015 earnings call. Today's call has been prerecorded and will include formal remarks from Richard Leeds, Chairman and Chief Executive Officer of Systemax and Larry Reinhold, Executive Vice President and Chief Financial 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 on 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 the non-GAAP metrics that are included in today's press release. The company believes that by excluding certain reoccurring and non-reoccurring adjustments from comparable GAAP measures, investors have an additional meaningful measurement of the company's performance. As a result, this call will include the 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 would now like to turn the call over to Mr. Richard Leeds.

Good afternoon and thank you for joining us today. Our results reflect another quarter of strong performance from our industrial products group, modest improvement in the media technology online and the challenges we are experiencing during the ongoing realignment of our North American technology business to serve the B2B and public sector marketplace. Industrial had another solid quarter, as revenue increased 27% highlighted by continued organic growth that outpaced the general MRO industry and the addition of the plant equipment group or PEG which we acquired during January. On a constant currency basis and excluding PEG, revenue grew 10%. We continue to move forward with our PEG integration activities. Our sales teams are proactively engaging PEG customers with product offerings that PEG did not have available. We bring our sales and marketing efforts under a single, unified and best practice approach, which we believe will maximize our inbound and outbound marketing initiatives. The integration of IT systems continues to move forward and remains on schedule. This effort is designed to improve efficiencies, lower cost and allow us to service every customer from any distribution center in North America. The buildout of our new 465,000 square feet Las Vegas distribution center, which is replacing a much smaller facility is nearing completion. We are excited to bring this new facility online as once it is fully operational, it will improve service levels to customers in the West Coast and we expect the operations to ramp throughout the rest of the year. We are also capitalizing on the addition of PEG's Canada distribution network, as we broaden our product offering and reduce both the cost and time to ship to the customers in this market. Near-term, we remain focused on the execution of our integration plan while continuing to make prudent investments in the business to support our growth and position us for the future. In EMEA technology, second quarter sales on a constant currency basis and excluding Misco Solutions increased 0.6%. France had another strong performance with double-digit top and bottom line growth for the sixth consecutive quarter. We posted improved operating performance overall, as most of our markets delivered better results on a year-over-year and sequential quarter basis, except for the U.K., where we are seeing continue decreased sales. In July we pointed Simon Taylor as President of our European Technology Products Group. Simon joins us from Insight Enterprises where he spent the past 14 years in various positions, including his most recent role as Senior Vice President of Operations in Europe. He brings a wealth of industry knowledge and significant operating experience in the EMEA region. I will be working closely with Simon in driving the growth strategy and operational initiatives for our EMEA business and one of his primary focus areas will be on improving our U.K. operations. The past several years we have taken substantial steps to enhance the operating structure and broaden our pan-European capabilities. This gives us a sound foundation for our business moving forward. In our Hungary shared service services operation is showing improved performance as our teams set on to their roles and they are more effectively supporting that market. In addition, we continue to broaden our solutions and service offerings, bringing enhanced value to our customers. Finally in North American technology, our results reflect the continued execution of our B2B strategy announced in March and the challenges that tend any significant business transition. The transition will take time and has a substantial disruption in the business as we transform our operations, which may continue to adversely impact our results. We are developing our service offerings and launched a more targeted marketing effort. This includes close partnering with OEMs to bring our customers more briefings and features that highlight technology. We believe our core B2B business is a significant asset and that can be improve by focusing on our strong SMB customer base, enhancing our real sources serving governments, education and healthcare customers. In summary, we are focused on improving the performance of all three of our business units and making progress in our efforts to support higher value customers through an expanded set of products, services and solutions. We believe these efforts will allow us to strengthen our competitive position and deepen our customer relationships. Our cash position remains strong and we look forward to keep you updated on our progress. Thank you. And with that I will pass the call to Larry.

Thank you, Richard. Looking at our results on a consolidated basis, second quarter 2015 total sales were $740.0 million, down 11.0% compared to the second quarter of 2014. Currency movements had a significant negative effect in the quarter. Excluding the impact of currency changes, the closed retail stores and the acquisitions of Misco Solutions and PEG, sales declined 2.9%. Our consolidated sales performance was led by solid growth in our industrial products group, which was more than offset by declines in our North America technology businesses. Turning to our reporting segments. The industrial product group's second quarter revenue grew 27.3% to $180.9 million as we benefited from solid growth across most product lines and the addition of PEG. On a constant currency basis and excluding PEG, industrial revenues increased 10.0%. GAAP operating margin declined 100 basis points driven by a 60 basis point reduction in gross margin as well as an increase in operating expense as a percentage of sales. Gross margin was negatively impacted by increased distribution costs associated with the new Las Vegas facility startup efforts and reduced freight margin. Product margin improved slightly in the quarter, driven by selling channel mix and growth of certain higher-margin categories. Our new Las Vegas distribution center is just commencing its operations and we anticipate industrial's overall reported gross margins will be negatively impacted until this facility is scaled to an efficient level over the next year. Longer-term, we expect this facility will result in modestly improved gross margins from freight cost reductions to West Coast customers and improve efficiency at the other distribution centers. While SG&A leverage improved within the existing industrial group, combined operating leverage declined slightly due to a higher cost structure within the acquired PEG business. When we finish integrating the businesses, we believe that we will see favorable leverage within the overall industrial products group Looking at our EMEA technology group segment, revenue declined 8.8% to $252.6 million. Reported revenues were significantly impacted by the year-over-year strengthening of the dollar against European currencies, primarily the Euro in the quarter and sales declines in the U.K. market. On a constant currency basis and excluding the impact of the Misco Solutions acquisition, revenue increased 0.6%. Operating losses narrowed in the quarter on a sequential and year-over-year basis, as we benefited from double-digit growth in France and bottom line improvement in all other markets, except the U.K. SG&A spend was down 16.9% year-over-year and savings from our now fully operational Hungary shared services center helped drive 830 basis point improvement in overall SG&A as a percentage of sales. Our German operations performance improved during the quarter. However, we continue to explore all options to bring this business to profitability. In our North America technology group, revenue declined 25.7% for the quarter to $305.1 million or 11.5% on a constant currency basis and excluding the impact of the now exited retail stores. Our B2B operations saw a lower rate of sales decline than last quarter. GAAP results were significantly impacted by the restructuring, which I will address later. Non-GAAP operating loss widened in the quarter due to the disruption of the restructuring and margin pressure in a tough IT marketplace. Overall volume declines across the business outpaced SG&A savings realized on an absolute basis. Consolidated gross margin improved to 15.1% from 14.8% last year. The key driver of the consolidated margin gain was the increased proportional weight of a higher margin industrial business' contribution to the overall consolidated results. Consolidated SG&A spend on an absolute basis decreased 9.1% in the quarter, reflecting the impact of the reduction in force and strategic initiatives within our North America technology segment and the lower cost structure in Europe as we benefited from our shared services center in Hungary. While spend was down on an absolute basis, as a percentage of sales SG&A increased by 30 basis points year-over-year. Consolidated deleveraging was primarily due to the higher operating cost structure of our industrial products group and its relative contribution to our consolidated business. Non-GAAP operating income was $2.2 million compared to $1.7 million last year. In Q2, each of our operating segments showed substantial non-GAAP bottom line improvement on a sequential basis compared to Q1 2015. Turning to our North American tech restructuring, which we announced during March. The closure of 31 retail stores and liquidation of their inventory was completed during May. The Naperville, Illinois distribution center was closed and its remaining inventory moved to the Jefferson, Georgia distribution center during June. In connection with these actions we recorded one time exit and severance costs of $28.8 million during Q2. This includes a $24.2 million one-time charge record for the leases of closed facilities, $1.8 million in commission and consulting expense related to our retail store closure process, $2.0 million reflected within COGS related to foregone gross profit from liquidation pricing and $0.8 million in severance related costs. Aggregate restructuring costs and impacts recorded in both Q1 and Q2 were $36.8 million. Although we still have a number of leased facilities that are vacant and being marketed, we believe the majority the restructuring actions have been completed as of June 30 and that the aggregate cost of the restructuring will be less than previously anticipated. Now, turning to our balance sheet. As of June 30, our balance sheet included over $260 million of working capital and approximately $144 million in cash. We continue to have a very strong and liquid balance sheet. This allows us to maintain healthy relationships with our vendors and to take advantage of payment discounts offered, to take positions in special inventory purchase deals, to execute on M&A opportunities such as Misco Solutions and PEG and to declare special dividends when circumstances warrant. The current ratio at June 30, 2015 was 1.6 to 1 and total debt was $2.4 million. This concludes our prepared remarks. If you have any questions about second quarter 2015 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.