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Edited Transcript of SYX earnings conference call or presentation 31-Oct-17 9:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 Systemax Inc Earnings Call

PORT WASHINGTON Nov 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Systemax Inc earnings conference call or presentation Tuesday, October 31, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lawrence P. Reinhold

Systemax Inc. - CEO, President and Director

* Michael Smargiassi

Brainerd Communicators, Inc. - MD

* Thomas Eugene Clark

Systemax Inc. - CFO and VP

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to Systemax Inc.'s Third Quarter 2017 Earnings Call. At this time, I would like to turn the call over to Mike Smargiassi of Brainerd Communicators. Please go ahead.

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Michael Smargiassi, Brainerd Communicators, Inc. - MD [2]

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Thank you, and welcome to the Systemax' Third Quarter 2017 Earnings Call. Today's call will include formal remarks from Larry Reinhold, President and Chief Executive Officer; and Tex Clark, 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 third quarter results, please contact Brainerd Communicators or Systemax. Contact details can be found in the press release issued today and at systemax.com.

Today's results 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 presenting the entire North American Technology Products Group, our divested European operations and Afligo, our former rebates processing business, as discontinued operations as well as excluding certain recurring and nonrecurring adjustments for comparable GAAP measures, investors have an additional meaningful measurement of the company's performance. Further, unless otherwise specified, when discussing revenue changes, management will be referring to constant currency average daily sales results.

This call will include a discussion of certain non-GAAP financial measures. Our company has provided 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.

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Lawrence P. Reinhold, Systemax Inc. - CEO, President and Director [3]

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Thanks, Mike. Good afternoon, everyone, and thank you for joining us today. Our North American Industrial Products Group and our France Technology value-added reseller businesses each delivered another exceptional quarter. Total revenues for these 2 businesses increased to $319 million in U.S. dollars, representing organic growth of over 11%.

Non-GAAP operating income was $19 million, and net income increased over 250%. We had strong cash flow generation and ended the quarter with total cash of $176 million on the balance sheet with no debt.

Starting with our Industrial Products Group. Industrial achieved another terrific quarter of record sales, surpassing $200 million for the second time in its history. This represented organic growth of 9% for the quarter and sales growth increased each month as we moved throughout the period. Sales were strong across product categories and customer end markets.

Industrial once again delivered improved operating leverage versus last year as we continue to benefit from improved product and freight margins as well as continued discipline within our selling, distribution and administrative spending. As a result, operating margin more than doubled from the third quarter of 2016, and we surpassed $20 million in segment operating income. We expect to make additional investments in our sales organization and in technical expertise to support our broad product offering, improve service levels and enhance the value we bring to our customers.

Industrial remains well positioned for the future. Our investments in operational improvements are showing solid returns, and we are strengthening our customer relationships. We remain focused on long-term profitability and continue to explore strategic acquisition opportunities that can support and accelerate our expansion efforts.

Turning now to our French business. Our Inmac WStore IT value-added reseller business generated almost $115 million in US dollars in revenue for the third quarter and extended its record of double-digit organic top line growth to 15 consecutive quarters. Revenue growth in Q3 was over 15% with broad growth across both product categories and customer segments, led by our large key accounts. Operating margins increased substantially over last year with operating income growing nearly 70% to more than $5.4 million in U.S. dollars.

We believe our France business continues to outperform its peers in sales growth and is benefiting from excellent customer and vendor relationships and an efficient operating structure. The business remains focused on expanding its services and solutions offering and is looking forward to its annual customer expo, which will be held on Thursday, November 23, in Paris. Last year, this event was attended by more than 120 vendors and over 1,000 customers, and we look forward to increased attendance this year.

In summary, our Industrial and France management teams are doing an exceptional job of driving revenue growth and greater profitability in their respective businesses.

This is a result of a lot of hard work from all of our employees and the investments we've made over the past several years. I want to thank our teams in both businesses as well as our great customers and vendor partners. Our businesses are well positioned in their markets, are generating tremendous organic growth. They're strengthening customer relationships, taking steps to broaden their service offerings and bringing more value to their customers. With our strong cash position, we continue to return capital to shareholders through our quarterly dividends, and we're actively seeking strategic M&A opportunities that can enhance the future success of our businesses.

Finally, we recently appointed 2 new senior executives to the team. Nancy Ashbrooke, as Vice President of Human Resources; and Dave Kipe, as Senior Vice President and Chief Operations Officer. Nancy and Dave are proven executives who bring extensive knowledge and experience to support the continued growth of Systemax. I look forward to continuing to work with them and the rest of our team members in advancing our growth and efficiency initiatives.

I will now turn the call over to Tex.

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Thomas Eugene Clark, Systemax Inc. - CFO and VP [4]

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Thank you, Larry. I will address our segment financial performance in more detail. As mentioned previously, my comments will primarily be directed to non-GAAP results. Both the 2017 and 2016 third quarters had the same number of selling days for both Industrial and France.

Turning to our results. Third quarter consolidated revenue reflects strong top line growth in both Industrial and France, while consolidated gross profit improved almost 20% year-over-year with margin expanding to 28.1%, driven by improved performance in both of our segments.

Consolidated SD&A decreased on a percentage of sales basis by over 200 basis points as we showed leverage across the business. Non-GAAP operating profit and margin increased to $19 million and 6%, respectively, compared to $7.4 million and 2.6% last year in Q3.

Starting with Industrial's financial performance. Industrial's third quarter revenue increased 8.9%. In our Canadian operations, we delivered 14.5% growth, the third consecutive quarter of double-digit gains. Overall revenue growth was again driven by solid gains within our legacy core lines.

Industrial's gross profit for the quarter increased to $71.2 million from $59.8 million last year. Reported gross margin improved 290 basis points from the year-ago quarter, reflecting a favorable sales mix between stocked and dropshipped items, improved freight margin performance as we more effectively utilized our nationwide distribution network and capitalize on our new WMS system and strategic pricing optimization.

On a sequential quarter basis, gross margin declined approximately 130 basis points, which was anticipated and highlighted in my second quarter comments. This was primarily driven by a return to more historical levels of category and sourcing mix as well as certain promotional freight activities, which we historically utilized on seasonal products in the third quarter.

Selling, distribution and administrative spending for the quarter was $51 million, a 230 basis point improvement as a percentage of sales from last year. We delivered improved leverage across major cost functions led by better utilization of marketing spend as well as a realization of salary savings from actions taken earlier in the year.

Industrial's non-GAAP operating income for the quarter was $20.2 million, and margin improved to 9.9%, an improvement of 540 basis points from last year. Total depreciation and amortization expense in the quarter was $900,000.

We have generated exceptional year-over-year improvements in Industrial's operating margin performance, which we expect to continue on an annualized basis. Given the lower number of selling days in Q4 related to the Thanksgiving and Christmas holidays, operating margin may reflect a higher percentage of fixed costs against the revenue base generated in the period. However, we anticipate enhanced profitability year-over-year. We are proactively managing the business for the long term and making additional investments in our sales organization, including training in additional product expertise as well as warehouse efficiency products and marketing efforts that may impact our margin performance, specifically when compared to the sequential quarter basis.

Turning to France's financial performance. Third quarter revenue increased 21.7% to $114.9 million on a USD reported basis. On a local currency basis, sales increased to 15.3%, marking almost 4 years of sustained double-digit revenue gains. This continued outstanding performance is a testament to the business' ability to provide increased value to its existing customer base while at same time, attracting new customers to service.

France's gross profit for the quarter increased to $18.4 million, while its gross margin was flat year-over-year at 16%. We were very pleased with France's margin performance as they completed a number of large deals in the quarter, which typically have a lower associated margin rate.

SD&A spending was $13 million, a 130 basis point improvement as a percentage of sales. The primary reason for the year-to-year improvement was related to volume growth spread across our fixed cost base and a reduction in costs associated with the migration of certain functions from our previous EMEA-shared service center back to France.

France's non-GAAP operating income for the quarter was $5.4 million, and margin improved to 4.7%, a 130 basis point improvement from last year. This is an exceptional performance given the historical seasonality of the third quarter, which typically results in our lowest sales volume for the year and soft margin performance as fixed costs [are covered] by the lower revenue and gross profit. France recorded $100,000 of depreciation and amortization expense in the period.

Within our discontinued operations in Q3, we recorded $2.5 million of expenses primarily associated with the exit of our former North American technology segment. These charges were related to reserves for sales taxes in our former NATG businesses and legal settlements for other commercial claims that's been brought against these businesses during their wind-down procedures.

Let me now turn to our balance sheet. We continue to have a very strong and liquid balance sheet with a current ratio of 1.9:1. As of September 30, we had approximately $176 million in cash, no debt and over $226 million of working capital. Further, we have approximately $71 million of availability under our $75 million credit agreement. The strength of our balance sheet allows us to continue to invest in growth opportunities, explore strategic M&A and return capital to shareholders.

As a result, our Board of Directors has declared a cash dividend of $0.10 per share of common stock to shareholders of record at the close of November 13, 2017, payable on November 20, 2017. We anticipate continuing a regular quarterly dividend in the future.

This concludes our prepared remarks. If you have any questions about third quarter 2017 earnings, please contact Mike Smargiassi at Brainerd, our investor and media relations adviser, or Systemax directly. Contact information can be found on the earnings release issued earlier today. Thank you for your time and your continued interest in Systemax.

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Operator [5]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.