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Edited Transcript of SYX earnings conference call or presentation 28-Feb-17 10:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Systemax Inc Earnings Call

PORT WASHINGTON Feb 28, 2017 (Thomson StreetEvents) -- Edited Transcript of Systemax Inc earnings conference call or presentation Tuesday, February 28, 2017 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mike Smargiassi

Brainerd Communicators, Inc. - IR

* Larry Reinhold

Systemax, Inc. - President & CEO

* Tex Clark

Systemax, Inc. - VP & CFO

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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. fourth-quarter and full-year 2016 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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Mike Smargiassi, Brainerd Communicators, Inc. - IR [2]

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Thank you and welcome to the Systemax fourth-quarter and full-year 2016 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 fourth-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 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 presenting the entire North American technology products group, Misco Germany, and Afligo, our former rebates processing business, as discontinued operations, as well as excluding certain recurring and nonrecurring adjustments of comparable GAAP measures, investors have an additional meaningful measurement of the Company's performance.

In addition, as the fourth quarter 2015 period included 14 weeks and the fourth-quarter 2016 period included 13 weeks, the results for the quarter and for the year are not directly comparable. The Company is now reporting an average daily sales metric to enhance comparisons of the periods.

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.

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Larry Reinhold, Systemax, Inc. - President & CEO [3]

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Thanks, Mike. Good afternoon, everyone, and thank you for joining us today.

In 2016 we made significant progress in streamlining our corporate structure, while continuing to invest in our ongoing businesses.

This commenced with the shutdown of the former North American technology group in the first quarter, the sale of our German IT reseller business in the third quarter, and the sale of our Afligo rebate processing business in the fourth quarter. These businesses each generated significant losses for a number of years and their exits have significantly improved Systemax's overall profitability as well as simplified the business.

We also continued to invest in growth initiatives in our successful industrial, France, and Netherlands businesses and in turnaround initiatives in our United Kingdom and other European businesses. The initial impact of these efforts are reflected in our improved operating results in the fourth quarter.

And we have returned the Company to overall profitability from continuing operations both on a GAAP and a non-GAAP basis for the first time in several years. We believe we are well positioned for a strong performance in 2017 and beyond.

Industrial had a solid year and fourth quarter on the top line, as we continued to outperform many competitors within the overall MRO market. Revenues reached a record $715 million for the full year 2016 and $176 million for the fourth quarter, which represented increase in average daily sales of nearly 3% for the year and 5% for the fourth quarter. The growth was broad across industrial's customer base and its product lines.

Industrial's product margins are stable and the business is focused on improving execution and better leveraging the infrastructure we have built the past several years. We recently completed our warehouse management system conversion and all six of our distribution centers are now on a single leading third-party platform.

Optimizing this new WMS and the distribution centers is ongoing, and we have already seen improvements in inventory turns and are now positioned to service most of our customer base with two-day shipping transit times for in-stock items. We are looking forward to achieving the full benefits and cost efficiencies of our nationwide distribution network throughout 2017.

We also made significant progress in strengthening key customer and vendor relationships. A large part of this effort included the launch of our customer and vendor shows last year. These were highly successful events that showcased the breadth of our product offering, the size and scope of our distribution centers, and our strong customer and vendor partnerships.

We are planning to host two of these events in 2017, with additional vendor and customer participation. Our first will be held in late April at the Meadowlands complex in New Jersey just outside New York City.

Finally, we made investments in our managed sales teams, which will allow us to more efficiently follow up on sales leads and ultimately drive higher customer lifetime values.

Industrial is strategically positioned for continued top-line growth and to deliver expanding margins in 2017 and beyond. We entered the year with strong top-line momentum as we ended Q4 with double-digit average daily sales growth in the month of December.

We have scalable infrastructure in place that has the capacity to handle higher volumes and, as we execute on our efficiency initiatives, we expect to see increased profitability.

In EMEA technology, and excluding Misco Germany, non-GAAP revenue increased modestly in the quarter on a constant currency and average daily sales basis. Consolidated bottom-line results showed a benefit from the German exit, growth in both absolute dollars and leverage performance in France, and improved results in the Netherlands, partially offset by continuing operating losses in the UK.

France had another outstanding quarter, with double-digit constant currency average daily sales growth, expanded gross margins, improved SG&A leverage, and record operating profit. France continues to benefit from a strong management team, excellent vendor partnerships, successful tender bids, and growth across its customer base.

In the Netherlands we completed the integration of our solutions and reseller businesses into a single organization. Overall, the business grew its top line on an average daily sales basis led by demand for our services and solutions offering, including several large tender wins within the government and education sectors. Our Netherlands services revenue growth remained strong and further validates our investment thesis and ongoing strategy in Europe.

In the UK, we narrowed our fourth-quarter operating loss versus the prior year as we took additional steps to focus our sales organization, realign our management, and broaden our solutions and services offering to the market. The UK business is showing some progress, but substantial work remains to return the business to profitability.

In summary, we executed on a number of initiatives in 2016 that will allow us to strengthen our competitive position and drive profitability. We have valuable assets in our industrial, France, and Netherlands operations and, with a strong cash position, we have significant flexibility to evaluate strategic M&A that will accelerate our growth.

We are returning capital to shareholders through our quarterly dividend and our entire team is committed to improving margin performance, which remains an area of significant opportunity.

I will now turn the call over to Tex.

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Tex Clark, Systemax, Inc. - VP & CFO [4]

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Thank you, Larry.

I will address our segment financial performance in more detail. As mentioned previously, our comments will be primarily [related] to non-GAAP results. In addition, revenue results now include an average daily sales metric to enhance comparability between periods.

Fourth-quarter consolidated revenue reflects top-line growth in both industrial and EMEA on a constant currency and average daily sales basis. Consolidated gross margins improved year over year, driven by the relative segment mix.

Consolidated SG&A decreased on an absolute basis and non-GAAP operating profit and margin increased to $6.5 million and 1.6%, respectively.

Starting with industrial's financial performance, industrial's fourth-quarter revenue decreased 1.7% on a reported basis, but was up 4.7% on a constant currency and average daily sales basis. And 2016's fourth quarter had four fewer selling days versus 2015's fourth quarter, which resulted in the difference between reported and average daily sales.

This was our strongest quarter of growth on an average daily sales basis in 2016, and we showed top-line momentum as we moved through the period, with December posting double-digit gains.

Industrial's gross profit for the quarter decreased to $48.9 million from $51.8 million last year. Gross margin was off 120 basis points, reflecting decreased freight margins and increased warehouse staffing costs due to incremental temporary labor to ensure customer service levels during our systems transition. This was partially offset by a modest increase to product margins.

We expect the higher levels of temporary staff to continue into the first quarter of 2017, but expect staffing expense to normalize in the second quarter, as we recently completed the warehouse management system conversion.

SG&A spending for the quarter was $39.4 million and reflects the reduction in back office staffing costs and lower marketing costs. These reductions were partially offset by increased salary within our sales organization and increased IT costs to service our enterprise software.

Industrial's non-GAAP operating income for the quarter was $9.8 million and margin improved to 5.6%.

We continue to proactively manage the business and in Q1 have taken action to further streamline our operations, which we anticipate will result in annualized savings of over $5 million. We've recorded approximately $0.5 million in severance and related costs associated with this action, which will be reflected in our first-quarter results. This was a strategic effort that primarily reflects a reduction in force in select areas as we continue to focus on our core growth opportunities.

Turning to EMEA's financial performance, EMEA's fourth-quarter revenue declined 11.2% to $238 million. This excludes Misco Germany, as will the remainder of my commentary on EMEA.

On a constant currency basis average daily sales increased 0.9%. As Larry mentioned, France and Netherlands had strong quarters, delivering over 10% and 6% growth respectively on a constantly currency and average daily sales basis. These results were partially offset by declines in our other markets.

EMEA gross profit for the quarter declined to $32.2 million, but gross margin increased 130 basis points to 13.5%. Improvements in gross margin were primarily the result of growth in France, which is our highest gross margin operation in Europe, as well as product and freight margin improvements in the UK.

SG&A spending declined $0.5 million inclusive of $2 million of long-term asset impairment recorded in the UK. Excluding these noncash charges, SG&A would have been down approximately $2.2 million.

EMEA's non-GAAP operating results for the quarter were breakeven compared to a loss of $1.7 million last year.

In the fourth quarter we sold our Afligo rebate processing business. This business originated within our North American technology group and it incurred losses of $2.2 million in 2016. We recognized a book gain of $3.9 million from this divesture.

Both of these results are highlighted as non-GAAP adjustments in the corporate segment of today's press release.

Let me now turn to our balance sheet.

We continued to have a very strong and liquid balance sheet, with a current ratio of 1.6 to 1. As of December 31 we had approximately $150 million in cash, less than $1 million in debt, and over $186 million of working capital. Further, we have approximately $59 million of availability under the new $75 million credit facility we entered into in October.

The strength of our balance sheet allows us to continue to invest in our growth opportunities and return capital to shareholders. As a result, our Board of Directors has declared a cash dividend of $0.05 per share of common stock to shareholders of record at the close of March 10, 2017, payable on March 20, 2017. We anticipate continuing a regular quarterly dividend into the future.

This concludes our prepared remarks. If you have any questions about fourth-quarter 2016 earnings, please contact Brainerd Communicators, our investor and media relations advisor, our Systemax directly. Contact information can be found on the earnings release issued earlier today.

Thank you for your continued interest in Systemax.