Global Industrial Co

NYSE:GIC

Earnings Call Transcript 2020-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to Systemax Inc.'s First Quarter 2020 Earnings Call.

At this time, I would like to turn the call over to Mike Smargiassi of The Plunkett Group. Please go ahead.

[Mike Smargiassi]

Thank you, Chris, and welcome to the Systemax First Quarter 2020 Earnings Call. Today's call will include formal remarks from Barry Litwin, Chief Executive Officer; and Tex Clark, Senior 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 the results, please contact The Plunkett Group 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 and under Risk Factors in the company's annual report on Form 10-K and quarterly reports on Form 10-Q. 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. Barry Litwin.

[Barry Litwin, executive]

Thanks, Mike. Good afternoon, everyone, and thank you for joining us today. Since our last call, so much has changed as the COVID-19 virus impacts every facet of our personal lives and the economic landscape. During this time, the safety and well-being of our associates, their families, our vendor partners and our customers have been our first priority. To ensure business continuity for our customers, we initiated the first remote workforce strategy of our entire back office in both North America and Asia in mid-March, and we did it within 24 hours. Our foundation as an e-commerce-centric business is a competitive advantage that helps secure a smooth operational transition and positions us to continue to serve customers in the current environment. Our remote workforce is operating efficiently without loss of productivity. Our distribution network has remained operational, and the team has settled into a new integrated work-life routine. I'm proud of how our employees and the business responded.

As with most essential businesses, we have needed a temporarily close certain distribution centers to ensure the continued safety of our employees and perform cleaning activities. The redundancy built into our distribution network has allowed us to reroute order fulfillment as needed with minimal delays to our customers. Our sourcing and supply chains are working tirelessly to secure high demand products for medical, health care and business-critical operations equipment and in turn, highlighting our position as a reliable and valuable partner. We are taking customer orders in real time, responding to and solving individual customer needs and constantly updating COVID-19-specific landing pages and emails so our customers are made aware of changing or replenishing stock.

As companies consider their reentry plans, we launched our R3; restore, return and rebound initiative on April 20. This customer-focused program is designed to help companies plan for the eventual reopening of their businesses and facilities and to keep their operations running. It provides guidance on room by room best practices for working in the post COVID-19 world including product solutions for cleaning and sanitizing requirements; indoor and outdoor maintenance; social distancing aids, such as signage and separators; and how to configure floor plans for everything from bathrooms and break rooms to lobbies, common areas and supply closets. Initiatives like R3 are designed to deepen relationships and secure our position as a true partner to our customers. We are not sitting still. As we move through this crisis, our entire team is focused on servicing our customers' unique needs and building relationships for the long term.

Our first quarter financial performance reflects the initial impact of COVID-19. Revenue for the quarter was down 2%, but up modestly through early March, at which point, we started to see the impact of business shutdowns. At this time, we also observed a shift in customer product demand into cleaning, PPE and other direct response COVID-related items and temporarily away from traditional core product lines.

We have seen an exponential increase in demand for these highly consumable items but due to constrained supply availability worldwide, we were unable to fill most of these orders in March. We anticipate this supply constraint to continue but are proactively working with our vendors to source product and remain cautiously optimistic that we will resolve a portion of this backlog in the second quarter. While our top line will continue to reflect the current economic environment across the nation, our business is operating very effectively given these unprecedented circumstances. This reflects the significant progress we are making in our multiyear strategic road map to grow customer engagement, generate operating leverage from current operations and investments and champion a stronger customer-centric culture across our entire organization. We continue to proactively manage our cost structure and invest in our customer-focused strategy, which will serve us well during this crisis, and in the long term. We remain committed to delivering higher service levels and end-to-end transaction transparency to our customers. Our expanded distribution network is allowing us to continue to meet customer expectations around service and delivery and provide additional redundancy to our operations.

We launched enhanced mobile and desktop order tracking that is removing friction from transaction process for customers. And we continue to drive sales efficiency through new tools and technology that will increase productivity over time. As we look to broaden our customer partnerships, we are expanding our product offering in new, emerging and existing categories. We have seen strong demand for PPE, janitorial and sanitation consumables as we move through the first quarter. We have been investing in these categories for a number of years in terms of product offering and building knowledge expertise as we added subject matter experts that are OSHA safety trained, giving us a competitive advantage in the market.

In conclusion, we continue to navigate the impact of COVID-19, a challenging personal and economic environment for everyone, but one that is opening new opportunities for the business. We have a strong platform and remain committed to driving our operating and customer-centric strategy. We are making investments in the business to enhance our competitive position as we emerge from the current environment and for the long term. We will proactively manage our cost structure while funding strategic investments. I believe we are well positioned to continue to serve customers during this crisis and emerge as a stronger organization. With a strong balance sheet and exceptional liquidity, we maintain significant financial flexibility. I hope you and your families remain healthy during this time.

I will now turn the call over to Tex, our Chief Financial Officer.

[Thomas Clark, executive]

Thank you, Barry. I will now address our performance in more detail and would like to note that we had the same number of selling days in the first quarter of 2020 as we did in the year ago period.

In the first quarter, revenue declined 2.1% on both a GAAP basis and an average daily sales constant currency basis over Q1 of last year. Revenue was approximately $227.3 million, with the U.S. declining 2.5%, while Canada grew 6.8% in local currency on an average daily sales basis. As Barry noted, we had modest sales growth through early March, but we recorded low double-digit revenue declines in the closing weeks of the quarter as businesses deemed nonessential were shut down by government mandates and many essential businesses reduced spending as they navigate the current environment. Revenue declines accelerated through late March and into early April as shelter-in-place requests and business shutdowns expanded across the country, but the rate of decline has stabilized in recent weeks. We currently anticipate these conditions to continue for the second quarter. However, as businesses open up and our supply chain for PPE stabilizes, we expect to be able to offset some of these challenges.

In the quarter, core product categories generally had negative results as customers' priorities temporarily shifted. These results were partially mitigated by continued strength in categories such as safety, packaging and janitorial maintenance. Like many of our peers, we saw order demand for personal protective equipment surge to record levels, getting late in the quarter. Industry-wide scarcity of these items constrained our ability to fulfill many of these orders in the quarter, but our product sourcing teams have been scouring the globe to locate key product offerings for our customers. We have actively sourced local providers and ramped up our private label supply chain, which we currently expect will mitigate some of the declines in our core categories in the second quarter.

Gross profit for the quarter was $76.7 million, down from $80.3 million last year. Gross margin was 33.7%, down 90 basis points from the prior year. Margin declines in the period were primarily associated with the product mix shift away from certain high-margin core product categories with a high concentration of private label sales towards more safety and PPE products, which typically carry a lower margin profile. In addition, there was an impact from the timing of tariff cost realization in early 2019 as we captured price in anticipation of tariff increases, which were deferred until later in Q2 last year. As all FIFO benefits have been utilized now, our inventory currently reflects the full tariff costs that were enacted throughout 2019.

We remain focused on maintaining our gross margin profile, but expect to see margin pressure due to the current economic environment and changes in mix as a result of our customers' strong demand of PPE and other related products. Selling, distribution and administrative spending for the quarter was $65.2 million or 28.7% of net sales, a 20 basis point improvement as a percentage of sales from last year. SD&A leverage was primarily the result of improved advertising efficiency, lower variable compensation and general OpEx discipline, which allowed us to absorb the incremental cost structure of our new Dallas distribution center. In light of the challenging economic environment, the company has taken a number of steps to streamline its cost structure. We are actively managing our digital advertising to further optimize spend in light of changes in customer demand profile. We have reduced discretionary spending across all functions, while also eliminating overtime and temporary labor where appropriate. Further, we've had and expect to continue to have a natural reduction in incentive compensation expense due to lower sales and profit.

GAAP operating income from continuing operations was $11.5 million and operating margin declined 60 basis points from the year ago quarter, driven by each of the areas previously discussed. Total depreciation and amortization expense in the quarter was $1.1 million. Capital expenditures for the first quarter were $0.3 million, and we continue to expect total 2020 capital expenditures in the range of $3 million to $5 million, primarily comprised of maintenance-related capital.

Total free cash flow from continuing operations was $13.4 million in the quarter.

Let me now turn to our balance sheet. We have a very strong and liquid balance sheet with a current ratio of 1.7:1. As of March 31, we had approximately $64 million in cash and cash equivalents, essentially no borrowings and approximately $108 million in working capital. In the first quarter, we returned over $43 million to our shareholders via our recurring quarterly dividend of $0.14 and a special $1 dividend announced on February 25. In addition, we repurchased approximately 233,000 shares of stock at an average price of $16.84 in the quarter. As of March 31, 2020, we had approximately 1.5 million shares remaining under our current repurchase authorization.

We have an exceptionally strong balance sheet and cash flow generation as evidenced by our current cash position, essentially 0 debt and current availability of approximately $71 million under our $75 million credit agreement. As a result, we maintain significant flexibility to fully execute on our strategic plan, continue to fund our quarterly dividend and successfully navigate through these challenging times. Our Board of Directors has declared its quarterly dividend of $0.14 per share of common stock, and we anticipate continuing that in the future.

This concludes our prepared remarks. If you have any questions about first quarter 2020 earnings, please contact Mike Smargiassi at The Plunkett Group, 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 continued interest in Systemax.

[Operator]

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