Global Industrial Co
NYSE:GIC

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Global Industrial Co
NYSE:GIC
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Price: 25.2 USD -0.47% Market Closed
Market Cap: 963.4m USD
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Earnings Call Transcript

Earnings Call Transcript
2018-Q2

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Operator

Good afternoon, ladies and gentlemen, and welcome to Systemax Inc.'s Second Quarter 2018 Earnings Call. At this time, I would like to turn the call over to Mike Smargiassi of The Plunkett Group.

M
Mike Smargiassi
executive

Thank you, Rocco, and welcome to the Systemax Second Quarter 2018 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 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.

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 and our divested European operations, excluding France, as discontinued operations as well as excluding certain recurring and nonrecurring adjustments from 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. 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 the 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.

L
Lawrence Reinhold
executive

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

Our Industrial and France businesses both delivered another quarter of strong financial performance, with double-digit revenue increases, healthy margins and strong cash flow generation. These businesses have continued to organically grow their top and bottom line quarter after quarter, and both are well positioned for the future. I would like to recognize all of our employees for their efforts. They are truly the key to our success.

On a consolidated, continuing operations basis, Systemax generated $363.1 million in revenue in the second quarter, an increase of 12.6% on a constant currency average daily sales basis, and non-GAAP operating profit of $25.9 million, an improvement of 13.6%.

In June, our Board of Directors declared a special onetime cash dividend of $1 per share and today, declared our regular quarterly dividend of $0.11 per share. Including today's dividend, we will have returned more than $100 million to shareholders in 2018, which is a direct reflection of our strong financial performance and the strength of our balance sheet.

Before turning to our business review, I would like to comment on our IT business in France, where we have had operations since 1991. Inmac Wstore is highly successful, having delivered in local currency, organic revenue growth at a compounded annual growth rate of 11.6% from 2012 through 2017. This revenue growth has outpaced the French IT market, and its margins are among the best in the industry.

It is the success of our operations in France that made it an attractive asset to both strategic and financial buyers, and we have been evaluating strategic alternatives for the business through a managed bidding process for a period of time.

In July, we received an irrevocable binding offer from Bechtle AG, Germany's largest independent IT systems integrator to acquire Inmac WStore. And today, we announced that we have accepted the offer and entered a definitive agreement to sell the business at an enterprise value equivalent to USD 246 million in cash. We believe the transaction recognizes the substantial value we have built in France and that Bechtle will be a good home for the Inmac WStore business, its employees, customers and vendor partners.

We currently expect the transaction to close later this year after customary closing conditions and deliverables, including receipt of France regulatory approvals. We believe the proceeds from the France sale will be repatriated on a tax-efficient basis and the transaction would provide substantial, additional liquid capital to invest in strategic acquisitions for Industrial and to return capital to shareholders.

Upon closing, our operations will be the Industrial business in North America, which focuses on industrial supplies and MRO, markets we have served since 1949. For reference, Industrial generated almost $850 million in sales revenue for the trailing 12 months, grew the top line organically at double-digit rates, processes more than 1 million dollars orders, utilizes more than 2 million square feet of distribution center space and employs more than 1,500 associates across North America and other geographies.

If the historical, double-digit growth continues, Industrial would surpass $1 billion in revenues in the next 2 years.

I will now turn to our current quarter results for Industrial. The second quarter of 2018 was another great performance. Sales increased 13.8% over the second quarter of last year and reflect an accelerated growth rate compared to Q1 of 2018. Demand remained robust across our diversified customer end markets, our broad product offerings and our multiple sales channels.

We delivered solid operating leverage across the business, and we are pleased with the 10% segment operating margin that we generated. As previously discussed, we faced a difficult comparison to the year-ago quarter, which had an exceptional operating margin performance. Second quarter margin results were in line with our internal expectations, and on a sequential basis, we showed improvement from the first quarter of the year on both gross and operating margins.

Our initiatives to drive both top line sales as well as enhanced profitability continue to make progress. Warehouse optimization efforts, which include the implantation of labor-management standards across our distribution network, are being rolled out. We have completed this initiative in 1 of our U.S. distribution centers and have seen improved productivity. We will complete this initiative in 2 more U.S. DCs during the remainder of 2018.

We also recently completed sales and leadership training for the entire U.S.- and Canadian-managed sales force of approximately 250 customer-facing team members and realigned the sales group to drive account-support efficiencies and service levels.

Finally, we added additional end-market specialists and product and technical expertise to support existing and emerging product categories to further differentiate the value we bring to customers.

Last week, we hosted our first National Customer and Vendor Expo in the New Jersey Meadowlands, just outside New York City. We had more than 100 vendors present and almost 1,000 attendees from around the United States. During this year's expo, we also hosted a series of technical events designed to drive customer engagement and highlight the depth of expertise that both global and its vendors provide. The event was a great success and is an important part of our efforts to broaden our customer relationships.

Turning now to our French IT reseller business. Inmac WStore had another outstanding quarter, with strong revenue growth and profitability. Revenue grew almost 11% on a local currency average daily sales basis, as we benefited from solid performance across the customer base.

Non-GAAP operating margin was 5.6%, a 30 basis point improvement from last year's second quarter, as we continue to deliver strong operating leverage. As a result, operating income improved approximately 28%.

France continues to benefit from its excellent reputation in the market, its terrific management and associate teams and a strong commitment to customer service.

In summary, Industrial is a terrific business that's performing exceptionally well and positioned for continued success. It is delivering double-digit organic growth, showing improved operating leverage, which is driving our bottom line performance.

With the sale of our IT business in France, Systemax will be focused on Industrial's continued growth and performance, a business which has historically delivered strong revenue growth and generated higher margins than our operations in France. We are making investments to optimize operations, enhance the value we bring to our customers and drive long-term profitability. We are generating strong cash flows and maintain significant financial flexibility to capitalize on our growth opportunities, including strategic M&A.

I will now turn the call over to Tex.

T
Thomas Clark
executive

Thank you, Larry. I will now address our segment financial performance in more detail. Both the 2017 and 2018 second quarters had the same number of selling days in the U.S. and France, while our operations in Canada had 1 additional selling day in the second quarter this year compared to the second quarter of last.

Turning to our results, second quarter consolidated revenue reflect double-digit top line growth in both Industrial and France, while consolidated gross profit improved 10.5% year-over-year, with gross margin of 27.8%.

Consolidated SD&A improved 120 basis points as a percentage of sales, driven by leverage gains across most key cost functions. Non-GAAP operating profit was $25.9 million, an increase of 13.6%, and margin decreased 20 basis points to 7.1% compared to the last year's second quarter, primarily driven by lower margin performance in Industrial, which we did anticipate.

Starting with Industrial's financial performance. In the second quarter, revenue increased 13.8% over Q2 of last year, an improvement from the 11.5% year-over-year growth reported in the first quarter of 2018. The rate of growth accelerated in May and June, with strength across both the U.S. and Canadian operations. Canada delivered it's sixth consecutive quarter of double-digit gains, generating revenue growth of over 25%.

Industrial's gross profit for the quarter increased to $80 million from $73.3 million last year. Gross margin declined 160 basis points from the year-ago quarter, reflecting primarily a shift in freight and product mix. Margin improved to 40 basis points sequentially and is in line with our previously stated expectations for our second quarter margin performance.

Selling, distribution and administrative spending for the quarter was $56.8 million, a 20 basis point improvement as a percentage of sales from last year. This cost benefit was largely driven by leverage within our fixed cost structure, partially offset by increased marketing spend.

Industrial non-GAAP operating income for the quarter was $23.2 million, and operating margin was 10.0%. We are pleased with our operating margin performance, which was in line with our internal expectations and showed solid sequential gains from the first quarter.

As we have previously noted, operating margin in the second quarter of 2017 was exceptional, and we did not expect a repeat of that performance this year. We continued to make investments to further improve our long-term profitability and believe Industrial's 2018 margin variability will be much more normalized. We expect to see a more moderate sequential variance given the impact of customer, product, channel and marketing mix on individual period results.

Total depreciation and amortization expense in the quarter was approximately $0.9 million. We continue to anticipate 2018 CapEx within the Industrial business to range between $4 million and $6 million.

Before reviewing France's financial performance, I would note that we expect to report France as a discontinued operation in our third quarter 2018 financial results. In our 10-Q being issued next week, we will include pro forma financials within the subsequent event footnote.

The agreement to sell our France business is denominated on a cash-free, debt-free basis and will include normalized working capital adjustments. The sale is subject to customary regulatory approvals and is expected to close later in 2018.

On a pro forma basis, assuming that it's closed on June 30, 2018, and using current exchange rates, the enterprise value would have been $246 million, and its equity value, inclusive of net cash on hand and other adjustments, would have been approximately $270 million.

We anticipate recognizing a pretax book gain of between $182 million and $188 million on the sale. And after funding transaction expenses, the total cash available to U.S. shareholders on a tax effective basis resulting from this transaction would have been between $238 million and $245 million.

After the closing of this transaction, we estimate a normalized income tax rate on our remaining operations of approximately 26% compared to an effective tax rate of approximately 30% in the first half of 2018, as France had operated in a higher corporate income tax rate environment.

France delivered another quarter of exceptional top and bottom line results. Second quarter revenue increased 19.6% to $131.9 million on a USD-reported basis. On a local currency basis, average daily sales increased 10.6%, largely driven by a continuation of the robust performance of the past many quarters. Strength in the quarter was evident in each of France's SMB, large corporate and public sector end markets.

France gross profit for the quarter increased to $21.1 million, while its gross margin decreased 50 basis points to 16.0%. The decline in gross margin was primarily attributable to the completion of a large government project, which had single-digit margins, common for deals of its type.

SG&A spending was $13.7 million, an 80 basis point decrease as a percentage of sales. Cost efficiencies were primarily the result of the elimination of certain transition, services and expenses the businesses -- the business was incurring, following the sale of our other European businesses as well as general cost and spend discipline across the workforce.

France's non-GAAP operating income for the quarter was $7.4 million, and the margin was 5.6%, a 30-basis-point improvement from last year. France recorded approximately $0.1 million of depreciation and amortization in the period, while CapEx is anticipated to be less than $1 million in 2018.

Let me now turn to our balance sheet. We continue to have a very strong and liquid balance sheet, with the current ratio of 1.6:1. As of June 30, we had approximately $97 million in cash, essentially no debt and over $163 million of working capital.

Further, we have approximately $71 million of excess availability under our $75 million credit agreement. I would note that our resulting cash balance at the end of the second quarter is after we funded the special dividend of $1 per share, which in total was approximately $37 million and was paid to shareholders on July 2, 2018.

The strength of our balance sheet allows us to continue to invest in our growth opportunities, explore strategic M&A and return capital to shareholders. As a result, our Board of Directors has declared a quarterly cash dividend of $0.11 per share of common stock, and we anticipate continuing a regular quarterly dividend in the future.

This concludes our prepared remarks. If you have any questions about the second quarter 2018 earnings, please contact Mike Smargiassi at The Plunkett Group, 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 continued interest in Systemax.

Operator

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