Global Industrial Co

NYSE:GIC

Earnings Call Transcript 2018-Q3

[Operator]

Good afternoon, ladies and gentlemen, and welcome to Systemax Inc's. Third Quarter 2018 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, executive]

Thank you, and welcome to the Systemax Third 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 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 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, including France, as discontinued operations as well as certain -- 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 the 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.

[Lawrence Reinhold, executive]

Thanks, Mike. Good afternoon, everyone, and thank you for joining us today. Let me start with our Industrial Products Group. Industrial, delivered an all-time record performance. Third quarter results were excellent and reflect the strength of its platform as sales increased over 15% organically compared to the third quarter of last year to $235 million.

The rate of sales growth at Industrial has accelerated for 5 consecutive quarters. Demand was robust across the business with solid performance in our managed sales channels as well as continued generation of new customers through our leading e-commerce platform.

Sales of our historical core categories, including material handling, storage and shelving, janitorial and maintenance, and business furniture delivered low double-digit gains while sales of our newer, smaller categories grew at a faster pace in aggregate, consistent with our product strategy and focus.

Gross margin percent was up slightly from last year, reflecting a relatively stable selling and purchasing environment in the quarter. Operating expenses were well managed overall and leverage remains healthy with segment operating margin above 10% for the second consecutive quarter and expanding approximately 40 basis points from Q3 of last year.

We saw no material impact on the business or profitability from tariffs in the quarter. Tex will have additional commentary on that later. We also made further progress on our operational excellence initiatives in the quarter. We are seeing initial benefits from our warehouse optimization efforts, which are delivering improving inventory turns and will allow us to more efficiently support the sales growth of our stocked products. Our sales force training programs have resulted in improved sales efficiency and support our efforts to deepen relationships with both existing and new customers. For select product categories and customer end markets, we continue to add subject matter expertise, which allows us to deliver additional value to our customers throughout the sales process and differentiate our offering in the market. And we continue to invest in our e-commerce platform to ensure it retains its market-leading functionality for our customers.

Turning to our former France business. As announced previously, on August 31, we completed the sale of our France IT business to Bechtle AG, a market leader based in Germany. This was a very successful transaction that benefited the France business, its loyal employees and Systemax shareholders. This gain significantly strengthened our cash position, generating gross proceeds of almost $270 million before taxes and transaction costs, and a pretax gain of $178 million. We have repatriated all of the cash from this transaction to the United States and have over $300 million on our balance sheet at quarter end.

With the France exit, we have completed the strategic restructuring of our operations, a process that started approximately 3 years ago. Today, we are focused on driving the continued profitable growth within the Industrial Products Group, which is a healthy business that has delivered consistent double-digit organic revenue growth for many years. It has a terrific management and associate team and a culture dedicated to customer service. We are uniquely positioned to serve the SMB market and are making investments to further enhance our competitive position, expand the value we bring customers and ensure remain well positioned for the future. With strong cash flow generation and an exceptional balance sheet, we have significant financial flexibility to capitalize on our growth opportunities, pursue strategic M&A and return capital to shareholders.

In closing, today marks my last earnings call, and I wanted to take this opportunity to personally thank all of our employees for their efforts and dedication to the company. You should be very proud of what you have accomplished and excited to be part of Systemax' future.

I also want to thank our customers for trusting us with their business and our vendors for their partnership. The previously announced appointment of Barry Litwin and planned CEO transition is on track and making good progress.

Barry has already hit the ground running and with the support of our outstanding management team and Board of Directors, Systemax is very well positioned for continued success. It has been my privilege to have been part of its management leadership team for the past 12 years.

I will now turn the call over to Tex.

[Thomas Clark, executive]

Thank you, Larry. I will now address our performance in more detail. I would like to note that as of the third quarter, the France operations are being reported as a discontinued operation for the current and prior periods. And then both 2017 and 2018 third quarters had the same number of selling days in both U.S. and Canada.

Starting with Industrial's financial performance. In the third quarter, revenue increased 15.6% organically on an average daily sales, constant currency basis over Q3 of last year, an improvement from the 13.8% year-over-year growth reported in the second quarter of 2018. Revenue of $235.8 million was a record for the segment, with strength continuing throughout each month of the quarter in both our U.S. and Canadian operations. Growth in the U.S. was 14.7%, while Canada delivered its seventh-consecutive quarter of double-digit gains, generating revenue growth of over 30%.

Revenue performance was solid across the spectrum of product categories that we offer and in each of our inbound, web and managed sales channels.

Industrial's gross profit for the quarter, increased to $82.2 million from $71.2 million last year. Gross margin was 34.9% and up slightly compared to the year-ago quarter, reflecting continued positive product and selling channel mix. Gross margin improved 30 basis points sequentially.

Selling, distribution and administrative spending for the quarter was $58.3 million, a 40 basis point improvement as a percentage of sales from last year. We remain disciplined in the management of marketing spend and general operating expenses, they continue to drive leverage within our fixed cost structure. This was partially offset by an increase in distributions in our staffing levels in an effort to keep up with increasing demand of our in-stock items.

Industrial's non-GAAP operating income for the quarter was $24.2 million and the operating margin was 10.3%, up 40 basis points from the third quarter of 2017 and up 30 basis points sequentially from the second quarter of this year.

Total depreciation and amortization expense in the quarter was approximately $0.9 million, and we continue to anticipate 2018 capital expenditures within the industrial business to range between $4 million and $6 million.

Turning to consolidated results from continuing operations, operating profit was $18.4 million, a 47% improvement from last year in Q3. Operating margin was 7.8% compared to 6.1% last year. On a non-GAAP basis, operating profit improved to $98.6 million from $13.5 million last year and margin improved to 8.3% from 6.6% last year.

As has been widely reported across the broader marketplace, there are a number of cost pressures that we are proactively navigating, including domestic and ocean-freight capacity, a tight labor market and tariffs on foreign-sourced goods. We are implementing employee recruitment and retention initiatives, including market-based adjustments to our compensation programs. This will result in some cost increases within our distribution centers commencing in the fourth quarter.

In addition, while we experienced minimal impact from the first 2 tariff list thus far in 2018, the third list, which went into effect the last week of September is more robust. We believe the timing and the extent of any financial impact will be gradual, as we sell through existing inventory purchase prior to the incremental tariffs, strategically, increased prices to offset the incremental cost of certain products and shift certain products to alternative resources where available. These cost pressures are not unique to us, and overall, we expect prices in our market to rise. That said, with solid organic revenue growth and the flexibility in our model, we believe we've remained on a path to deliver continued improvement to long-term profitability, as we further leverage our cost structure.

Turning to an update of our discontinued operations, we've recorded a gain of approximately $178 million from the sale of our France business before taxes of approximately $18 million for a net gain of $160 million. Cash received was almost $270 million before taxes and transaction costs.

Further, to our North America Technology Group business, we completed the settlement with the landlord related to our Atlanta, Georgia area warehouse, which included a cash payment of $8 million. This warehouse which had been vacant for over 2 years, while being aggressively marketed was our largest and longest lease obligation remaining from our former NA Tech operations. The gross liability on this property was over $30 million. This settlement payment is reflected in our third quarter 2018 cash flow and had a de minimis impact on the P&L, as the settlement closely matched our accrued lease mitigation liability.

Finally, in the quarter, we incurred an additional $2.4 million in lease reserve, associated with our last 2 remaining properties from our NA Tech operations that remain unsettled or without a subtenant. We anticipate limited further lease reserve adjustments in the future in each of our other remaining properties that currently have subtenants.

Let me now turn to our balance sheet. With a very strong and liquid balance sheet, with the current ratio of 3.4:1. As of September 30, we had over $302 million in cash, essentially no debt and over $346 million in working capital.

Our cash position reflects the repatriation of net cash generated from the sale of our France business. Further, we have approximately $71 million for the excess availability under our $75 million credit agreement.

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 have declared a quarterly cash dividend of $0.11 per share of common stock and we anticipate continuing regular quarterly dividend in the future.

This concludes our prepared remarks. If you have any questions about third quarter 2018 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]

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