Global Industrial Co

NYSE:GIC

Earnings Call Transcript 2019-Q3

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Systemax Inc. Third Quarter 2019 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, and welcome to the Systemax Third Quarter 2019 Earnings Call. Today's call will include formal remarks from Barry Litwin, 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 excluding certain recurring and nonrecurring adjustments from comparable GAAP measures, investors have an additional meaningful measurement of the company's performance. This call will include a discussion of certain non-GAAP financial measures, which we will identify as such. The company has provided a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures in today's discussion and 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.

I would now like to turn the call over to Barry Litwin.

[Barry Litwin, executive]

Thanks, Mike. Good afternoon, everyone, and thank you for joining us today. In the third quarter, we continued to execute our customer-centric strategy and strategic growth pillars. Specifically, we made investments in our distribution and digital platforms that will allow us to deliver a differentiated customer experience, while driving long-term customer value and financial results.

Our third quarter revenue of 3.5%, on an average daily constant currency sales basis, reflects the soft market environment, and a cautious, but committed global customer. Gross margin was stable for the third quarter compared with the first and second quarter of 2019, both of which were impacted by tariff cost increases. The consistent performance in the first 9 months of the year is a direct result of the proactive actions our team is taking to mitigate the tariff impact and manage current market dynamics.

Operating results primarily reflect the impact of planned investments, specifically in our distribution network. Approximately $1.7 million of costs were incurred as we started up our new distribution center in Dallas. Excluding these costs, the overall business generated improved profitability over last year. The Dallas facility went live in early September, and we have rebalanced our distribution workforce to optimize cost and will drive additional efficiency as Dallas ramps capacity. The expansion of our distribution network is a key component of our strategy and was critical to providing customers with shorter lead times and more competitive shipping rates, while supporting growth and long-term operating leverage.

As part of our ongoing strategy, we have executed a number of initiatives that will position us to deepen customer relationships and drive operational excellence.

On August 8, we held the Global Experience National Trade Show in Nashville, Tennessee. It was an exceptional event with more than 1,000 customers and 150 vendor partners in attendance. We showcased the breadth of our product offering and the exceptional capabilities we are adding to the customer experience. I had the opportunity to personally meet with many of our largest customers, and their feedback confirmed that Global has the right strategy in place to address the rapidly changing needs of customers and strengthen our competitive position.

As I previously mentioned, our new Dallas distribution center has commenced full operations. This new facility allows us to significantly increase service levels through same-day shipping and next day delivery, an important factor in the customer buying decision. We will continue to optimize the performance of our national network, and expect to see improved leverage in our operations.

In the third quarter, we launched a new Global Industrial website with advanced self-service capabilities. In total, we have introduced more than 160 improved features on the site, with some first-to-market capabilities. Customers can now place returns online, for both less-than-truckload and small parcel shipments with full tracking capabilities. Another new feature provides convenience for purchasing consumable products like janitorial and maintenance supplies through a new reorder feature. Finally, we have strengthened our pricing intelligence capabilities and upgraded talent throughout the organization.

In conclusion, our team is focused and continues to embrace our strategy and strategic pillars. We are championing a continuous improvement culture that is providing greater end-to-end transaction transparency. We will continue to make targeted investments in our business and our people that will drive greater lifetime customer value and our financial performance.

I will now turn the call over to Tex.

[Thomas Clark, executive]

Thank you, Barry. I will now address our performance in more detail and would note that we had the same number of selling days in the third quarter of 2019 as we did in the year ago period.

In the third quarter, revenue increased 3.4% on a GAAP basis, and increased 3.5% on an average daily sales constant currency basis over Q3 of last year.

Revenue was approximately $244 million with growth in the U.S. of 3.4%, while Canada grew 5.3% in local currency on an average daily sales basis.

I would note that in the year ago quarter, we recorded our strongest organic revenue growth in 5 years and benefited from a large project-based customer order, which impacted our third quarter 2019 growth rate by approximately 50 basis points. We continued to see strength in categories where we are investing in subject matter expertise and strong customer retention. While on an overall basis, we saw some weakness in average order values as customers appeared to be taking a cautious approach in their buying behavior.

Gross profit for the quarter increased to $84.4 million, up from $82.2 million last year. Gross margin was 34.6%, down 30 basis points from the prior year, but in line with the first and second quarters of 2019. This stable gross margin performance sequentially reflects proactive management of our inventory, purchasing and pricing to address tariff increases.

We delivered modest product margin improvement in the quarter, and remain focused on maintaining our gross margin profile.

Selling, distribution and administrative spending for the quarter was $66.7 million or 27.3% of net sales. SD&A leverage contracted in the quarter, primarily as a result of costs associated with our new distribution center in Dallas, which more than offset improved efficiencies in other parts of the business. Within GAAP results from continuing operations, we recognized a favorable gain on the settlement of a lease from a former IT distribution business of $0.8 million. This has been highlighted as a special charge on the P&L published in today's earnings release and 8-K.

Barry noted, the company recorded $1.7 million of expense in our new Dallas facility. This facility remains on plan and on budget, and we commenced the ramp-up of outbound shipping operations in September. We continue to anticipate increased operating expenses due to the fixed cost of the new center, and are confident that much of the variable expense profile of Dallas will be absorbed by spend reduction in our other distribution centers through 2020.

GAAP operating income was $18.5 million, and operating margin contracted 20 basis points from the year ago quarter. Non-GAAP operating income was $18.8 million. We are actively managing our costs and driving efficiencies across our operations. We remain committed to investing in our business for the long term, specifically initiatives that will enhance our growth profile and strengthen our ability to deliver an exceptional customer experience.

Total depreciation and amortization expense in the quarter was approximately $3 million. Capital expenditures for the third quarter were $3.8 million and $6.2 million for the first 9 months of 2019.

Total free cash flow from continuing operations was $11 million in the quarter. We continue to expect strong cash flow generation for the full year, and total capital expenditures in the range of $6 million to $8 million.

Let me now turn to our balance sheet. Very strong and a liquid balance sheet with a current ratio of 1.8:1. As of September 30, we had approximately $97.6 million in cash and cash equivalents, essentially no borrowings and over $132 million in working capital. Further, we have approximately $71.7 million of excess availability under our $75 million credit agreement. The strength of our balance sheet and our cash flow generation 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 dividend of $0.12 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 third quarter 2019 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.