Global Industrial Co

NYSE:GIC

Earnings Call Transcript 2019-Q4

[Operator]

Good afternoon, ladies and gentlemen, and welcome to Systemax Inc.'s Fourth Quarter 2019 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Mike Smargiassi of The Plunkett Group. Please go ahead.

[Mike Smargiassi;The Plunkett Group;Founding Partner]

Thank you and welcome to the Systemax Fourth Quarter 2019 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.

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 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. In 2019, we made significant progress in the execution of our customer-centric strategy and strategic growth pillars. We generated almost $950 million in revenue, delivered $66 million of operating income and had strong cash flow generation of $63 million from continuing operations. For the year, we were able to modestly expand our gross margins despite an ongoing challenging trade environment while increasing our operating income, inclusive of making investments to support and drive future growth.

In the fourth quarter, we generated revenue growth of 2%, in line with many of our industry peers and significantly expanded our non-GAAP operating income by 23%, highlighting our efforts to proactively manage our cost structure, even as we funded strategic investments such as the expansion of our distribution network.

A year ago, we embarked on a multiyear strategic road map to grow customer engagement and generate operating leverage from current operations and investments. We also championed a stronger customer-centric culture across our entire organization.

Our strategy prioritized initiatives supporting 6 core areas we believe we can win. These are delivering a differentiated customer experience, offering innovative branded and private label products, providing rich MRO knowledge and technical expertise, driving operational excellence, propelling talent, financial management and technology innovation and pursuing potential acquisitions to drive synergies and expand capacity, customers and product growth.

We made progress in each of these areas the past year and delivered on a number of important projects, including the expansion of our distribution network, which has allowed us to improve service levels and will support our growth. Next, the launch of our new global industrial website, which delivers a significantly enhanced customer experience and self-service capabilities.

Three, the creation of a voice of customer process to solicit, analyze and address customer feedback in real time. And finally, investments in new leadership and talent to drive and execute our strategy.

Our entire company has made substantial progress in the journey around the customer experience. And today, we are delivering higher service levels and greater end-to-end transaction transparency to our customers. We have more work to do. But it's clear our strategy is relevant and resonating and we continue to drive it.

As we begin 2020, we see our customer-focused strategy accelerating. We will continue to invest in our sales growth by strategically adding selling resources throughout the year and extending our one-to-one sales model to more accounts. We will drive sales efficiency and technology by adding new data-driven tools that support our sales agents and increase our productivity, and we plan to expand our product offering and a series of new and existing categories. We will continue to grow our private label assortment, which provides both high quality and great value to our customers. These efforts will help us better meet the needs of our customers.

We recently launched a new digital marketing strategy that we expect to accelerate new customer growth and strengthen retention through new innovative promotional and loyalty programs. In regards to customer experience, we will forge a competitive advantage by addressing our customers' growing expectations around service and delivery. This includes our goal of achieving 100% customer promise date delivery on orders and the rollout and enhancement of new digital self-service tools and functionality. Finally, we will continue to streamline our fixed and variable cost structure using automation and process improvements that will deliver improved operating leverage.

In conclusion, our customer-centric strategy and continuous improvement culture is allowing us to better serve our customers and build a greater long-term competitive advantage. We have a strong platform and will continue to make targeted investments in our business and our people that we believe will enhance our competitive position and support our future growth.

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 like to note that we have the same number of selling days in the fourth quarter and full year of 2019 as we did in the year ago period.

In the fourth quarter, revenue increased 2.1% on both a GAAP basis and in average daily sales constant currency basis over Q4 of last year. Revenue was approximately $222 million with growth in the U.S. of 1.9%, while Canada grew 5.4% in local currency on an average daily sales basis. Product categories generally had mixed results in the quarter with continued strength in key categories such as safety, packaging and janitorial and maintenance, where we are making investments in our offering and subject matter expertise. We did see significant softness in heating as a result of the mild winter weather, which has continued into Q1 of 2020. Gross profit for the quarter increased to $75 million, up from $73 million last year.

Gross margin was 33.8%, up 30 basis points from the prior year. In line with our expectation, sequential performance was soft and reflects our historical product mix shift in the fourth quarter as well as increased promotional efforts in the period. Our gross margin performance continues to highlight the proactive management of our inventory, purchasing and pricing to address tariff increases. We do not expect any impact from the recent tariff reductions in December and remain focused on maintaining our gross margin profile. Further, we are monitoring the coronavirus situation in China and possible future supply chain impacts but have not experienced any material disruptions to date.

Selling, distribution and administrative spending for the quarter was $60.6 million or 27.3% of net sales, relatively flat as a percentage of sales from last year. Maintaining SG&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 operations. We continue to optimize the performance of our national distribution network and expect to see improved leverage in our operations as we move through 2020.

GAAP operating income was $14.4 million and operating margin improved 10 basis points from the year ago quarter. Non-GAAP operating income was $15.2 million, an increase of 23.6% and a non-GAAP operating margin improvement of 120 basis points. As Barry noted, softness in the short term will not impact our decisions to continue 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 $1.1 million. Capital expenditures for the fourth quarter were $0.7 million and $6.9 million for the full year. Total free cash flow from continuing operations was $4.7 million in the quarter and $63.4 million for the full year. In 2020, we currently expect total capital expenditures in the range of $3 million to $5 million, primarily comprised of maintenance-related capital.

Let me now turn to our balance sheet. We have a very strong and liquid balance sheet with a current ratio of 1.9:1. As of December 31, we had approximately $97.2 million in cash and cash equivalents, essentially no borrowings and over $144 million in working capital. Further, we have approximately $71 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 increased our quarterly dividend to $0.14 per share of common stock, an increase of approximately 17%.

We anticipate continuing a regular quarterly dividend in the future. In addition, we announced today a special cash dividend of $1 per share. I would note, our cash position at year-end does not reflect payment of our quarterly or special dividend.

This concludes our prepared remarks. If you have any questions about fourth 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.