Mary Gentry - VP, Treasurer and IR Mike Baur - CEO Charlie Mathis - CFO.

Chris McGinnis - Sidoti & Company.

Welcome to the ScanSource Quarterly Earnings Conference Call. [Operator Instructions]. I would now like to turn the call over Mary Gentry, Vice President, Treasurer and Investor Relations. Ma'am, you may begin..

Thank you, and welcome to ScanSource's earnings conference call for the quarter ended September 30, 2015. With me today are Mike Baur, our CEO and Charlie Mathis, our CFO. We will review operating results for the quarter and then take your questions.

A slide presentation that accompanies our comments and webcast is posted in the Investor Relations section of our website. Certain statements made on this call will be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties include, but are not limited to those factors identified in the release and in ScanSource's SEC filings.

Any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. ScanSource undertakes no duty to update any forward-looking statements to actual results or changes in expectations.

We will be discussing both GAAP and non-GAAP results during our call and have provided reconciliations between these amounts in our slide presentation and in our press release. These reconciliations can be found on our website and also have been filed with our Form 8-K. Mike Baur will now begin our discussion with an overview of our results..

Thanks Mary. Thank you for joining us today. We delivered strong results for the quarter with net sales with our expected range and non-GAAP EPS above our expected range. We reported record net sales of $871 million and non-GAAP earnings per share of $0.68.

During the quarter we executed well in our strategic initiatives including returning cash to our shareholders through share repurchases, our three acquisitions during the past year, Imago, Network1, and KBZ all contributed positively to our growth and delivered strong operating performance.

This quarter we met live with our SAP ERP system in North America. This followed our February implementation in Europe and we now have over 80% of our business worldwide using our global SAP ERP platform. The new system went live on time and on budget and we produced very good operating and financial results.

However our implementation was not perfect, as we were replacing a legacy system. We've been using for twenty years and our employees had learned plenty of shortcuts that became second nature over that time.

So yes we had a few bumps in the road and we benefited from the loyalty and patience of our customers, vendors and our own employees who work tirelessly. We are still learning how to best operate with our new system and we are regaining efficiencies in serving our customers inventors.

Another key initiative we accomplished was the completion of our acquisition of KBZ on September 4th, as Cisco's top video products and solutions distributor worldwide, KBZ focuses its business almost exclusively on Cisco and complementary vendors.

The KBZ team is focused on forming deep local relationships and educating resellers on how to be profitable with Cisco programs including our KBZ branded service program called ZCare. The integration of the KBZ acquisition is going very well and we expect our Cisco collaboration and network security business to be areas for growth.

We're very pleased with KBZ financial results for September, a seasonally strong month due to year-end federal spending. Consistent with our value added strategy of dedicated business units providing specialized focused in specific technology solutions, we're bringing our networking vendors together.

This will allow us to provide more customized solutions and value add to our networking customers and vendors.

As of October 1, 2015 we branded ScanSource Security as ScanSource Networking and Security to provide more resources and focus on our fast growing networking vendors and as our security products especially video surveillance are increasingly delivered as part of a total network solution.

We are excited about this organizational change and believe it will enhance our go to market strategy for this business.

Starting with the second quarter of fiscal year 2016 we have moved some business operations from our communications and services segment to our POS and market segment and we will reclassify prior period results to provide comparable information.

With that I'll turn the call over to Charlie to discuss our financial results in more detail and our outlook for next quarter.

Thanks Mike. We exceeded our expected financial results due to three main factors. First the acquisition of KBZ was not in our forecast and we closed that deal at the beginning of September because of the greater public sector seasonality. KBZs financials for the one month we reported were strong.

Second our recently acquired Network1 had better operating performance than forecast and a difficult Brazilian economic environment and third a higher than forecast gross profit margin due to timing of vendor programs. On a consolidated basis net sales totaled $871 million, a 10% year-over-year increase or 15% in constant currency.

Year-over-year change in foreign currency exchange rates had a negative impact of $37 million. First quarter of 2016 results include a full quarter for Imago and Network1 and one month for KBZ excluding these acquisitions first quarter 2016 net sales increased 2% year-over-year in constant currency.

Our first quarter 2016 gross profit of $87.6 million or 10.1% of net sales compared to $77.6 million or 9.8% of net sales a year ago. This reflects a favorable mix of international business from our acquisitions. Operating expenses were $59.2 million or 6.8% of net sales compared or $45.8 million or 5.8% net sales in the prior year quarter.

Last year included a $2 million credit for bad debt expense, while this year we had SAP related onetime ERP cost of $2.4 million excluding these impacts operating expenses as a percent of net sales would be 6.5% this year compared to 6% last year.

In addition operating expenses were higher year-over-year due to the higher margins from international acquisitions which have correspondingly higher operating expenses. Our first quarter 2015 non-GAAP operating income was $28.4 million or 3.3% of net sales compared to $31.8 million or 4% in the prior year quarter.

Our effective tax rate was 34.5% for the first quarter of 2016 and 33.4% for the prior year period. First Quarter 2016 non-GAAP net income was $18.9 million or $0.68 per diluted share compared to $21.6 million or $0.75 per diluted share for the first quarter of 2015.

Foreign currency translation had an estimated $0.04 negative impact when compared to last year and the SAP onetime cost had a $0.06 negative impact as well. Total shares outstanding as of September 30, 2015 were 27.1 million shares decrease of approximately 5% from year ago from share repurchases.

Average diluted shares for the first quarter 2016 totaled 27.9 million shares down 3% on the year earlier period as a result of share repurchases. Now shifting to the balance sheet and capital allocation plan.

We continue to execute on our capital allocation plan and remain disciplined and focused on acquisition opportunities that are strategic accretive to the EPS and increase our ROIC.

The acquisitions we completed during the last year were in keeping with our strategic business plan, value added distribution model and focus on growing our bottom line profitability. At September 30, 2015 we had cash and cash equivalents of $41.2 million and debt of $94 million or net debt of $51.8 million.

During the quarter $61 million of cash was used for the acquisition of KBZ and associated working capital and $42 million was used for share repurchases while cash from operations consumed $58 million principally from higher working capital.

Consistent with our overall financial plan objectives, leverage increased approximately 0.45 times trailing 12 months EBITDA and lowered weighted average cost of capital.

Our day sales outstanding DSOs at September 30, 2015 were 56 days up from 55 days, higher inventory levels lead to lower inventory churns for the quarter, 5.3 times compared to 5.7 times for the prior year. Paid for inventory days increased to 13 dates up from 9.7 for the prior year.

These working capital metrics exclude the impact of the KBZ acquisition. During the quarter we purchased additional inventory in order to not disrupt our customers and vendors during our SAP implementation in North America.

Our return on invested capital total 14.6% for the quarter As of September 30, we have purchased over 1.6 million shares for approximately $61 million and executed over 50% of our authorization as part of our planned capital allocation strategy. We have now repurchased over 6% of our outstanding shares.

Turning now to our next fiscal quarter and let me add some additional color here. The forecast also assumes a stronger dollar compared to the previous quarter a year ago reflecting U.S. dollar exchange rates of $1.12 for the euro and $1.53 for the British pound and an average Brazilian real exchange rate of 3.91 for the U.S. dollar.

The foreign translation negatively impacts our forecast versus prior year by an estimated $33 million for sales. We expect net sales for the quarter ended December 31, 2015 to range from $900 million to $980 million and non-GAAP diluted earnings per share to range from $0.70 to $0.80 per share. I would like to turn the call back over to Mike..

Thanks, Charlie. We have two reporting segments and I'll start Worldwide Barcode and Security. Net sales of $516 million increased 3% year-over-year and 10% in constant currency. This increase includes our KBZ acquisition over one month. Our security business in North America and our POS and barcode team in Mexico had record sales quarter.

It was a strong quarter for big deals, in North America, Europe and Mexico for POS and barcode and business units. In North America we had a strong quarter in enterprise point of sale system and solutions and continued to realize strong growth in our retail and hospitality payment solutions.

Our payment processing in terminal sales achieved record results, more than double of the prior quarter. The EMV chip and pin [ph] opportunity is still gearing up in North America and we continue to make investments in our payment terminal configuration center and secure encryption capabilities to support this fast growing business.

We had good results from our mobile computing and printing products and solutions as well. We're pleased that Alex Conde who joins ScanSource with a purpose of CDC Brazil is now our President of ScanSource, POS and Barcode [ph] of all Latin America.

Alex's team had another strong quarter in Brazil in spite of the economic challenges that country still is experiencing. Driven by continued growth in retail and hospitality markets and specialty technology solutions.

A big growth opportunity continues to be the required government mandated fiscal solutions with the economic slowdown in Brazil our strong balance sheet gives us a strong competitive advantage and we have gained market share from competition and increase the number of customer service.

Our net sales in Brazil increased 10% year-over-year in local currency but declined 29% when translated into U.S. dollars. Our security business had another record sales driven by growth in networking especially from our wireless vendors and the strong resurgence in our video surveillance products.

[Indiscernible] spending for schools to purchase technology was a seasonal assist to our strong results. We expect to see strong growth from our change to consolidate our networking vendors in this business unit in the future.

Also as I mentioned earlier KBZ delivered exceptional results in the most of September principally from the public sector business. Now to our second segment Worldwide Communication and Services which had net sales of $355 million, net sales increased 22% from the year ago or 23% increase in constant currency.

The strong increase includes our successful and ongoing integration of Imago and Network1. In North America we had solid performance in our enterprise business and good services growth with all of our top vendors.

We also did a very good job growing our smaller audio visual line and in late October we expanded our collaboration offerings with the launch of Unify in North America. Unify's platform of communication solutions fits well with our value add model and services offerings. In Europe we're finding good opportunities from bringing our businesses together.

We had year over year sales growth in local currency and improved operating performance. We're also benefiting from Imago services offerings and expanded offerings with newer vendors including Unify.

Network1 rebound in Brazil and Latin America with solid operating performance that exceeded our planned sales and profitability, it's included run rate business and big deals as well as strong growth in Latin America where our teams sees opportunities in Chile, Colombia, Mexico and Peru.

Network1 successfully kept a focus on the small medium sized businesses also working closely with vendors on big deals. We're excited about what we accomplished this quarter and we believe we’re track for continued growth.

This week we announced an expansion of our headquarters in Greenville and plans to add more than 100 highly skilled positions here in the next five years. During the past year we completed three acquisitions and all three acquisitions had strong operating performance for the quarter.

We implemented our new SAP ERP system in North America and our team is working very hard to use the new tools and SAP to accelerate profitable growth. And we make significant progress in moving to a more optimal capital structure or returning cash to our shareholders through our share repurchase program. So now we'll open it up for questions. .

[Operator Instructions]. Our first question is from Chris McGinnis with Sidoti & Company. Your line is open..

Can you just maybe break out the growth rate on an organic basis for both of the two divisions?.

We have not broken that out and the growth rate in constant currency excluding acquisitions, we have not done that and we don't intend to disclose that at this point in time..

I guess many can you just give an update on obviously you said you saw record sales on the POS, can we just talk about maybe where the chip pin kind of implementation is at this point and how much longer you’ve left from that benefit?.

We have been talking about that program as you know for over a year. And what our customers tell us is that only a small percentage of the retailers and point of service providers in the U.S. have implemented the new technology to-date.

It started most with the larger retailers first and so October 1st, was the official cut over date that credit card companies suggested would be the critical date.

But what we're seeing is that there's a continued need for these products to be sold into the marketplace so we believe it's like typical in a new technology, it's a multi-year process, not a single quarter and certainly not in the near foreseeable future..

Can you just touch on the balance sheet a little, it sounds like a little bit maybe acquisition driven but you know it is kind of first time in a while since I’ve been covering just the debt in the balance sheet.

Can you just talk maybe a little bit, is it somewhat temporary because of the acquisition? Maybe a comfortable leverage ratio that you would run the business with, maybe just kind of talk a little bit about that please..

Yes just a couple of points on the balance sheet and the script I talked about the inventory levels. That was a big driver about the use of working capital. We brought in additional inventory due to the SAT implementation to ensure we were not going to disrupt customers or vendors.

It will be determined as far as how fast we work that inventory down based on the progress that we make going forward. We anticipate a longer term for that use of cash in working capital to come down and our working capital to improve..

And so it's almost like a kind of a timing issue to some degree with the SAP the cash balances -- where do typically want to keep your cash balance operating?.

So it is temporary and I would say -- and if you remember we've talked about a leverage ratio of at least one time.

So that's what we're working toward to get to the one times and we've made progress on that, but also there's a great deal of focus on our working capital and are to make sure that that is in line and as I said the inventory levels were higher due to the SAP implementation in this quarter in North America..

[Operator Instructions]. Our next question is from [indiscernible] with Northcoast Research. Your line is open..

Just real quick on the decline in the Worldwide Communications operating margin year-over-year, could you provide some color on that?.

So the decline in the operating income is largely driven by this bad debt credit that we had that was a favorable pick up last year of $2 million that we talked about in the September quarter last year. That was a very large contributor to the decline in the operating income percent year over year.

The mix and then you have the 2.4 million of SAP onetime cost that gets allocated to the segments. So you have that in there and if you take that out then it gets closer to where it was in the prior year..

And [Technical Difficulty] in our communication some of our fastest growing product lines have been our lower margin product lines if you will..

And then the guidance, the range pretty big, so could you go into maybe what factors are going into it and you know are you expecting one segment top to outperform the other? Just a little more color on that, that will be good..

No the range that we're giving is consistent with the range from the last quarter. So you know we have new acquisitions in here we have, three acquisitions in the last year that gave us a little bit of caution about the range and making sure that it's appropriate. So I would say that was the biggest reason for the range being where it is..

[Operator Instructions]. We do have one more, looks like we’ve a follow-up from Chris McGinnis with Sidoti & Company. Your line is open. .

Can we just talk a little bit just with the obviously the currencies outside of your means of control, how has the macro issues in Brazil maybe changed the way you think about the market, approach the market, maybe just talk about that just because obviously there is a lot of issues in the region itself?.

I will make a couple of comments, one is in our barcode business we've been fortunate that there's been this underlying demand for these fiscal printing solutions and that was mandated by the government and we are the primary go to market distributor, frankly the only distributor [indiscernible] tech product line in Brazil and [indiscernible] focuses a lot of effort at always had physical printing [ph] and so we're benefiting from this requirement that these retailers and point of service providers who take cash have a physical training solution that is updated.

So that's happening you know even though the rest of the business has had some delays [indiscernible].

We have mentioned that two quarters ago that some of our larger projects in our barcode, POS business was delayed because of the impact of the currency because obviously it's a lot, a lot of these products that we still bring in the country are US pay, so the prices are higher now. So we've seen that.

The physical printing has offset that decline and on the communications side that Netowrk1 they've been opportunistic at taking advantage of the business that is available in the market right now because our competitors are weaker.

We generally are competing against smaller local companies and our guys believe that our ability to provide credits terms, reasonable credit terms and provide stocking inventory is allowing us to increase our market share in a market that is not growing when that we're taking share.

So we really believe locally we're doing well even though the translation still is weak that we're able to gain market share in this time and so that's from a long term perspective we think it's very positive because we'll be able to come out once the things start to settle down but we will have even stronger market position in the future.

So we really like the fact that we got into Brazil, we like the fact that we've got a great team that knows how to manage their margins, manage their expenses, it still show strong probability even though the translated revenue is less than we would want..

And then just a follow-up on that one of the things you’ve commented on the physical printing, I imagine you will give me the same answer on the chip and pin but maybe is that sustainable for good amount of time especially why you’re seeing some weakness maybe in other parts?.

Well that’s true. You know the difference here is the rest of this [indiscernible] North America POS market businesses so much larger than the chip and pin business even though chip and pin business doubled for us year-over-year. It wasn't enough to move the needle on the entire business as much as it would in Brazil.

But yes we like the fact that we have located in each of our markets opportunities to grow even when the rest the market is not doing so well.

And we recognize that even in North America there are always opportunities and we've got the best network of resellers, of customers and these guys they are independent business people and they find ways to sell something to somebody and that's why we feel good about our business model long term as we’ve got the best customers in the marketplace and they will find a way to sell product..

One last question just on ERP implementation cost for Q2, can you maybe just talk a little bit about that and then maybe how that phases out throughout the rest of the year just to remind us on that. Thank you..

So on the SAP this related ERP cost that we have been calling one time in nature that actually goes away. So this in the first quarter was the last quarter that we will have those type of cost at that level of spending.

So we will continue to work on SAP and we will continue to look to gain efficiencies and additional functionality of those costs that we've been reporting in the last couple of quarters as one time related go away and not in the forecast again..

Thank you and now I'm not much showing any further calls. I will turn the call back over to Mike Baur for closing remarks..

Great. Thank you for joining us today, we expect to hold our next conference call to discuss December 31, quarterly earnings results on Tuesday, February 9th. So that’s a new day of a week for ScanSource, so Tuesday, February 9th, 2016. Thanks very much..

Ladies and Gentlemen thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day..