Richard Leeds - Chairman and CEO Larry Reinhold - CFO Michael Smargiassi - Managing Director-Brainerd Communicators, Inc..

Anthony Lebiedzinski - Sidoti & Company.

Good afternoon ladies and gentlemen, and welcome to Systemax Incorporated First Quarter 2014. During the presentation, all participants will be in a listen-only mode. Afterwards you will be invited to participate in a question-and-answer session. (Operator Instructions) As a reminder, this conference call is being recorded today April 29, 2014.

At this time, I’d like to turn the call over to Mike Smargiassi of Brainerd Communicators. Please go ahead..

Thank you, operator. Welcome to the Systemax first quarter 2014 earnings conference call. I’m here today with Richard Leeds, Chairman and Chief Executive Officer of Systemax; and Larry Reinhold, Executive Vice President and Chief Financial Officer. 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 caption, Forward-looking Statements in the Company’s annual report on Form 10-K and quarterly reports on Form 10-Q.

I’d like to highlight the non-GAAP metrics that are included in today’s press release. The Company believes that by excluding certain recurring and non-recurring adjustments from comparable GAAP measures investors have an additional meaningful measurement of the Company’s performance.

As a result, 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 Web site 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’ll now turn the call over to Mr. Richard Leeds..

Good afternoon and thank you for joining us today. 2014 is off to a solid start with our first quarter consolidated results showing improvements in both our gross and operating margins, and a swing to positive adjusted operating income.

Our performance was driven by our B2B operations as we benefited from continued outstanding performance from our Industrial Products Group and sound results at both our EMEA, technology group, and our North American B2B operations.

The Industrial Products Group deliver a strong 22% increase on the top line and the bottom line was up 16% as we continue to execute on our initiatives and make additional investments to support future growth in this business.

Our revenue performance reflects broad based growth across product categories and the continued expansion of private label and brand name selections. I’m pleased to announce that today we now offer over 1 million SKUs, a significant milestone and a reflection of the efficient and scalable infrastructure we’ve built in the industrial business.

We continue to make investments to strengthen our best-in-class globalindustrial.com Web site and last week we began the rollout of a major update which enhances our web infrastructure and improves our functionality and search capabilities.

The expertise and capabilities we’ve built into this Web framework strengthens our competitive position and is an asset we can leverage across our B2B technology businesses in Europe and North America.

In our B2B technology products businesses we’re encouraged by the progress we’re making from a strategic and operating perspective, as we generated first quarter growth in revenue and operating income in both EMEA and North America. Our EMEA technology business delivered 10% revenue growth, a 13% increase in gross profit versus the year-ago quarter.

Our larger markets continue to perform well, while the performance of our smaller markets remain mix. Operations at our shared service center in Hungary continue to ramp. We remain pleased with the initial results.

As we’ve noted on past calls, we will continue to encourage additional costs throughout 2014, while certain functions are duplicated until the transition process is complete.

In a continued effort to enhance our strategic position within EMEA, we’ve recently added a team of high level Cisco certified engineers, sales experts, and technical support personnel in the U.K. North American B2B technology had a solid first quarter as we delivered modest revenue growth and made additional progress in improving our profitability.

We continue to see traction from a number of initiatives and are encouraged by the recent trends we’re seeing in this business. Our North American consumer technology performance remains weak. Our computer related product sales had been generally stronger than our consumer electronic product sales as computer products as a core of our business.

However, additional improvement is required and we remain disciplined in the management of this business with a strong focus on regaining profitability. Our efforts to right size our operations and our product offering and improve our IT infrastructure ongoing.

In summary, we’re expanding our already profitable B2B businesses, are working diligently to reestablish a profitable consumer business. We are benefiting from the outstanding performance of our Industrial Products Group, and we see a number of growth opportunities for our B2B technology operations in both EMEA and North America.

Our management team remains focused on strengthening our competitive position and improving profitability on a consolidated basis. We continue to have a strong cash position and remain well positioned to execute our strategic plan. Thank you. And with that, I will pass the call to Larry..

Thank you, Richard. I’d like to begin today by briefly commenting on the changes to the presentation of our results in our press release issued this afternoon. Given our focus on our B2B operations we’ve removed our product category and same-store results tables, enhanced our channel sales table.

We believe these changes better reflect our current focus and the way we view and manage the business today. I’d note that with the change in our channel disclosure, we’re now including all sales from our EMEA technology group as B2B, rather than classifying a small portion as consumer.

This more accurately reflects our managed accounts approach and lead generation focus of our e-commerce efforts in EMEA and is consistent with how we’ve historically presented the industrial business. I also want to note that Easter fell into the second quarter of this year versus the first quarter last year.

This resulted in more business days first quarter this year partially offsetting the impact of particularly bad winter weather in certain geographies.

Turning to our results, starting with consolidated revenue, first quarter 2014 total sales were $873.4 million, a decline of 0.8% and off 2.1% on a constant currency basis compared to the first quarter of 2013.

Sales for the quarter were led by continued growth in our Industrial Products Group, which was offset by weakness in our North American technology businesses.

Looking at our revenue by channel; first quarter B2B channel sales were $649.0 million, an increase of 9.3% or an increase of 7.1% on a constant currency basis as we delivered growth in all of our B2B businesses. Our consumer sales were $224.4 million, a decrease of 21.8% or 21.1% on a constant currency basis.

Turning to our reporting segments; the Industrial Products Group delivered a revenue increase of 22.3% year-over-year to $129.1 million as we benefited from continued growth in both new and core product offerings.

Gross and operating profit showed strong double-digit increases and we grew our adjusted operating margin sequentially to 8.0% compared to 7.7% in the fourth quarter of 2013. At the end of the quarter, global industrial global industrial SKUs totaled 960,000 up 9.1% sequentially and up 32.6% compared to a year-ago.

And as Richard noted earlier, today we offer more than 1 million SKUs. Sales for our Technology Products segment, which includes our European and North American operations, declined 4.0% to $742.8 million and 5.5% on a constant currency basis, while non-GAAP operating loss was $3.6 million, a $0.4 million reduction from the loss reported last year.

In the quarter, special charges totaled $2.4 million including costs associated with our transition to our European shared services center and additional lease accruals associated with the closure of underperforming retail stores in North America.

Looking at our Technology Group segment on a geographic basis, in Europe revenue grew 9.8% in the quarter and on a constant currency basis improved 4.4%.

Gross margin expanded on a Pan-European basis and while SG&A increased in absolute dollars, spend as a percentage of sales remained flat year-over-year and improved 50 basis points from Q4 of last year.

Furthermore, the SG&A cost structure in EMEA reflects the rollout of our new IT platform in certain countries and a temporary overlap of costs as we continued the transition of functions to our shared service center. We currently employ over 300 people in this center.

One-time charges in the quarter equaled $1.7 million including severance charges as well as other recruitment costs in our shared service center. In North America, our Technology Products group’s revenue declined by 12.4% for the quarter or 11.6% on a constant currency basis, driven by negative results in our consumer e-commerce and retail channels.

Our North America technology B2B channels delivered 1.6% revenue growth in the quarter or 2.7% on a constant currency basis. On a monthly basis, throughout the first quarter, we recorded sequential improvement each month in B2B sales.

In North America consumer, our results continued to be weak as both consumer Web and retail sales declined significantly. In retail, we ended the quarter with 34 stores versus 36 stores at the end of the fourth quarter and 41 stores in Q1 of 2013.

As we noted on our fourth quarter conference call, the two stores we closed in the first quarter were at the end of their lease terms. In total, store closures accounted 4.3% of the 21.8% overall decline in consumer sales. We continue to review and evaluate our stores as they come up for renewal.

We continue to execute on our improvement initiatives across our North American technology operations demonstrated by our expanded gross margin and reduced SG&A spending. We remain focused on continuing to improve our bottom line performance and bring our North American technology operations back to profitability.

Consolidated gross margin improved to 14.6% from 13.8% last year. Key drivers of the increase included the growth of our Industrial Products Group and the higher gross margin within this business unit, as well as moderate improvement in gross margin in both our North American and EMEA technology businesses.

Consolidated SG&A increased modestly and reflects reduced expense in North American technology offset by investments in industrial products in Europe.

As a percentage of sales, SG&A increased by approximately 50 basis points over last year and includes planned investments to support our strategic initiatives as well as a reflection of the larger contribution from our Industrial Products Group whose business model mandates higher SG&A particularly in advertising.

Consolidated non-GAAP operating margin improved to 0.3% compared to negative 0.1% last year. Non-recurring and recurring adjustments during the quarter were $3.9 million on a pretax basis. Non-GAAP operating income was $2.6 million, an improvement of $3.3 million from the non-GAAP operating loss of $0.7 million last year.

Non-GAAP net income was $1.2 million or $0.03 per diluted share compared to non-GAAP net loss of $0.8 million or $0.02 per diluted share last year. GAAP operating results were a loss of $1.3 million compared to a loss of $8.7 million last year.

GAAP net loss was $3.0 million or $0.08 per diluted share compared to a loss of $6.3 million or $0.17 per diluted share last year. As of Match 31st, our balance sheet included over $345 million of working capital and approximately $160 million in cash. The current ratio at March 31st, 2014 was 1.7:1 and total debt was $4.7 million.

With that we would like to open the call to questions.

Operator?.

Thank you. (Operator Instructions) Our first question comes from Anthony Lebiedzinski from Sidoti & Company. Your line is open, please go ahead..

Good afternoon. I have a few questions here. So, just looking at the, first I’ll start off with the technology product segment and looking at the non-GAAP operating income disclosure, so roughly half a percent loss this year versus a year ago.

Can you talk about as far as the sub-segments within the technology group EMEA, North America and the consumer business? How should we think about the margins in each of these three segments for the quarter and what's your outlook going forward?.

Hi, Anthony its Richard. So looking at the two segments, EMEA and North America -- so we’ve made better progress in EMEA than we have in North America, and as we’ve mentioned in our call before that we see certain -- I would say the northern part of Europe and the larger countries performing better.

One of the smaller countries actually has started to turn around as well. But in general I would say that, as we make the shift to Hungary and as we put in our computer systems there, we still have work ahead of us, but we see that the fruits of our labors are paying off there.

In North America clearly we have a good business like a B2B part of it, and let me just back up about EMEA one more point. EMEA is strictly B2B at this point, there’s very, very little consumer.

North America we’re having good success with our B2B and we’re not (indiscernible) consumer, we’re just going to emphasize more of our efforts on B2B and try to continue to fix and get the consumer business to be profitable..

Okay.

So, I guess one of those initiatives is to continue to close stores, I imagine?.

No, we constantly evaluate which stores are making money, which ones are not and as leases come up, and so it's a constant evaluation for us. Again it's -- we’ve to drive that consumer business to profitability, so that’s really our emphasis..

Okay.

And as far as the -- I think Larry had mentioned as far as on the quarter one more day, because actually -- as far as the Easter shift and the weather impact were there equally offsetting factors?.

Anthony they were in different locations. Easter in Europe is a bigger event and it is here in North America at least in terms of businesses taking the day off. North America most of the bad weather was here in the Northeast as you experienced it along with me. But there were also some weather events in certain parts of Europe.

So whether they exactly offset or not I don’t know. They would certainly tend to have gone in opposite direction..

Got it. Okay and then turning to the Industrial Product segment, another strong performance on the top-line there.

Looking at the margin, it was down a little bit a 40 basis point decrease, is that where we should expect that to continue or what are your thoughts on the profitability of the Industrial Product segment going forward?.

So as we can add our model there is as we continue to add products, those products typically are at a lower gross profit until we get our volume built up on those products.

And that’s -- and then once we get our volume up, we will then either bring them into inventory or we will negotiate with the manufacturer what we -- we’re continuing to negotiate with manufacturer for what we want to get a better price on.

There the new products typically are growing faster at a faster rate because there’s smaller base than the older products. And so that’s where we’re seeing our decline. Typically the older products have steady or slightly increasing gross margins.

So a slight decline in the gross profit margin really doesn’t bother us as we’re growing this, growing (indiscernible) it's a good problem to have..

And Anthony to supplement that, at the bottom line this business requires us to spend a substantial amount on advertising. It's different than the computer business where the vendors spend plenty on advertising.

We spend a lot and we have elected to sort of keep the pedal to the metal and we’re spending a lot and we are -- it's paying off in terms of revenue growth.

We still retained the ability to lighten up on that if we want, which would drop to the bottom line, but we’ve elected to really push it as we’re trying that we’re having a lot of success and we want to stay with it for now..

So you mentioned that this is now -- this business is now up to 1 million SKUs, ultimately what's the game plan as far as like the number of products that you envisioned selling through that segment?.

So the interesting thing about having 1 million SKUs is and growing it as fast as we have is that, unfortunately not a 1 million SKUs have sold so far. So, one of the things that we have to do is, we have to concentrate on all those SKUs that we’ve put up and get them to sell, and then really work on that.

The second part of it is, is continuing our growth on the SKU count because it's this machine that we have, that we have to keep going. So, we still want to continue to grow at kind of the same clip that we’ve been growing at in the past. That’s depending upon a lot of factors.

One is getting the lines from the manufacturers at the right price and finding vendors that could perform for us. But our goal is to continue with the same pace that we have been..

And can you comment on your performance in Canada and Mexico?.

So Mexico is still very, very, very in its infancy, we’re kind of just learning our way there. The Canadian business is still growing nicely. So I mean, I’m talking about in the Industrial segment, it's continuing to grow nicely and so it's not -- just continue -- just part of our overall growth strategy..

All right. And two more questions if I can.

As far as the move into the Hungary service center, when do you fully expect to complete that process?.

Fully, fully?.

Full, full, yes..

Fully, fully. Larry, do you want to ….

I think well we can expect that will at least another year. There’s a lot of moving parts to this, and we’re trying to take a measured and careful approach to this. Along the way we’ve again I said we have over 300 employees there already. Everybody is working hard. There’s been a lot of transition.

We’ve learned some things from our transitions we’ve done already that we want to make sure we do the good things that worked well and not do some things that didn’t work as well. But throughout the rest of this year we certainly are going to be continuing the transition of functions and the ramping up of the capability of that center..

Okay and the last question, looking at your balance sheet it continues to be very healthy with cash of roughly $4 per share, what are your plans on cash usage.

Could we perhaps see a special dividend like we’ve seen in the past?.

Anthony, we certainly love this question..

We should just put this in our prepared remarks from now on Larry..

Okay. But we look at this continually. We have outside Directors who are always encouraging us to look at what's the best use of our capital. We have lot -- there is always lots of M&A opportunities. So, I guess stay tuned. We think we’ll -- what we’re doing right now is the best use of the company’s excess cash if there is any.

But we really also like, learn the lesson if you will of the financial meltdown in our deep liquidity we think helps the business, the stability of the business, our vendors really appreciate that, we’re as strong as we are, our employees do and -- so I don’t plan on us levering up any time soon..

Okay. Thanks very much..

You’re welcome..

Okay. Thank you..

Thank you. (Operator Instructions) And gentlemen I’m showing no further questions. I’d like to hand it back over to you for closing remarks..

Thank you ladies and gentlemen and we look forward to talking to you with our next quarters result..

Ladies and gentlemen thank you for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day..