Mike Smargiassi - Brainerd Communicators Richard Leeds - Chairman and Chief Executive Officer Lawrence Reinhold - Chief Financial Officer and Executive Vice President.

Anthony Lebiedzinski – Sidoti & Company.

Good day, ladies and gentlemen, and welcome to the Systemax Incorporated Fourth Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will be given at that time (Operator Instructions).

As a reminder, today's conference is being recorded. I would now like to turn the call over to Mike Smargiassi..

Thank you, Jamie. Welcome to the Systemax fourth 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 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 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 the 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 and our Form 8-K.

This call is the property of, and is copyrighted, by Systemax Inc. I will now turn the call over to Mr. Richard Leeds..

Good afternoon. And thank you for joining us today. Overall, our fourth quarter performance was similar to the trends we witnessed throughout 2014, with our B2B channels delivering top-line growth, offset by continued difficulties in our consumer business.

Our results highlight the focus we’ve placed on our B2B channels during the past several years and our opportunities for growth in these businesses. Across the Company, we've taken steps to optimize our operating performance and competitive position.

And today, we're announcing the strategic decision to accelerate our B2B and public sector customer focus by substantially exiting our brick-and-mortar retail stores.

This decision is driven, as much by the excitement we have for our B2B operations, as well as the reflection on the realities of the consumer and retail businesses, over the past few years.

Exiting retail will allow us to place additional resources behind our B2B growth initiatives and will generate an immediate improvement of our overall financial performance, excluding the onetime exit costs we'll incur. I'll provide additional details in a moment, before I start to review our B2B Industrial Products and EMEA businesses.

Industrial Products group delivered another quarter of terrific performance, with revenue increasing 15% over the last year. Full year revenue increased 17% to $556 million and adjusted operating income was $43 million. Global Industrial continues to gain market share.

And we're making prudent investments in the business that will further strengthen our competitive position and enhance our ability to execute on our operating plan.

Our efforts and focus on bringing additional value to customers by adding customized expertise to our sales force and expanding our productive SKU count, both of which, are helping us meet the specific needs of our customers. Over the past few years, we’ve grown industrial SKU count dramatically. Some of those SKUs have been productive and some not.

In the future, our growth will be more targeted as we look to optimize SKU offerings, obtain more favorable vendor pricing and reduce the number of non-productive SKUs.

In January, we acquired the Plant Equipment Group from TAKKT America, which includes the C&H Distributors brand in the U.S., and Avenue brand in Canada, among others, and which further strengthens our operations and positions Industrial for further growth.

PEG is a great addition to the Industrial family and provides us with an experienced and dedicated employee base, expands our ability to serve the MRO market and broadens our geographic footprint.

It brings logistics capabilities in the Midwest, which allow us to improve service levels in that region and status operations in Canada, which are a great fit with Global’s existing operations and a feasible presence in Mexico, which will be key as we look to expand in that market.

Integration efforts are well underway and we look forward to another year of strong performance at Industrial in 2015. At our EMEA Technology business, fourth quarter sales were 5.5%. The constant currency basis and excluding SEC services, sales were up 0.5%.

The highlight of our performance continue to be [5] where we posted our fourth consecutive quarter of organic double-digit growth. We also had solid performance in Sweden and Spain, which is offset by weakness across our other markets. Our results in the UK remain disappointing.

The market environment is challenging but our new local management team, which has put in place in October, is focused on improving our performance.

Efforts to add additional value to our customers to expand in services offerings continue and now we rebranded SEC services as MISCO Solutions and then I’m pleased with this recent performance as it delivered a solid quarter and secured a number of long-term service agreement wins.

The expansion of our service offerings across EMEA operations remains a key strategy initiative for the future. In Hungary, the transitional functions from their legacy country locations is complete and we’ll continue our efforts to optimize performance in supporting our in-country operations.

We expect to see more normalized cost structure moving forward and to reach some of the benefits we anticipated when we began this restructuring over two years ago. Turning to our North American technology business, on a consolidated constant currency basis, revenue grew about 2% in the quarter, but was up 4% for the full year.

We continued our cost reduction efforts and reduced our non-GAAP operating loss in both periods.

As a result of the disappointing consolidated North American tech performance in past several years, accounting rules required to record a one-time non-cash impairment of $10 million in the fourth quarter to write down long-lived assets to net realizable value and this write-off of certain intangible assets.

Larry, will review this in more detail in a moment. Embedded in our consolidated North American tech group is a strong B2B business that delivered solid growth in 2014, with revenue up over 4% in the quarter and full year.

In contrast, the performance of our consumer business remains soft, which led us to the strategic and operational announcements that we made today. Part of our accelerated B2B marketplace focus will be targeting high lift-time value customers and an expanded offering of product and solutions.

We believe this approach will deepen and strengthen our relationships and position us to provide additional value to our customers. As part of this transition, we’ve made the decision to primarily serve the consumer markets around e-commerce platform and exit substantially all of our brick-and-mortar consumer retail stores.

We have engaged Gordon Brothers to assist with this process, which has included the closer of 31 of our 34 stores. We expect the closings to be completed by the end of the second quarter.

Upon completion, we plan to continue in operating three retail locations; one in a technology products distribution center; one located in Puerto Rico, which has a significant B2B operations in that market; and the well known Flagway Miami location, which is adjacent to our North American tech headquarters.

Second, as a result of our retail exit, we’re taking a number of steps across our North American tech operations to optimize our cost structure in line with our focused B2B approach. We’re closing one of our two technology products distribution centers, which we expect will be completed by the end of Q2.

And we’re consolidating and restructuring our operations at Miami headquarters. This will include a general reduction enforce across most functions. These are difficult decisions to make. But the dynamics of the consumer market make the necessary, and we’re moving forward with them at an extensive review and planning process.

I would like to personally thank all of our employees for their efforts and specifically those directly impacted by these difficult decisions.

We expect the majority of these actions to be completed in the second quarter of the year and we’ll emerge from this process as a focused B2B IT products and solutions provider with a streamlined operating structure that will place great recourses and investments in our growing B2B business.

In fact, once complete, all our operations across Europe and North America will be B2B centric. In market we’ve served continuously, since Systemax’s founding over 65 years ago and one where we see continued growth opportunities across all geographies.

We also believe these steps will be accretive to our financial performance once the one-time costs are incurred. While we see a lower consumer and retail sales going forward, with a substantial reduction in our cost structure, and we believe will drive the significant improvement in our bottom-line.

In summary, our B2B businesses in Europe and North America grew in 2014 and we’re making investment to strengthen our market positions and capitalizing our opportunities. We’re bringing more value to our customers with improved service levels and expanded product offering and deepening of our relationships through new solutions capabilities.

In Europe, we have infrastructure in place that is designed to support our growth. And in North American technology we’re optimizing our operations to match our focus and we’ll increase our level of investments in the B2B channel. With the strong cash position, we’re well positioned to execute on our strategic plan. Thank you.

And with that I’ll pass the call to Larry..

Thank you, Richard. Looking at our results on a consolidated basis. The fourth quarter 2014 total sales were $912.9 million, an increase of 4.4% compared to the fourth quarter of 2013. On a constant currency basis, and excluding the acquisition of SCC Services which we have rebranded as Misco Solutions, sales increased 3.2%.

Our consolidated sales performance was led by strong growth in our Industrial Products Group and supported by solid performance from our B2B North America and EMEA technology businesses, which was partially offset by softness in consumer and retail. Looking at our revenue by channel.

Fourth quarter B2B channel sales were $652.5 million, an increase of 7.0%, or 4.9% on the constant currency basis and excluding Misco Solutions. Our consumer sales were $260.4 million, a decrease of 1.6%, or a 0.7% on a constant currency basis. Turning to our reporting segments.

The Industrial Products Group increased fourth quarter revenue, 15% year-over-year to $142.1 million, as we benefited from strength across both our core and new product lines. Margins declined slightly and reflect increased marketing spend year-over-year to drive traffic and a slight decline in gross product margins.

As the growth rate of Industrial domestically sourced products, is greater than the growth of rate of the imported private label products. At the end of the quarter, total SKUs offered on globalindustrial.com Web site totaled almost 1.4 million, an increase of 30% from a year-ago.

Sales for our Technology Product segment, which includes our European and North America operations, increased 2.7% to $769.3 million, as reported, and increased 1.3% on a constant currency basis and excluding Misco Solutions.

The non-GAAP operating loss was $7.3 million and primarily reflects the soft performance in certain EMEA countries and our North American consumer operations. Looking at our Technology Group segment, on a geographic basis, in Europe, revenue grew 5.5% in the quarter.

Reported revenues were significantly impacted by the year-over-year strengthening of the dollar against European currencies in the quarter. And also reflect the acquisition of MIsco Solutions. On a constant currency basis, and excluding the impact of the acquisition, revenue increased 0.5%.

Operating losses expanded in the quarter, primarily related to volume and margin decline in UK. Special charges in the quarter were $3.4 million, primarily comprised of severance related shifts and positions from country locations to Hungary.

In North America, our Technology Products Group’s revenue increased 0.9% for the quarter, or 1.7% on a constant currency basis, driven by solid B2B channel performance, which was partially offset by consumer weakness.

Our North American Technology B2B channels delivered 4.4% revenue growth in the quarter as we improved our top-line performance every quarter in the year. We also expanded operating margins in this channel as we streamlined SG&A and maintained gross margins during the year.

Our North American consumer technology channel sales declined 1.6% in the quarter. Looking at our consolidated North American Technology operations, gross margins declined, primarily due to freight margin deterioration within our consumer business.

However, SG&A was reduced, both on an absolute basis and as a percentage of sales, as we continue to narrow our non-GAAP operating loss. Consolidated gross margin declined to 13.6% from 14.7% last year.

The key driver of this decline was reduced selling margins in Europe, particularly in the UK, which more than offset the positive impact on consolidated gross margins, from a higher portion of consolidated sales represented by the industrial business. Consolidated SG&A increased 2.3% in the quarter and decreased slightly as a percentage of sales.

Our SG&A spend reflects planned marketing and sales team expansion in our Industrial Products Group, in support of its growth efforts and in Europe, from the inclusion of Misco Solutions this year. These were offset by reduced expenses in North American Technology. Non-GAAP operating loss was $1.4 million compared to income of $5.9 million last year.

In the fourth quarter, we recorded a non-cash impairment charge of $10 million, resulting from the required impairment testing of our long lived assets in accordance with U.S. accounting rules. The impairment is related solely to our North America technology business and will not impact the Company’s overall liquidity or cash flows.

In regards to our planned exit of our retail business and the restructuring of our North America tech operations, we expect one-time exit in severance costs will aggregate between $50 million and $55 million.

This charge will be incurred for financial reporting purposes during Q1 and Q2 of 2015 and we expect its cash flow will be incurred over the remainder of 2015 and in subsequent years. After completion of these actions, we expect to realize improved operating results of between $18 million and $22 million annually.

Now, let me turn to the balance sheet. As of December 31st, our balance sheet included over $312 million of working capital and approximately $165 million in cash.

We continued to have a very strong and liquid balance sheet; this allows us to maintain healthy relationships with our vendors; to take advantage of payment discounts offered; to take positions in special inventory purchase deals; to execute on M&A opportunities, such as MISCO Solutions; and the Plant Equipment Group or PEG; and to declare special dividends when circumstances warrant.

The current ratio at December 31, 2014 was 1.6:1 and total debt was $3.6 million. I would also like to update you on our 2011 internal whistleblower investigation, which resulted in subsequent investigations by the SEC and U.S.

Attorney’s Office, into the conduct of Gilbert Fiorentino, Former Executives of the Company’s North American Technology business. This has been a very long process for the Company and one in which we have invested significant time and money to see it to its conclusion.

Earlier this month, both Gilbert and Carl, were sentenced to 60 and 80 months in prison respectively for their actions while they were part of our North American Technology business. We have received some initial restitution in the form of gold bullion, worth approximately $120,000, that was seized by the government from Gilbert.

There will be a restitution hearing in early April that will start the process to determine the amount of final restitution that the Fiorentinos will owes Systemax. Given the ongoing legal actions in this matter, we will not be commenting further or taking any questions on this today. Thank you for joining us today.

And at this point, we would like to open the call to questions, Operator?.

(Operator Instructions) The first question comes from Anthony Lebiedzinski from Sidoti & Company..

I have few questions here or so first just wanted just to clarify, as far as the exit of the retail store operation. So looks like, from what I glance at your 8-K, it looks like you’re keeping the online piece of TigerDirect just wanted to clarify that first right..

Yes, that is correct, Anthony..

And is that going to be a drag on your bottom line performance as far as you keeping the online piece of TigerDirect?.

Anthony, we expect that the restructuring actions will improve the financial operations of our NA Tech business significantly and that’s again after the onetime costs, we expect that this will -- the losses will be eliminated..

And can you just tell us the stores that you are closing, how much revenue do they do in 2014?.

About $400 million..

Okay 400 million, so if I look -- okay got it, so roughly -- okay all right -- that’s helpful. And also when I look at the press release commentary, so on a GAAP basis -- I am sorry non-GAAP basis, the Tech segment had an operating loss $25.6 million for 2014.

So if I were to exclude the drag from the retail operations of $20 million, if you take the midpoint of $18 million to $22 million, then, is it fair to say that the rest of the Tech B2B business had a negative $5.6 million impact in 2014? Just want to see if that’s the right way to think about the business kind of on a go forward basis?.

I am sorry there is, again as we said, there will be savings from the retail store exit with savings from the distribution center exit and there will be savings from the back office restructuring as well. So, it’s a bigger pot than just where you’re looking at there..

But I just wanted to get a better understanding of the profitability of the Tech B2B segment, because the way you report now is you do provide revenue numbers for the Tech businesses, both Europe and North America. But when I look at the operating income results, you have technology all lumped into one.

So I just wanted to get a better understanding of the profitability of the business now on a go forward basis?.

Again, there is a combination of cost structure reductions that we’ve outlined in there. We expect that the business performance will be enhanced by more than the cost structure reductions. We talked about the ability to focus our investments on B2B growth and the number of other actions.

So again, we expect that the business -- the losses in the North America Tech will be curtailed and it will be a significant improvement to our bottom line of our Tech operations, and the consolidated operations..

Just switching gears to the industrial segment. So the margin was down for the quarter and for the year.

And I think from, what I heard from Richard that it sounds like going forward there will be little bit more -- so I guess focus or discipline as far as which products to allocate to that segment?.

No, I mean there is -- what I was talking about was the SKU count and the expectation of the SKU count growth going forward. So, we’re looking at the productivity of all those SKUs that we’ve added over the last few years where we grew the SKU count by 1 million SKUs or whatever.

And we’re probably -- we are going to be calling a bunch of them out of the non-productive SKUs because they’re; one is, they request to maintain them; and two is, they clutter up the site; and three is, they might be from some vendors that are not willing to give us a better prices or terms.

And so those vendors, we might have to see some business with if they don’t give us better pricing in turn. So, there was going to be some calling of SKUs and that’s what I was referring to.

The overall SKU count might not increase as high as it has in the past or as high as we talked about in the past as well, there will up might be less as we’ve talked about in the past..

And in addition Anthony the industrial businesses as Richard said it's integrating the C&H acquisition, so it’s a significant change to the business and a significant project to integrate it. The results reflect industry headcount to support sales operations that reflect increased spending in marketing.

And again there is a mix shift, as we alluded to, related to importing the highest margin imported products versus the growth of other domestically sourced product that has come from all the SKU counts, the increased SKU count.

So, there is a lot of things going on in it but the business is performing very well and we expect to continue and accelerate with the integration of C&H..

I mean I would consider these high-class problems, not real problems. These are just operational decisions that we’re making as we go along..

And also just couple of quick housekeeping items here.

Do you have the -- Larry the cash from operations for 2014 and your CapEx and any sort of thoughts on 2015?.

I’ve got papers all over my desk here. Cash from op -- for the full year, operating cash was flat and in the quarter it was $37.3 million of cash provided from operations..

(Operator Instructions) And it showed no further questions. I would now like to turn the call back over to Richard Leeds..

Thank you for listening to our call. And we look forward to speaking to you next quarter. Bye..

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day..