Mike Smargiassi - Managing Director, Brainerd Communicators Richard Leeds - Chairman and Chief Executive Officer Larry Reinhold - Chief Financial Officer.
Good day, ladies and gentlemen, and welcome to the Systemax Inc. First Quarter 2015 Earnings Call. At this time, I would like to turn the call over to Mike Smargiassi of Brainerd Communicators. Please go ahead..
Thank you, Abigail. Welcome to the Systemax first quarter 2015 earnings call. Today’s call has been prerecorded and will include formal remarks from Richard Leeds, Chairman and Chief Executive Officer of Systemax; and Larry Reinhold, Executive 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 first quarter results, please contact Brainerd Communicators or Systemax. Contact details can be found on the press release issued today and at www.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 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 reoccurring and non-reoccurring 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 website 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 would now like to turn the call over to Mr. Richard Leeds..
Good afternoon and thank you for joining us today. It’s been a very active few weeks since we announced our strategic decision to focus our North America Technology Group on the B2B marketplace. We’ve made significant progress in our efforts to realign our operations and accelerate our services to business and public sector customers.
We have more work to do and we’ll provide an update of where we stand in a moment. Our results in the first quarter reflect continued solid performance from Industrial Products Group. EMEA Technology sales were negatively impacted by currency exchange and less than stellar execution in the UK, offsetting continued strong performance in France.
North American Technology results reflect the impact of our in-progress restructuring actions, as well as the continuation of the challenging market trends that led us to our decision to implement the strategic changes. I would now like to review our three business units starting with the Industrial Products Group.
Industrial delivered another solid quarter with revenue growing 23% as we benefited from continued organic growth and the acquisition of the Plant Equipment Group, which includes C&H in the U.S. and Mexico and Avenue Industrial Supply in Canada. On a constant currency basis and excluding PEG, revenue improved to 11%.
We’ve been pleased with the initial performance of PEG and customer and vendor reactions have been positive. We continue to make progress merging knowledge bases and talent within the Global Industrial and PEG operation. Our goal is to increase depth and support as we broaden our product offering and sales initiatives.
Integration and distribution centers and back-office operations are starting, so that all industrial companies will be able to offer enhanced service levels across the United States, Canada, and Mexico at lower-cost.
As we look to improve efficiencies and better serve our expanding customer base, we’ve recently made a decision to relocate to a larger distribution center in Las Vegas. This new 465,000 square foot facility will replace an existing 90,000 square foot facility, is expected to begin operations this summer.
To allow us to offer a substantially broader selection of products with much shorter lead times and lower transportation costs to our West Coast customers. We remain focused on successfully integrating PEG and improving efficiencies across our operations with a focus on increasing gross margins in all business units within Industrial.
We continue to make investments in the business to strengthen our competitive position and capitalize on the growth opportunities we see in the market. In our EMEA Technology business, first quarter sales on a constant currency basis and excluding Misco Solutions declined 10%.
France continued its strong performance as it benefited from a number of large customer wins, including contracts with government ministries, as well as continued growth in its core customer base. This was the fifth consecutive quarter of double-digit organic revenue growth.
Our UK sales have been disappointing and we’re implementing a number of actions to improve the efficiency of the sales systems and processes that are represented as utilized and working with our customers, and this is a key focus area for management.
As we look at the year ahead with our Hungarian shared services transition completed, we are focused on improving execution across the business and growing our value-added solutions and services offering. We should bring more annuity-based longer-term revenue streams.
Turning to our North American Technology business, on a constant currency basis revenue declined 15% in the quarter. This performance reflects a continuation of the performance we’ve seen past several years that led us to take the strategic actions we announced in March.
It also highlights a near-term disruption of these actions on our business, which we expected. In addition to building upon our existing B2B operations, our goal is to reshape North American Technology into B2B IT products and solutions provider with a streamlined operating structure.
With our new focus we’re targeting higher lifetime value customers, including government and education customers through a more focused commercial offering. We believe this will allow us to deepen and strengthen relationships with our customers.
The restructuring actions we’ve announced are well underway and we expect to be in a period of significant transition across virtually every part of the business for the next several quarters.
Our retail liquidation efforts are progressing as planned and on track that conclude in the next few weeks, while the restructuring of our distribution network should be complete by the end of June.
Reorganization of our teams is moving forward and we will be strengthening our sales organization with new training and more technical expertise and orders for the higher-value products, services, and solutions that we are bringing into market.
To reinforce our B2B focus and offerings we will be launching a new branding campaign, which will update everything from the look and feel of our website to our go to market strategy. We have a lot of work ahead of us but continue to believe the steps we are taking will be accretive to our financial performance once the one-time costs are incurred.
While we see substantially lower consumer and retail sales going forward, we’ll have a significant reduction in our cost structure and we believe will drive improvement in our bottom line. In summary, across all three of our business units we’re singularly focused on serving the B2B marketplace.
We are working to optimize our operating performance and strengthen our competitive position. The prudent investments we are making in our strategic initiative shall allow us to capitalize on the growth opportunities ahead. We are focused on bringing more value to our customers with expanded offering of products and solutions.
Our cash position remains strong and we are well-positioned to execute on our strategic plan. Thank you. And with that, I’ll pass the call to Larry..
Thank you, Richard. As a result of our recent decision to exit retail operations and solely focus on the B2B marketplace, in this quarter we are no longer providing revenue breakup by channel as it is not meaningful.
Looking at our results on a consolidated basis, first quarter 2015 total sales were $785.8 million, down 10.0% compared to the first quarter of 2014. On a constant currency basis and excluding the acquisitions of Misco Solutions and PEG sales declined 9.2%.
Our consolidated sales performance was led by solid growth in our industrial products group which was more than offset by declines in our North America and EMEA Technology businesses.
Turning to our reporting segments, the industrial product groups, first quarter revenue grew 23.1% to $158.9 million as we benefited from solid growth across most product lines and the addition of PEG. On a constant currency basis and excluding PEG, industrial revenues increased 10.8%.
GAAP operating margin declined to 140 basis points driven by reduction in gross margin percent, partially offset by positive operating leverage within SG&A.
Gross margin was negatively impacted by capacity constraints within industrial’s current distribution network, a mix shift with domestically sourced products growing faster than our imported private label products, a mix shift in revenue between our e-commerce and outbound selling channels and higher sales discounting.
We anticipate that the larger Las Vegas distribution center will improve gross margin in the long-term, when it is fully operational and scaled to an efficient level. However, we anticipate that while it is ramping up, overall gross margins will be impacted.
Partially offsetting these gross margin declines were lower spending on SG&A as a percent of sales, particularly advertising spend. Looking at our EMEA Technology Group segment, revenue declined 15.6% to $272.6 million.
Reported revenues were significantly impacted by the year-over-year strengthening of the dollar against European currencies in the quarter, and sales declines in the UK market. On a constant currency basis and excluding the impact of the Misco Solutions acquisition, revenue decreased 9.8%.
Operating losses widened in the quarter primarily due to poor UK performance and despite double-digit growth in France. SG&A savings from the consolidation of positions from country locations to Hungary were offset by reductions in volume and margin.
In Germany, the losses we have incurred over the past years have resulted in recording a one-time non-cash impairment of $0.3 million in the first quarter to write-down the long-lived assets to net realizable value. Our results in Germany have been poor for number of years and we’re considering all options for improving this business.
In our North America Technology Group, revenue declined 16.0% for the quarter to $352.8 million, or 15.0% on a constant currency basis.
Non-GAAP operating loss widened in the quarter, as we’ve reduced selling prices to a liquidation pricing strategy in the retail stores being exited, resulting in approximately $5.3 million in retail inventory write-downs and foregone gross profit. These impacts were all expected and factored into our decision-making analysis for the restructuring.
Market driven freight losses expanded by $1 million in the quarter, and overall volume declines across the business outpaced SG&A savings realized on an absolute basis. Consolidated gross margin declined to 13.7% from 14.6% last year.
The key drivers of this decline were reduced selling margins in Europe, particularly in the UK driven by a higher proportion of sales from public sector and commercial accounts.
The impact of the previously mentioned inventory reserve and foregone gross profit in North America Technology related to our retail store liquidations, and supply chain and category mix shifts within our industrial segment.
These negative impacts more than offset the positive contribution from France, as well as the overall growth of the industrial business. Consolidated SG&A spend decreased 3.8% in the quarter and reflects the partial period impact of the reduction in force within our North America Technology segment.
Lower operating costs in Europe, as we remove duplicative costs, which have been incurred as part of the transition to our shared service center in Hungary, as well as the overall volume decline and associated reduction in variable costs.
Non-GAAP operating loss was $8.2 million compared to income of $2.6 million last year, due primarily to the aforementioned performance of our EMEA and North America tech operations.
In regard to our plan to exit of our retail business and the restructuring of our North America tech operations, we recorded one-time exit in severance costs of $8.0 million.
This includes $2.7 million recorded in the special charges section of SG&A and $5.3 million in retail inventory reserve and foregone gross profit within the cost of goods sold related to losses on inventory at retail.
The company continues to expect total one-time exit in severance cost will aggregate between $50 million and $55 million, and that will realize improved annual profitability of between $18 million and $22 million on a pre-tax basis. Now, turning to our balance sheet.
At March 31, our balance sheet included over $267 million of working capital and approximately $133 million in cash. We continue to have a very strong and liquid balance sheet.
This allows us to maintain healthy relationships with our vendors; and to take advantage of payment discounts offered; to take positions in the special inventory purchase deals; to execute on M&A opportunities, such as Misco Solutions and the planned equipment group; and to declare special dividends when circumstances warrant.
The current ratio at March 31, 2015 was 1.6:1 and total debt was $3.1 million. This concludes our prepared remarks. If you have any questions about first quarter 2015 earnings, please contact Brainerd Communicators, our investor and media relations advisor or Systemax directly.
Contact information can be found on the earnings release issued earlier today. Thank you for your interest in Systemax, and we look forward to updating you on our results for the second quarter in three months..
Ladies and gentlemen, thank you for participating in today’s program. This does conclude the call. You may all disconnect..
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