Richard Leeds - Chairman and Chief Executive Officer Larry Reinhold - Executive Vice President and Chief Financial Officer Jenny Perales - Brainerd Communicators.
Good afternoon and welcome to the Systemax event. All participants will be in listen-only mode. [Operator Instructions] I would now like to turn the conference over to Jenny Perales at Brainerd Communicators. Please go ahead..
Thank you, operator. Welcome to the Systemax third 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 question-and-answer session at the end of today's call. If you should have any questions on third 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 or the quarterly reports on Form 10-Q.
We 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 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 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. Our results reflect another quarter of strong performance from our industrial products group, significant improvement in EMEA operating results offset by continuing challenging operating results in North American technology segment.
Industrial had another terrific quarter as revenue increased 26.2% driven by the addition of the Plant Equipment Group or PEG, which we acquired in January, and solid organic growth which continues to outpace the general MRO industry.
On a constant currency basis and excluding PEG, organic revenue growth was 10.2% while other public companies in the MRO space have all reported flat or negative growth. The integration of PEG is moving forward and on plan.
This includes the integration of IT systems and our distribution centers which will improve efficiencies and allow us to improve our service levels in all areas of the country. During the quarter, we consolidated two smaller warehouses in Nevada into our new and larger Las Vegas distribution center and storage shipping in July.
We now have large, full service distribution centers on a national scale. We are focus on ramping operations at the new Las Vegas location and optimizing performance across our entire distribution network.
In the last month, we have also commenced a co-branding initiative which will allow us to transition PEG brands such as C&H into the global industrial family. We are excited about this effort which will allow us to further build our brand recognition in the market.
With the execution of our integration activities, the build out of our distribution assets and the continued growth in the business, we believe we are well positioned for further success in the year ahead. In EMEA Technology, third quarter sales were flat on a constant currency basis.
We delivered improved consolidated operating performance as France had another exceptional quarter and except for the U.K., all of our other markets showed improvements. This is the second consecutive quarter we have delivered improved consolidated operating results. We remain focused on enhancing our performance.
In the U.K., our new leadership has undertaken an extensive review of our operations and implemented a number of steps to improve our ability to serve the market, including addition of new sales leadership.
Across our operations we continue to benefit from our Hungary shared services operations as they drive additional efficiencies and benefit our businesses and customers.
Finally, our North American Technology segment results reflect the ongoing realignment of our business to focus primarily on the b2b and public sector market place and substantially exiting the retail and consumer market.
While we continue to see substantial disruption to business, we are making progress and we have reduced our cost structure significantly. However, the business has not yet reached an acceptable performance level and we are exploring strategic alternatives as we move forward with our restructuring effort.
We continue to develop our services offerings and are adjusting our marketing approach to our b2b audience. Our teams have been very busy planning our fourth annual Tiger Innovation and Tech Bash event which will take place this Friday, November 6 at Marlins Park in Miami.
The b2b innovation expo connects small businesses with the latest technology innovations and will include a keynote presentation by our spokesperson, Kevin O'Leary from Shark Tank. In summary, we are working towards improving the performance of all three of our business units and making progress against our operating plans.
We are prudently investing in our operations to strengthen our competitive position and capitalizing our growth opportunities. We have a strong cash position and are committed to delivering additional value to our customers and shareholders. Thank you and with that I will pass the call to Larry..
Thank you, Richard. Looking at our results on a consolidated basis, third quarter 2015 total sales were $699.3 million, down 15.3% compared to the third quarter of 2014. Currency movements had a significant negative effect in the quarter.
Excluding the impact of currency changes, the closed retail stores and the acquisitions of PEG, sales declined 3.5%. 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 technology businesses. Turning to our reporting segments.
The industrial product group's third quarter revenue grew 26.2% to $180.1 million, as we benefited from the continued growth across most product lines and the addition of PEG. On a constant currency basis and excluding PEG, industrial revenues increased 10.2%.
GAAP operating margin declined 180 basis points driven primarily by a reduction in gross margin. Gross margin was negatively impacted by increased distribution costs associated with the new larger Las Vegas facility and reduced freight margin.
Our new Las Vegas distribution center is very early in its ramp process and we anticipate industrial's overall reported gross margins will be negatively impacted until this facility is scaled to an efficient level over the next year.
Longer term, we expect this facility will result in modestly improved gross margins from freight cost reductions to West Coast customers and improved efficiency at the other distribution centers. SG&A was essentially flat as a percentage of sales in the quarter.
As we finish integrating PEG operations and optimize our distribution footprint, we believe we will see favorable leverage within the overall industrial products group Looking at our EMEA technology group segment. Revenue declined 13.4% to $241.8 million.
Reported revenues were significantly impacted by the year-over-year strengthening of the dollar against European currencies, primarily the euro, and sales declines in the U.K. market. On a constant currency basis revenues were flat.
Operating losses significantly narrowed in the quarter as we benefited from strong growth in France and bottom line improvement in all other markets, except the U.K.
SG&A spend was down 16.3% year-over-year and savings from our Hungary shared services center and personnel changes helped drive a 50 basis point improvement in overall SG&A as a percentage of sales.
In our North America technology group, revenue declined 31.3% for the quarter to $276.1 million or 12.6% on a constant currency basis and excluding the impact of the now exited retail stores. GAAP results continue to reflect the impact of the restructuring which I will address later.
Non-GAAP operating loss widened in the quarter due to the disruption of the restructuring and a challenging competitive environment. SG&A declined 33.2% but we saw a 30 basis point improvement as a percentage of sales as we continue to right size our cost structure.
In addition, inventory was reduced to less than $85 million as we made further progress on the restructuring and aligned our inventory with our b2b focus. Consolidated gross margin was 14.4%, essentially flat with last year.
Gross margin reflects the benefit of a higher contribution from the industrial business, offset by lower gross margins in the North American tech business.
Consolidated SG&A spend on an absolute basis decreased 10.4% in the quarter, reflecting the impact of the reduction in force and strategic initiatives within our North America technology segment and the lower cost structure in Europe as we benefited from our shared service center in Hungary.
While spend was down on an absolute basis, as a percentage of sales SG&A increased by 80 basis points year-over-year. Consolidated deleveraging was primarily due to the higher operating cost structure of our industrial products group and its relative contribution to our consolidated business.
Non-GAAP operating loss was $5.4 million compared to $0.1 million last year. In Q3, non-GAAP operating loss was impacted by the opening of the new warehouse for the industrial products group and the ongoing transition of our North American tech business.
Turning to our North American tech restructuring, which we announced during March and substantially completed during Q2. During Q3 we recorded additional one time exit costs of $2.3 million. These additional accruals result from reevaluating the remaining vacant retail and distribution center leases in light of current market conditions.
Aggregate restructuring costs and gross profit impacts recorded in the first, second and third quarters were $39.1 million. As of September 30, we have successfully exited and settled 20 of the 30 standalone retail stores that we closed during Q2.
Although we still have ten standalone retail store leases that are being marketed as well as the Illinois distribution center and retail facility, we continue to believe that the ultimate aggregate cost of the restructuring will be less than originally estimated. Now, turning to our balance sheet.
As of September 30, our balance sheet included approximately $249 million of working capital and approximately $136 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 special inventory purchase deals, to execute on M&A opportunities such as PEG, and to declare special dividends when circumstances warrant.
The current ratio at September 30, 2015 was 1.6 to 1 and total debt was $1.7 million. We also recently renewed our line of credit with three money center banks for an additional year with the expiration date extended to October 31, 2016. This concludes our prepared remarks.
If you have any questions about third 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..
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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..