Mike Smargiassi - Investor Relations, Brainerd Communications Richard Leeds - Chairman and Chief Executive Officer Larry Reinhold - Executive Vice President and Chief Financial Officer.

Good day and welcome to the Systemax Fourth Quarter 2015 Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Mike Smargiassi of Brainerd Communications. Mr. Smargiassi, the floor is yours sir..

Thank you and welcome to the Systemax fourth quarter 2015 earnings call. Today’s call has been pre-recorded 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 fourth 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 presenting the entire North American technology products group as a discontinued operation and excluding certain recurring and non-recurring adjustments from comparable GAAP measures, investors have an additional meaningful measurement of the company’s performance. Larry will expand on this in his introductory remarks.

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 website and will be filed with the SEC and on 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. During the fourth quarter, we announced the strategic exit of our North American technology business. This transformative event will significantly improve our consolidated financial performance and profitability and allows us to sharpen our focus on driving the value of our two remaining businesses.

The exit process in North American tech, include the sale of certain assets and the winding down of remaining operations. I am happy to report the exit of those operations is largely complete. Larry will provide a full update on the details as well as address the impact of the exit on our financial reporting in a moment.

As a result of this strategic decision, Systemax today operates two value-added B2B distribution businesses, an industrial MRO business, serving the North America market and an IT products and services business serving EMEA. We believe both of these businesses have opportunities for organic growth and select M&A.

To better position them for the future, over the past several years, we have strengthened and built out their infrastructures, improve operating efficiencies, expanded their products and service offerings and enhanced customer service level.

Our industrial products group continues to deliver strong performance and for the full year, it generated almost $700 million in revenue, up 26% from the prior year.

Our revenue growth was driven by the addition of the Plant Equipment Group, or PEG, as well as double-digit organic growth, which continues to significantly outpace the general MRO industry. Industrial enters 2016 positioned to benefit from the investments and efforts of the past year.

PEG has been fully integrated in our co-branding initiative to allow us to leverage the power of our brands and enhance our recognition in the marketplace have been well-received by our customers.

With the recent opening of our Las Vegas distribution center and the integration of the Wisconsin, D.C., which came with the PEG acquisition, we have a national distribution footprint in place on an integrated logistics platform.

We expect improved service levels and more efficient freight and logistics as we scale and optimize our distribution network. On the sales front, we spent a good part of the year melting the global and PEG teams together and putting the organization on a single CRM platform. In the year ahead, we look forward to additional integration benefits.

In EMEA technology, we significantly improved our performance, particularly in the fourth quarter where we delivered revenue growth on a constant currency basis and made progress towards achieving a breakeven bottom line.

Our quarterly results reflect strength in our largest market, France, which continues to grow with top line much faster than the market and leverages this growth to the bottom line. In the UK, we are improving our operations and customer service levels and we have been able to recruit a number of experienced and credential sales personnel to join us.

While we have more work to do to reach our goal for the UK, I believe the business is headed in the right direction and our entire team is focused on additional improvement initiatives. In summary, the strategic and operational steps we took this past year positioned us to enhance our performance and execute on our operating plans.

We are driving efficiencies and giving our customers superior service across our operations. In North America, we are now fully focused on our growing industrial business and are poised to capitalize on recent investments. And in EMEA, we are committed to returning the business to consistent profitability.

We have a strong cash position and are committed to delivering additional value to our shareholders.

Finally, as part of our succession plan, effective March 10, Larry Reinhold will assume the position of Chief Executive Officer in our transition to Executive Chairman focusing on long-term strategic direction and working with our management teams on new product and service development.

Larry will retain the CFO title on an interim basis until a successor is determined. Larry is in his 10th year as part of the Systemax family. I have worked closely with him during that time and look forward to continuing to do so in our new role.

He is a proven executive and strong leader who knows our company very well, make him the ideal person to manage our day-to-day operations and lead our company for the future. Congratulations, Larry..

Thank you, Richard. I am honored by the confidence both you and the Board have placed in me. Systemax is a great company, with a strong management team and dedicated employees. It’s an exciting time at the company and we have numerous opportunities in front of us.

I would like to thank you for the leadership, dedication and mentoring that you have provided as CEO and I look forward to continuing our work together to the benefit of our customers, employees and shareholders. The first thing I want to address today is the presentation of NA Tech in our consolidated financial reporting.

I believe the non-GAAP presentation of financial results, which I will explain in a moment, is a more meaningful presentation for our investors than the GAAP presentation. As you know, in November, we announced the decision to sell most of NA Tech to PCM and to wind down the remaining operations to fully exit the business as soon as possible.

A substantial portion of NA Tech was its retail operations, which peaked at 42 stores in 2011. During 2012 and through the first half of 2015, 39 of these stores were closed, leaving 3 stores in operation at the time of the PCM announcement. Those 3 stores were closed during January 2016. The U.S.

GAAP rules for discontinued operations changed effective January 1, 2015. These revised rules mandate that, because the 39 stores have been closed prior to the PCM announcement, their historical results along with allocations of shared distribution and back office costs must be presented as part of continuing operations for U.S. GAAP.

This counterintuitive presentation results in 2015 full year GAAP continuing operations, including about $98 million of revenues and $42 million of net losses, which were incurred by the discontinued NA Tech business.

We believe our non-GAAP presentation of financial results is a better presentation of the economic substance of both Systemax’s continuing operations and its discontinued NA Tech operations.

Accordingly, our supplemental non-GAAP presentation has adjustments to present the entirety of NA Tech as a discontinued operation as well as typical adjustments for one-time items, tangible amortization, equity compensation and a normalized effective tax rate.

Note that when we get to reporting the first quarter of 2016 in early May, substantially all Q1 activity for NA Tech should be reflected as discontinued operations for GAAP purposes. Unless otherwise noted, my comments today will focus on non-GAAP performance.

Finally, due to our fiscal year end being midnight on Saturday closest to December 31, the fourth quarter of 2015 included 14 weeks versus 13 weeks during 2014 and the full year 2015 included 53 weeks versus 52 weeks during 2014.

The fourth quarter included four extra selling days in North America, France and the UK, five days in the Netherlands and the full year included four extra selling days in North America, the UK, the Netherlands and five days in France. These represent our largest geographical markets around the world.

First looking at consolidated results, fourth quarter 2015 consolidated sales were $465.8 million, up 2.6%. On a constant currency basis and excluding the January 2015 acquisition of PEG, in North America, consolidated sales increased 4.5%. The increase was led by solid growth in industrial and modest increases in EMEA.

For the full year, consolidated sales were $1.8 billion, up 0.3%. On a constant currency basis and excluding both the January ‘15 acquisition of PEG and the June 2014 acquisition of Misco Solutions in the Netherlands, consolidated sales increased 1.9%. The yearly increase reflected solid growth in industrial and overall sales declines in EMEA.

Consolidated gross margin for the quarter improved 100 basis points over last year’s 18.7%. This increased gross margin reflects the impact of a higher contribution from industrial, as gross margins in both industrial and EMEA were relatively consistent with the fourth quarter of last year.

For the full year, consolidated gross margin increased 60 basis points to 18.9%. This increased gross margin reflects the impact of a higher contribution from industrial, partially offset by modestly lower gross margins in both industrial and EMEA.

Consolidated SG&A spend on an absolute basis increased about $5 million in the quarter, reflecting growth in industrial and corporate spending of about $10 million and reduced spending in EMEA of about $5 million. The growth in absolute dollars included PEG during the current year’s fourth quarter, but not in last year’s.

Operating margin grew from 0.5% to 0.6%. For the full year, consolidated SG&A spend increased about $10 million, reflecting growth in industrial and corporate spending of about $33 million and reduced spending in EMEA of about $23 million.

The growth in absolute dollars included PEG for 11 months of 2015, but not in 2014 and Misco Solutions for the full year 2015 with only six months in ‘14. Consolidated operating income for the quarter increased from $2.9 million in 2015, compared to $2.4 million last year, which represented consolidated operating margin of 0.6% and 0.5% respectively.

For the full year, consolidated operating income declined to $16.8 million from $20.5 million last year, which represented consolidated operating margin of 1.0% and 1.2% respectively.

Consolidated net income from continuing operations for the quarter after a 35% assumed effective tax rate was $0.2 million, compared to income of $1.1 million last year. The driver of the small decrease was unfavorable foreign exchange movements in both the Canadian dollar and the euro.

For the full year consolidated net income from continuing operation after a 35% assumed effective tax rate plus $4.5 million compared to $9.2 million last year. The decline reflects primarily larger losses in EMEA in the earlier part of the year and unfavorable foreign exchange.

Turning to our two reporting segments, Industrial’s fourth quarter revenue grew 25.8% overall. On a constant currency basis and excluding PEG, revenues grew 9.6%. For the full year, revenue grew 25.6% overall and on a constant currency basis and excluding PEG, revenues grew 10.1%.

The organic growth in both the quarter and full year reflected sales of products in newer categories as well as growth in government and certain other end markets. Gross profit for the quarter grew to $51.8 million this year from $41.1 million last year and gross margins for both periods were relatively flat at about 29%.

Gross profit dollars reflect both the impact of organic sales growth and the impact of the PEG acquisition. Gross margin reflects the improved product margins, offset by increased costs for the larger Las Vegas distribution center.

For the full year, gross profit grew to $198.7 million from $163.4 million last year, but gross margin declined by about 100 basis points. This decline reflects improved product margins offset by freight and logistics inefficiencies earlier in the year prior to the opening of the larger Las Vegas warehouse.

SG&A spending for the quarter was about $40.2 million, compared to $32.3 million last year. Operating income for the quarter grew to $9.9 million compared to $8.7 million last year, but operating margin declined from 6.1% to 5.5%.

The decline in operating margin for the quarter reflects the impact of integrating the PEG business, which had a higher cost structure than the existing industrial business. For the full year, SG&A spending was about $150.2 million compared to $120.3 last year.

Operating income grew to $44.0 million compared to $43.0 million last year, but operating margin declined from 7.7% to 6.3%. The decline in operating margin for the year reflects the impact of lower gross margin in the earlier part of the year and the aforementioned integration of PEG.

Now looking at our EMEA segment, EMEA’s fourth quarter revenue declined 8.0% overall. However, on a constant currency basis, revenues grew 2.3%. This reflects growth in France and most of the other markets.

For the full year, revenues declined 11.5% overall, but on the constant currency basis and excluding the impact of the June 2014 acquisition of Misco Solutions in the Netherlands, revenues declined only 1.9%. This reflects organic growth in France of nearly 20% as well as growth in most of the other markets.

Gross profit for the quarter declined to $34.4 million this year from $38.1 million last year. But the decline in gross margin to 12.0% was modest due to the impact of currency. For the full year, gross profit declined to $129.8 million from $153.7 million last year. But the decline in gross margin to 12.3% was again, modest.

The gross margin decline reflects the impact of pricing on larger government tenders and enterprise sales. SG&A spending for the quarter was about $35.7 million compared to $40.8 million last year. Operating loss for the quarter declined to $2.1 million compared to $3.5 million last year.

For the full year, SG&A spending was about $135.6 million compared to $158.5 million last year, operating loss was $9.0 million compared to $7.8 million last year.

The decline in spending for both the quarter and the year reflects primarily the impact of currency with a smaller impact from cost reduction initiatives put in place during the second half. Now, let me update you on the status of the discontinued NA Tech business. We closed on the PCM transaction on December 1.

Between that date and February 15, we continued to operate the business for the purpose of selling through the remaining inventory. We closed the Puerto Rico retail store during December and the two U.S. stores during January. We stopped sales on the websites and other channels on February 15 and transferred the URLs to PCM on that date.

We closed the Georgia warehouse during late February.

As of today, we have approximately 30 employees remaining in this business who are focusing on the final wind down activity and we anticipate that substantially all of those activities will be completed during the second quarter and that any remaining activities after that date will be completed by corporate staff here in New York.

For the quarter, the discontinued NA Tech business incurred losses of $25.0 million and for the full year the losses were $93.4 million. We anticipate recording additional losses on discontinued operations of between $15 million and $25 million during the first and second quarters of 2016.

These losses will primarily relate to accruals for terminated leases on the warehouse, the two retail stores that operating during January and the Miami headquarters building.

Finally, last week the United States District Court of the Southern District of Florida awarded Systemax almost $36 million in restitution from Gilbert and Carl Fiorentino, while the company will utilize all available means to collect this restitution, none will be reflected in our financial statements prior to its collection.

Let me now turn to our balance sheet. As of December 31, our balance sheet included approximately $214.2 million of working capital and approximately $215.1 million of cash. Of this total cash, approximately $136.6 million was held in our continuing businesses of industrial, EMEA and corporate. The remainder was held by NA Tech.

We continue to have a very strong and liquid balance sheet. The current ratio at December 31, 2015 was 1.5 to 1, total debt was $1.0 million with $33.0 million of availability under our line of credit with three money center banks. This concludes our prepared remarks.

If you have any questions about fourth 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..