Michael Smargiassi - IR Larry Reinhold - President and CEO Tex Clark - VP and CFO.

Good afternoon, ladies and gentlemen, and welcome to the Systemax Inc.'s. first quarter 2017 earnings call. At this time, I would like to turn the call over to Mike Smargiassi of Brainerd Communicators. Please go ahead..

Thank you and welcome to the Systemax's first quarter 2017 earnings call. Today's call will include formal remarks from Larry Reinhold, President and Chief Executive Officer; and Tex Clark, 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 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.

This 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 presenting the entire North American Technology Products Group, our divested European operations and Afligo, our formal rebates processing business has discontinued operations, as well as excluding certain recurring and nonrecurring adjustments from comparable GAAP measures, investors have an additional meaningful measurement of the company's performance.

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 in the Form 8-K.

This call is the property of and is copyrighted by Systemax Inc. I will now turn the call over to Mr. Larry Reinhold..

Thanks, Mike. Good afternoon, everyone, and thank you for joining us today. More than a year ago, we commenced the strategy to exit our underperforming businesses and streamline our company.

With the sale of our former North American Technology Group in late 2015, the sale of Germany in September 2016, the sale of Afligo in December 2016 and the sale of the remainder of our underperforming businesses in Europe in March 2017, we have substantially completed this initiative and successfully transformed Systemax.

Each of these businesses generated significant losses for several years, and their disposition substantially improves our overall profitability. While certain wind down activities remain, we are now focused on our core operations. This was a significant and multistep process, that was completed in a very short period of time.

And I want to thank our corporate team and the board for all their efforts, assistance and guidance. Today, Systemax is essentially a new company. We have shed the unprofitable businesses that hit the growth potential and value of our profitable North American Industrial Products Group and our France technology value-added reseller businesses.

These two continuing businesses each delivered exceptional performance in the first quarter, generating double-digit revenue and significant operating income gains over the prior year. Both are highly successful and we're focused on their continued growth.

We believe both businesses are positioned to deliver strong top and bottom line performance in 2017. And our first quarter results highlight their success and future potential. Industrial had a terrific first quarter on the top line and showed improved leverage, as we are starting to benefit from our efficiency initiatives.

Revenue growth continues to outperform many competitors in the Industrial supplies, MRO market and reached a record $190 million for the first quarter, which represents an increase of 13% on a constant currency average daily sales basis. Growth accelerated each month as we moved throughout the quarter.

Our performance benefited from strong results across core product lines and across our customer base, including solid growth in Canada. We delivered almost two full points of improved operating leverage versus the year-ago quarter, reflecting a more streamlined employee base and improved advertising efficiency.

We also made progress on several additional continuous improvement initiatives. And in February, we completed our warehouse management system conversion in our final distribution center and are continuing to work to optimize the stocking and service capabilities of our fully integrated and national distribution footprint.

We also continue to invest in our sales teams with enhanced product training and better lead generation and customer support tools, to drive both the productivity of our reps and customer satisfaction levels. In late April, we held our first customer and vendor show of the year at the Meadowlands Complex in New Jersey, just outside of New York City.

This show was very well attended and highlighted the breadth of our offering. These events are valuable opportunities to showcase the global industrial brand and deepen our customer and vendor relationships. Industrial is very well positioned for continued success.

We are seeing top line momentum and improved execution within the business, which will drive our long-term profitability. The infrastructure we have in place today is still being optimized and has the capacity to handle increased volumes without significantly adding to our cost structure.

We are focused on delivering organic growth and continue to evaluate potential strategic M&A opportunities.

In Europe, we exited all of our unprofitable markets at the end of the first quarter, while retaining our highly successful and profitable operations in France, where we operate a technology value-added reseller business primarily going to market under the Inmac Wstore brand.

It is focused on the B2B marketplace and was by far, our largest and most profitable business in Europe. It operates in a highly fragmented market, but is one of the leading and largest companies in its industry and was recently ranked #6 in the French market, in terms of revenues by an industry trade publication.

In the first quarter, France delivered exceptional performance, with the revenue up 14% on a local currency average daily sales basis and operating income up 25% as the business showed strong leverage. France has now delivered double-digit organic growth for 13 consecutive quarters.

France has outperformed its industry sector in revenue growth for a number of years and its success is due in part to its great management team, efficient operations, outstanding customer and vendor relationships, a long tenured sales organization and excellent customer service.

The business is built around a core base of SMB accounts, but also serves large corporate customers and participates in public sector tenders. It has benefited from growth across customer segments and product categories and serves the entire French market from three physical locations within the country.

And it has steadily expanded its customer base and average order size.

More than 50% of its business is comprised of client infrastructure devices, including desktops, laptops and IT peripherals and it is focused on broadening its service capabilities with the addition of advanced technical certification teams to provide product and solutions integration.

This business was always our most autonomous operation in Europe, operating on a locally managed IT platform as well as having had limited utilization of our former shared service center.

As such, it had very limited operational disruption in comparison to our other European businesses and its management team is focused on continuing its excellent performance and expanding its services and solutions offerings. In summary, in little more than a year, we have significantly streamlined our operations.

And today, operate two highly successful, growing and profitable businesses. Moving forward, a value of our Industrial and France businesses will be clearly visible in our financial results.

With a simplified and focused operating footprint and a strong cash position, we are well positioned to continue executing on our strategic plan and drive the performance and value of our businesses. We are returning capital to shareholders through our quarterly dividend, which we have increased this quarter from $0.05 to $0.10.

And we are committed to further improvements in our overall margin performance. I will now turn the call over to Tex..

Thank you, Larry. I will address our segment financial performance in more detail. As mentioned previously, our comments will primarily be directed to non-GAAP results. In addition, revenue results now include an average daily sales metric to enhance comparability between periods.

First quarter consolidated revenue reflects double-digit top line growth in both Industrial and France on a constant currency average daily sales basis.

Consolidated gross margins declined slightly year-over-year, driven by a temporary increase in logistics costs in our Industrial segment as well as a reduction in gross margin in France, primarily attributable to product and customer mix. Consolidated SG&A decreased on a percent of sales basis.

And non-GAAP operating profit and margin increased to $13.3 million and 4.4%, respectively. Starting with Industrial's financial performance, Industrial's first quarter revenue increased 11.5% on a reported basis and was up 13% on a constant currency average daily sales basis.

The 2017 first quarter had one fewer selling day versus 2016 first quarter, which resulted in the difference between reported and average daily sales. This was our strongest quarter of organic growth on an average daily sales basis in more than two years and we showed top line momentum as we move through the period with 14% growth in March.

Further, we were able to return our Canadian operations to growth, as we delivered 22% local currency growth as we improved our logistics performance and delivered an enhanced value proposition to our customers. Industrial's gross profit for the quarter increased to $53.4 million from $48.7 million last year.

Reported gross margin was off 40 basis points, reflecting increased warehouse staffing cost, due to incremental temporary labor to ensure customer service levels during our systems transition.

This temporary cost increase was partially offset by a 20 basis point increase in our net selling margin to customers to 33.6%, which is inclusive of both the product and freight.

Our freight performance, which was challenged last year, improved sequentially and year-over-year, reflecting continued progress in utilizing our broad distribution network more efficiently. With the completion of our warehouse systems transition in February, we expect staffing expense to normalize in the second quarter.

SG&A spending for the quarter was $40.5 million and 250 basis point improvement as a percentage of sales from last year. We delivered an improved leverage across all major cost functions, including advertising, salaries and related, and general operating expenses.

In March, we saw the additional benefits from the previously announced headcount reduction and continue to expect annualized savings of over $5 million from this action. We recorded approximately $0.3 million in severance and related costs in the first quarter within the Industrial segment.

Industrial's non-GAAP operating income for the quarter was $12.9 million and margin improved to 6.8%, an improvement of over 200 basis points from the year-ago quarter and 110 basis points on a sequential quarter basis. Total depreciation and amortization expense in the quarter was $1 million.

While we are happy with the progress shown in Q1, we continue to proactively manage the business and expect to see additional benefits from our optimization and cost structure reduction efforts as we move through the year. Turning to Europe's financial performance.

With the sale of the majority of our European businesses, I will focus my comments on our continuing operations in France. France's first quarter revenue increased 12.2% to $112.3 million.

On a constant currency basis, average daily revenues increased over 14%, as the business benefited from solid performance across its customer segments, led by growth of almost 20% in its key accounts.

For your background, our French business has some historical seasonality, with the fourth quarter typically the strongest quarter of the year, followed closely by the first quarter.

Our second quarter performance is typically softer and is impacted by several holidays, while the third quarter is typically the slowest period due to high personal holiday rates amongst our customers, vendors and staff.

France gross profit for the quarter increased to $17.4 million, while its gross margin decreased 50 basis points to 15.5%, primarily reflecting product mix, more heavily weighted towards client devices in the period and a relative lower margin this categories generate, as well as the shift in customer mix.

Historically, France is our highest gross margin operation within our European segment, as they have successful wrapped higher margin peripherals, during sales of PCs and notebooks. SG&A spending was $11.6 million, a 100 basis point improvement as a percentage of sales. Leverage was primarily related to volume growth spread across our fixed cost base.

France's non-GAAP operating income for the quarter was $6 million and margin improved to 5.3%, which we believe is among the highest operating margins amongst its peer group. France recorded a $0.2 million of depreciation and amortization in the period.

Over the next two quarters, our French team will work to completely transition away from the companies shared service center in Budapest, which was divested during the sale of our European operations and will repatriate certain of those functions internally.

While there will be some duplicative cost while we wind down reliance on shared service center and begin training the new team members in Paris, we anticipate the impact to be minimal. Net income from discontinued operations in the quarter was a loss of $28.8 million, of which $26.9 million related to the sale of our European operations in March.

These losses consisted of $23.3 million of non-cash charges, including the recognition of cumulative translation adjustments for the sold entities, as well as the write-down of the net asset value of the sold operations to the sale price.

The remaining $4.3 million of net loss is recorded related to this sale, consisted of the first quarter net loss of the sold European businesses from January 1st to the closing date, as well as certain legal, professional and other fees associated with the transaction. Both of these cash flows occurred in Q1.

Additionally, we recorded $1.9 million of cost related to our former NATG operations, associated with adjustments to lease accruals and certain incremental reserves on accounts receivable. For each of these discontinued operations, certain contingent liabilities still exist and may result in additional charges in future periods.

Let me now turn to our balance sheet. We continue to have a very strong and liquid balance sheet with a current ratio of 1.9 to 1. As of March 31, we had approximately $144 million in cash, no debt and over $195 million of working capital.

We continue to manage our working capital efficiently, and we were able to maintain our DSOs across each operation and improve inventory turns within our Industrial segment. Further, we have approximately $65 million of availability under the $75 million credit agreement we entered into in October.

The strength of our balance sheet allows us to continue to invest in our growth opportunities and return capital to shareholders. As a result, our Board of Directors has declared an increased cash dividend of $0.10 per share of common stock to shareholders of record at the close of May 15th 2017, payable on May 22nd 2017.

We anticipate continuing a regular quarterly dividend in the future. This concludes our prepared remarks. If you have any questions about our first quarter 2017 earnings, please contact Brainerd Communicators, our Investor and Media relations advisor or Systemax directly. Contact information can be found in the earnings release issued earlier today.

And thank you for your continued interest in system Systemax..

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That concludes today's conference. You may now disconnect your lines..