Good afternoon, ladies and gentlemen, and welcome to Systemax Inc.'s Fourth Quarter 2020 Earnings Call. At this time, I would like to turn the call over to Mike Smargiassi of The Plunkett Group. Please, go ahead..

Thank you and welcome to the Systemax fourth quarter 2020 earnings call. Leading today's call will be Barry Litwin, Chief Executive Officer; and Tex Clark, Senior Vice President and Chief Financial Officer. Formal remarks will be filed by a question-and-answer session. 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 and other risk factors in the company's Annual Report on Form 10-K and quarterly reports on Form 10-Q.

The press release is available on the company's website and has been filed with the SEC in a Form 8-K. This call is a property of and is copyrighted by Systemax Inc. I will now turn the call over to Barry Litwin. .

Thanks, Mike. Good afternoon, everyone, and thank you for joining us today. We ended 2020 with an impressive fourth quarter performance on both the top and bottom line. Revenue increased 23% to $274 million, with an average daily sales growing over 15%.

For the full year revenue increased over 8%; and we exceeded $1 billion in sales, a significant milestone. Growth in the quarter was once again led by our Global Industrial branded product offering, pandemic-related supplies and equipment and continued recovery in core product categories.

Profitability was strong in the quarter, as we delivered year-over-year improvements in gross margin, SD&A leverage and operating margin, which increased and resulted in 46% improvement in fourth quarter operating income. For the full year, we generated operating income of $84 million and cash flow from operations of approximately $67 million.

With this impressive financial performance, we were able to pay a special $2 per share dividend in December and today increased our quarterly recurring dividend by 14%, from $0.14 to $0.16 per share the fifth increase in as many years. The past year has been life-changing for all of us. And at times it was trying personally and professionally.

I'm grateful to all of our associates, as they really stepped up to the challenge and for their commitment to our customers and our company. As a result of their efforts, 2020 was a resounding success for our business.

With the strong execution of our ACE strategy and the deliberate and swift actions we took in an unprecedented business environment, we were able to be there for our customers and generate industry-leading growth. As we look to 2021, we are focused on the continued execution of our strategy and building upon our financial performance.

At the core of our efforts is our multi-year ACE strategy, which guides our actions across the business and specifically in our customer end-to-end purchase, service and delivery experience. In the year ahead, we'll be making further investments within the core pillars of our strategy.

This includes investments in automation and technology in our customer service stack; our e-commerce shopping experience, to provide a seamless shopping journey filled with educational content and solution offerings; our distribution centers to increase timeliness, quality and accuracy and customer order fulfillment, while driving labor productivity; and sales force productivity and automation, which will continue to allow our managed sales force to proactively provide our customers with the solutions they need in order to operate their business.

These actions will enhance our end-to-end customer experience, drive the further evolution of our e-commerce platform and strengthen our overall competitive position. We will also continue to invest in our Global Industrial branded products where we have an opportunity to increase its share of total sales and expand the product line.

Our private label offering further differentiates our value proposition and enhances our margin profile. As we build a world-class organization, we are strengthening talent within the business that will help guide and support our growth.

The recent addition of Claudia Hughes to the newly created position of Chief Sales Officer expands our leadership team and will help us drive our digital and multi-channel sales model. Finally we kicked off the year by providing Global Industrial with a new look and brand promise.

It's an evolution of the brand identity that honors our 70-year history of service and reflection of our core values and continuous improvement mindset. It has generated significant excitement across the organization and represents another step in our efforts to strengthen and deepen connections with our customers.

In conclusion, we are investing in our growth and believe our strategy has tremendous relevance in the marketplace today. We are looking forward adapting to the needs of our customers and moving the business to where it needs to be tomorrow.

We believe we are well positioned to continue to capitalize on the acceleration of B2B e-commerce environments and to capture additional market share in a highly-fragmented industrial distribution marketplace.

While the current environment remains unpredictable, the commencement of COVID vaccinations and signs of improving economic demand are promising. As we start the New Year, I'm pleased with the momentum and excitement we have in the organization and remain optimistic for 2021.

Across the company we are driving operational excellence in everything we do. This is resulting in a better customer experience and improved customer acquisition, retention and overall satisfaction rates.

With an exceptional platform and a differentiated go-to-market strategy, we believe, we have a lot of opportunity ahead and are just getting started. I'll turn the call over to Tex. .

Thank you, Barry. I will now address our performance in more detail and would like to note that we had four additional selling days comprised of the New Year's holiday week in the fourth quarter of 2020 as compared to the year ago period. In the fourth quarter revenue grew 23.3% over Q4 of last year.

Revenue was $273.9 million with average daily sales growth of 15.8%. U.S. average daily sales growth was 14.2% while Canada average daily sales grew 43.4% in local currency. Growth was stable as we moved through the fourth quarter and rates of growth continued to outperform the industrial distribution industry.

This growth continued into January, however at a lower rate than the fourth quarter. We recorded double-digit growth across all sales channels, led by e-commerce which again accounted for more than 55% of our transaction count for the second consecutive quarter.

New customer acquisition was very healthy and our managed sales team expanded average order value as they deepen relationships with existing accounts.

Sales performance continued to benefit from investments in our private label offerings and the rebound of our core product lines continued, as we again recorded growth in the quarter, despite the challenging macro environment.

Consumable products within the pandemic assortment including PPE and sanitizing supplies made up roughly 9% of sales in the fourth quarter, as compared to approximately 2% of sales in the same period last year.

While this was a reduction in the percentage of sales as compared to the third quarter, we did see these categories increase as a percentage of total share as we move through the period and we continue to believe they will have some permanence moving forward. Gross profit for the quarter was $93.1 million, an increase of 24.1% from last year.

Gross margin was 34%, up 20 basis points from the prior year, primarily driven by improvements in prices and rationalization, as well as our private label offering being a larger share of our sales mix.

On a consecutive quarter basis gross margin was down 180 basis points, which primarily reflects the comparison against an exceptional third quarter performance and seasonal changes in quarterly mix.

We did see a number of margin pressures during the quarter, primarily related to freight promotions increased parcel shipping costs associated with the extended peak season and ocean freight costs.

We expect these costs to continue into the first quarter, and will also incur what we believe to be temporary additional freight costs as we've transitioned to a new third-party logistics partner in an effort to further improve service levels and our customers' experience.

We continue to actively manage our gross margin profile and remain focused on driving higher-margin sourcing channels and improving operational excellence. Selling distribution and administrative spending for the quarter was $72 million, or 26.3% of net sales, a 100 basis point improvement as a percentage of sales from last year.

Improved SD&A leverage primarily reflects continued optimization and marketing spend as well as fixed cost leverage as sales volume grew.

I would note, SD&A is inclusive of an incremental $3 million of variable bonus and commission expense over last year's fourth quarter, which is directly attributable to our excellent financial performance both in the quarter and for the year.

Bottom line profitability was strong as operating income from continuing operations was $21.1 million, a 46.6% improvement compared to the year ago period. Operating margin expanded 120 basis points to 7.7%. Total depreciation and amortization expense in the quarter was $1 million.

Capital expenditures for the fourth quarter were $1.5 million and $2.7 million for the full year, primarily comprised of maintenance-related capital. Operating cash flow from continuing operations was over $25 million in the quarter and over $67 million for 2020. Let me now turn to our balance sheet.

We have a very strong and liquid balance sheet with a current ratio of 1.4:1. As of December 31, we had approximately $22 million in cash zero debt and availability of $72 million of our $75 million credit facility.

Our cash position at year-end reflects the payment of our special $2 per share dividend in December, which in total was approximately $75 million. We maintain significant flexibility to fully execute on our strategic plan, continue to fund our quarterly dividend and successfully navigate through the current market.

As a result, our Board of Directors has increased our quarterly dividend to $0.16 per share of common stock an increase of approximately 14%. We anticipate continuing a regular quarterly dividend in the future. This concludes our prepared remarks. Operator, please open the call for questions..

We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Ryan Merkel with William Blair..

Hey, everyone. Nice quarter..

Hey, Ryan.

How are you?.

Hey, Ryan..

So my first question is on the sales outlook for 2021.

I know, you're not giving guidance but can you just help us think about what level of growth is sustainable? And will tough PPE comparisons be a headwind and if so how much?.

I mean, a couple of things, I can tell you on that, Ryan. I mean, I think from a PPE perspective, and when you take a look at -- we do believe that PPE will continue to be a permanent in our overall sales mix and we have a good view of what that's going to be for the year, and we've been trending along well there.

From a revenue perspective, I think we're going to be -- I think our outlook for the year continues to be above-market growth rate for the business. And certainly as we start to look through the first half and the second half, our performance against those comps have been adjusted and measured accordingly.

So, we do see continued market beating performance..

Okay. And then you mentioned inflation in a few areas.

Are you planning on a price increase? Or is it too early to think about that yet?.

There's certainly overall market impact from the suppliers right now. I mean, we obviously hear about that in the news and the way we look at pricing is we have to be competitive in the market. So we definitely see spots where there's pricing coming through.

And where we can pass it we do it, but if it means that we're going to be unprofitable, I would say, uncompetitive price-wise, we'll manage against it. I think that's where our private label performance has been helpful for us in terms of providing value and price because -- where we can be a little bit more competitive there.

But certainly, we're seeing supplier price pressure on certain commodities and adjusting accordingly..

Okay. And then maybe just lastly and I'll turn it over. You mentioned accelerating customer acquisition and retention in the release and I know you've made a lot of investments in that area.

But can you just put some numbers to that? And then I'm curious what have been the returns on digital marketing?.

Yes. I mean, it's a good point. I think a couple of things. I mean, we typically don't broadcast usually our acquisition rates, but I can tell you we've had some benefits over the last couple of years, which continues to improve our acquisition. We've changed a little bit our digital marketing strategy around paid search.

We've generated some optimization that has helped us both in growing new customers and creating some leverage. We have made some shifts in our SG&A to reinvest into retention efforts particularly around customer onboarding and driving incremental campaigns that continue to trigger promotions and offers to customers along the life cycle.

And we've been testing and expanding there over the last 1.5 years particularly with the expansion of our marketing team and Klaus Werner, who leads our marketing function. So we are starting to definitely see improvements in our retention rates, which has been a big support to the business.

And certainly on the acquisition side, we continue to test pretty aggressively outside of just paid search. As you guys know, we expanded our -- we've created a new brand proposition for Global Industrial this year and we just launched that in the period.

And it was really well received and I think that's helping us to create more awareness out in the market for customers to be attracted to Global Industrial's brand..

Very helpful. Thanks for the answer..

Sure..

Our next question comes from Anthony Lebiedzinski with Sidoti & Company..

Yes, good afternoon, and thank you for taking the question.

So first as far as the fourth quarter, you guys talked about an expanded -- could you give us a sense so when we look at the average daily sales growth, kind of, breakdown roughly speaking between AOV versus transaction volume growth?.

Yes. Barry I can take that one….

I had trouble hearing him on that one. I'm sorry, I had trouble hearing him on that one..

Yes, Anthony. I think your question was thinking about the growth rates, how much was broken down between price and volume.

Is that the primary question, Anthony?.

Yes..

All right, perfect. So, yes, as we highlighted -- yes. So as we highlighted, we grew about 23% in the period. We did have the extra four selling days. Those four selling days were that New Year's week. So every handful of years we had that 53rd week in the fiscal year.

So when we think about pricing, clearly there were some pricing opportunities as we just talked about with inflation. At the same time, we had some negative pricing comps as we talked about some of the PPEs have been commodified, some of that pricing has come down as well. Costs have come down and prices have come down.

So you're seeing less price capture on some of that product. So overall I think the growth rate was pretty consistent split between price and volume. So while it was a small AOV increase, primarily it was going to be generally volume related driving that growth. .

Got it. Yes, thank you for that Tex.

And then hearing some more issues from companies talking about their imports as far as the shortage of ocean, shipping containers and of course rates going up as well, can you talk about that? And also as far as your inventory position, do you think you have adequate inventory here for 2021?.

Yes, maybe take a couple of questions on Anthony. This is Barry. Clearly from an import perspective, you're right I mean we hear what's happening in the market related to pandemic and weather disruptions that have challenged the imports on containers.

And certainly the cost as it relates to ocean freight has been significant as well some of the LTL costs and I think we've been managing that fairly well. I think our inventory positions on much of our core products, we've been managing well, see ourselves fairly flush in being able to support the current volume that we project for the year.

But -- and I think with our private label strategy, obviously that becomes more critical to us. So we're managing customer expectations in relates to delivery times and notifications to customers as products do arrive, but we feel we've got the inventory position across our core to be able to support our revenue going forward..

Yes. And Anthony I just talked we had about $130 million of revenue at the end of the quarter. We're roughly flat with where we were in Q3 last year -- I'm sorry Q3 this most recent year. So again, there's always gaps and there's always areas to identify by managing our inventory around Chinese New Year. That's coming up.

Has always been a core competency of the company and something we focused on to make sure we have the right product at the right time..

Got it. Okay. And then last question for me. So in your prior investor presentations you guys talked about long-term operating margin goals of 10% plus kind of longer term.

Now with 2020 in the rearview mirror and looking ahead to 2021 and beyond, how do you guys feel about those previous operating margin goals?.

I mean, I would tell you we're still fairly consistent in terms of our long-term operating margin goal at double-digit 10%. I mean that's what we've had in our investor deck and we continue to move in that direction. We see a few areas that I think will help us achieve that.

One is considering expansion of our private label brand business that drives premium margins to us and our customers love the product. So the more we mix into that helps our GP rate.

We're continuing to put as you know a huge focus around operational excellence from the fulfillment side of our business and being able to look at continuous improvement opportunities to overall optimize our operating expenses and cost to serve.

And then, certainly in terms of our marketing optimization and our selling optimization, so you look at overall improvement in SG&A. So the better we do around our selling and marketing more efficient, we get we get more return on investment there and that all drives to the bottom line for us.

So those are some of the three big drivers that we see in getting us to our long-term goal. .

Got it. Thank you and best of luck..

Thank you, Anthony..

Thank you, Anthony..

This concludes our question-and-answer session as well as today's conference call. Thank you for attending today's presentation. You may now disconnect..