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Systemax Inc  (NYSE:SYX)
Q4 2018 Earnings Conference Call
Feb. 26, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to Systemax Inc.'s Fourth Quarter 2018 Earnings Conference Call.

At this time, I would like to turn the call over to Mike Smargiassi of The Plunkett Group. Please go ahead, sir.

Mike Smargiassi -- Founding Partner

Thank you and welcome to the Systemax Fourth Quarter 2018 Earnings Call. Today's call will include formal remarks from Barry Litwin, 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 should have any questions on the results, please contact The Plunkett Group or Systemax. Contact details can be found in the press release issued today at 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 and under Risk Factors 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 and European Technology Products Groups as discontinued operations, as well as excluding certain recurring and non-recurring 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, which we will identify as such. The Company has provided a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures in today's discussion and press release. The press release is available on the Company's website and will be filed with the SEC in a Form 8-K. This call is the property of and is copyrighted by Systemax Inc.

I will now turn the call over to Mr. Barry Litwin.

Barry Litwin -- Chief Executive Officer

Thank you, Mike. Good afternoon, everyone, and thank you for joining us today. In 2018, Systemax delivered another year of strong sales and operating performance, with our Industrial Products business generating almost $900 million in revenue, an increase of 13% over the prior year and resulting in more than $60 million in operating income from continuing operations. Systemax also successfully divested its France IT business, which generated gross proceeds of almost $270 million. With that sale, we established a single strategic focus on the industrial MRO market.

I am delighted to have joined Systemax in early January and my first two months have been a very busy and exciting time, as I have met and listened to senior executives and associates across all of our facilities. I believe Systemax is well positioned to win within the rapidly changing and competitive market for industrial product distribution. We have talented and engaged associates, strong industry expertise, specifically in core branded and private label products a high touch, multi-channel sales strategy, a scalable technology platform and the back office and sales support to successfully drive long-term performance.

Our foundation for success in 2019 is built on growing our customer engagement and generating operating leverage from current operations and investments. Systemax will focus on serving our customer's need, for higher service levels and end-to-end transaction transparency. By championing a stronger customer-centric culture, we will better serve our business customer and build greater competitive advantage. To accomplish this, we are carefully listening to our customer's voice and adopting a continuous improvement mindset at every level of the Company, to simplify automate and speed the processors that serve our customers. We're investing in our leading e-commerce platform, as well as our sales and product assortment. Over time, we believe this should result in revenue growth, improved profitability and higher customer satisfaction.

Our strategy is clear and will be implemented through a multi-year roadmap with prioritized initiatives supporting six core areas we believe we can win. These include: one, delivering a differentiated customer experience; two, offering innovative branded and private label products; three, providing rich MRO knowledge and technical expertise; four, driving operational excellence; five, propelling talent, financial management and technology innovation; and six, pursuing potential acquisitions to drive synergies and expand capacity, customers and product growth.

As we execute our strategy, some featured initiatives to support these six core areas include: one, engaging customers more intimately through deployment of online and offline personalization capabilities to increased convenience in the customer buying experience; two, the continued managed account channel growth through sales productivity enhancements, building upon our efforts of last year; three would be increasing selling efficiency and value proposition of our high-touch sales force and expanding customer access to product knowledge by adding category subject matter experts; four, introducing an enterprisewide customer experience process to collect data, identify gaps and eradicate friction from the order to cash process that will drive higher customer satisfaction; finally, within our distribution network, focus on enhancing service levels, same day shipment performance, labor productivity and improved inventory management to better serve our customers.

I'm excited to be here and enthusiastic about the opportunity ahead. We have a strong platform that is well suited to support our growth in 2019 and beyond. Our associates are dedicated to championing a customer-centric culture to meet growing demands for improved customer experience, while enhancing Systemax' leading product assortment, digital and high-touch multichannel selling model, and strong and efficient fulfillment network.

I will now turn over the call to Tex.

Tex Clark -- Vice President & Chief Financial Officer

Thank you, Barry. I will now address our performance in more detail and would like to note that both the 2017 and 2018 fourth quarters and full years had the same number of selling days in the US and Canada, respectively. Starting with Industrial's financial performance, in the fourth quarter, revenue increased 11.9% on a GAAP basis and 12.1% on an average daily sales constant currency basis over Q4 of last year. Revenue was $217.7 million with growth in the US of 11.4%, while Canada delivered its eighth consecutive quarter of strong double-digit gains, generating revenue growth of over 29% in local currency.

Revenue performance was broad based across product categories, with growth led by many of the newer product lines we have invested in over the past several years. We also had growth across all of our sales channels, specifically managed sales where we are benefiting from increased productivity, supported by the implementation of a new sales force training program in 2018.

Industrial's gross profit for the quarter increased to $73 million, up from $65.3 million last year. Gross margin was 33.5%, essentially flat to the prior year, reflecting continued positive product margin, which was offset by freight pressures both domestically and through ocean freight surcharges, which we noted on our third quarter call. Ocean freight surcharges were lifted in January of 2019 and we anticipate that this impact will stabilize over time.

Selling, distribution and administrative spending for the quarter was $53.6 million, a 160 basis point improvement as a percentage of sales from last year. This improvement of SG&A leverage was primarily the result of certain one-time items incurred in the period. In the fourth quarter, a net gain of $3.1 million was recorded related to the settlement of previously disclosed state audits, partially offset by an impairment charge against certain intangible assets.

In addition, we had cost structure increases within our distribution centers due to increased labor costs associated with both the compensation rate increases and increased staffing levels in efforts to support demand of our in-stock items. Efforts to improve efficiencies are ongoing and should drive improved service levels across our distribution network and generate positive operating leverage over time. We remain disciplined in the management of our marketing spend and general operating expenses, and are focused on driving leverage within our fixed cost structure.

Within Industrial, on a GAAP basis, operating income was $19.4 million. Excluding recurring and non-recurring adjustments, operating income for the quarter was $16.6 million on a non-GAAP basis, an increase of 12.9%; and operating margin was 7.6%, flat from the fourth quarter of 2017.

As a reminder, we have historically generated our highest margins in the third quarter followed by the second, first and then fourth. While we were pleased with the margin performance in 2018 overall, we did not experience the operating leverage we were targeting in the fourth quarter, specifically across our distribution network.

We continue to believe there is an opportunity to drive operating and productivity efficiencies across the business and enhance long-term profitability. This is a key focus area for 2019 and beyond. Tariff impact was minimal in the fourth quarter. We continue to believe the timing in extent of any financial impact will be gradual as we sell through existing inventory, purchase prior to the incremental tariff and possibly shift certain products to alternative sources when the opportunity exists. We've remained proactive in our efforts to address any tariff impact.

Total depreciation and amortization expense in the quarter was approximately $3 million, reflecting the accelerated amortization expense noted earlier in my comments associated with the impairment of certain abandoned intangible assets. Total 2018 capital expenditures for Industrial business was $4.5 million. In 2019, we expect capital expenditures in the range of $8 million to $12 million.

We currently anticipate an expansion of our distribution footprint in the second half of 2019, which likely will include opening a new distribution center. This new facility would allow us to drive service level improvements, be closer to our customers and provide a bit additional capacity to expand sales of our high-margin in-stock goods, in line with our organic growth strategy.

Within our Corporate and Other segment, 2018 SG&A spending in the quarter increased to $5.5 million. This spend included $1 million of incremental accrued expenses related to our previously announced CEO transition plan. This expense will be cash flowed over the second half of 2019 through the first half of 2020. In addition, we anticipate an additional $1 million non-cash charges in 2019 and beyond associated with the modification of certain equity arrangements with our former CEO.

Let me now turn to our balance sheet. We've had a very strong and liquid balance sheet with a current ratio of 1.3 to 1. As of December 31st, we had over $295 million in cash and cash equivalents, essentially no debt, and over $117 million of working capital. Further, we have approximately $71 million of excess availability under our $75 million credit agreement.

Our cash position at year-end does not reflect payment of our special dividend of $6.50 per share, which was payable on January 3rd, 2019. This dividend resulted in a total cash outlay of over $243 million, and was essentially funded by the sale of our France operations in September, which generated gross proceeds of $270 million.

The strength of our balance sheet allows us to continue to invest in our growth opportunities, explore strategic M&A and return capital to shareholders. As a result, our Board of Directors has increased our quarterly dividend to $0.12 per share of common stock and we anticipate continuing a regular quarterly dividend in the future. In addition, we continue to maintain the share repurchase program with the remaining repurchase authorization of approximately 1.8 million shares.

This concludes our prepared remarks. If you have any questions about fourth quarter 2018 earnings, please contact Mike Smargiassi at The Plunkett Group, 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 continued interest in Systemax.

Operator

Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect your line.

Duration: 13 minutes

Call participants:

Mike Smargiassi -- Founding Partner

Barry Litwin -- Chief Executive Officer

Tex Clark -- Vice President & Chief Financial Officer

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