Systemax (SYX) Q1 2019 Earnings Call Transcript

Image source: The Motley Fool.

Systemax (GIC 1.57%)
Q1 2019 Earnings Call
April 30, 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 first-quarter 2019 earnings conference call. [Operator instructions] At this time, I would now like to turn the call over to Mike Smargiassi of The Plunkett Group. Please go ahead.

Mike Smargiassi -- The Plunkett Group

Thank you, and welcome to the Systemax first-quarter 2019 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 and 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 excluding certain recurring and nonrecurring adjustments of 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

Thanks, Mike. Good afternoon, everyone, and thank you for joining us today. Systemax delivered an excellent financial performance in the first quarter. Revenue achieved $232 million with average daily sales increasing 9.6%.

We also generated strong operating leverage from current operations with the expansion of gross and operating margins, delivering a 19% improvement in operating income and an impressive 27% improvement in non-GAAP operating income. This in turn provided strong cash flow generation in the quarter. On the year-end call in February, we outlined our strategy and multi-year roadmap, which included six core areas we believe we can win. These are: Delivering a differentiated customer experience; offering innovative branded and private label products; providing rich MRO knowledge and technical expertise; driving operational excellence; propelling financial, talent and technology innovation; and pursuing potential acquisitions to drive synergies and expand capacity, customers and product growth.

We have launched a number of new initiatives in support of these areas and are pleased with the initial progress as we look to grow customer engagement and champion a stronger customer-centric culture across every facet of the company. The actions we are taking are specifically designed to accelerate our customers' experience. Our customers' experience is starting to improve as we enhance service levels in our distribution network and call center operations. We are providing customers with greater visibility on product shipping status and driving improved same-day shipment performance in coordination with our logistics partners.

These successes highlight increased efficiencies in the distribution network and are allowing us to provide greater end-to-end transaction transparency. We are seeing growth of our managed sales channel and increased sales efficiency gains, which are being driven by our continuous training initiatives. This includes better tools and deeper product knowledge that are increasing the selling efficiency and value proposition of our high-touch sales force. As we look to better serve customers, I'm excited to announce that we will be expanding our distribution footprint in the second half of the year with a new facility in the Greater Dallas area.

This distribution center will allow us to be closer to our customers, improve shipping performance and increase overall service levels. It will also provide additional capacity to efficiently support our future growth. In addition, we will be hosting our second Annual National Trade Show on August 8 in Nashville, Tennessee. This event allows us to directly engage customers and highlight the depth of expertise, products and value that both our vendors and Global Industrial provide.

With more than 100 vendors already signed up and a series of technical events and product demonstrations on the agenda, we are looking forward to an outstanding show that showcases our vendors and our associates, strong industry expertise and leading product assortment. The customer experience impacts everything we do and is at the core of our efforts to successfully drive long-term performance. We are carefully listening to our customers' voice and adopting a continuous improvement mindset at every level of the company that will allow us to better serve customers and build a greater competitive advantage. Our associates are the key to delivering a differentiated customer experience and have embraced the various initiatives we have in support of our strategy.

As we grow customer engagement and generate operating leverage, we will be well-positioned to continue to drive revenue performance, improve profitability and deliver higher customer satisfaction. I will now turn the call over to Tex.

Tex Clark -- Vice President and Chief Financial Officer

Thank you, Barry. I will now address our performance in more detail and would like to note that we have moved to a single reporting segment reflecting our strategic focus on the industrial business and that we had one additional selling day in Canada in the first quarter of 2019 versus the year ago period due to the later Easter holiday this year. In the first quarter, revenue increased 9.4% on a GAAP basis and 9.6% on an average daily sales constant-currency basis over Q1 of last year. Revenue was $232 million with growth in the U.S.

of 9.3%, while Canada delivered its ninth consecutive quarter of strong double-digit gains, generating revenue growth of more than 17% in local currency. We did see a modest benefit in the period as the weekend leading into the Easter holiday fell in the second quarter this year versus the first quarter of 2018. Revenue performance remained broad-based across product categories with growth led by newer product volumes while we are investing in subject matter expertise, sales training and an expanding offering. We also had growth across sales channels, specifically managed sales, where we continue to benefit from sales productivity gains and training initiatives.

Gross profit for the quarter increased to $80.3 million, up from $72.5 million last year. Gross margin was 34.6%, an expansion of 40 basis points from the prior year, reflecting continued positive product margin, which benefited from price capture and product mix. In addition, freight margin improved sequentially compared to Q4 from better overall shipping performance in our distribution network and the lifting of ocean freight surcharges in January. Selling, distribution and administrative spending for the quarter was $67.1 million or 28.9% of sales.

This spend level included $600,000 of executive separation and transition expense. Excluding those expenses, SD&A improved to 30 basis points as a percentage of sales from the prior year. The improvement of SD&A leverage was primarily the result of improved efficiencies in marketing spend and general operating expenses. As Barry noted, we have been pleased with certain improvements in our distribution network performance, and we are continuing to work to further improve service levels as well as to generate leverage within our fixed cost structure.

In the second half of the year, we anticipate to incur start-up costs within our new distribution center, which may drive short-term cost increases, but we believe this additional DC will benefit labor efficiency in other DCs, lower our freight cost as we move closer to certain of our customers and provide the capacity needed to continue to drive above market growth. We are currently targeting commencement of shipping in the fall of this year. On a GAAP basis, operating income was $13.2 million and operating margin expanded 50 basis points from the year ago quarter. Excluding recurring and nonrecurring adjustments, non-GAAP operating income for the quarter was $14.9 million, an increase of 27.4% and non-GAAP operating margin was 6.4%, a 90 basis point improvement from the first quarter of 2018.

Total depreciation and amortization expense in the quarter was approximately $1 million. Capital expenditures for the first quarter were also $1 million. Total free cash flow from continuing operations was $22.8 million in the quarter. In 2019, we expect capital expenditures in the range of $6 million to $8 million.

This reduced estimate is due to a greater portion of our rollout of our new distribution center being capitalized within the lease itself. Let me now turn to our balance sheet. We have a very strong and liquid balance sheet with the current ratio of 1.7 to one. As of March 31, we had approximately $70 million in cash and cash equivalents, essentially no borrowings and over $114 million of working capital.

Further, we have approximately $72 million of excess availability under our $75 million credit agreement. During the quarter, the company implemented the new lease accounting standard and recorded right-of-use assets and corresponding lease liabilities of approximately $54 million and $64 million, respectively. This strength of our balance sheet and our free cash flow generation 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 declared a quarterly dividend of $0.12 per share of common stock, and we anticipate continuing a regular quarterly dividend in the future.

This concludes our prepared remarks. If you have any questions about first-quarter 2019 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 continued interest in Systemax.

Operator

[Operator signoff]

Duration: 11 minutes

Call Participants:

Mike Smargiassi -- The Plunkett Group

Barry Litwin -- Chief Executive Officer

Tex Clark -- Vice President and Chief Financial Officer

More SYX analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.