Systemax (SYX) Q2 2019 Earnings Call Transcript

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Systemax (GIC -0.82%)
Q2 2019 Earnings Call
Jul 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 second-quarter 2019 earnings call. At this time, I would like to turn the call over to Mike Smargiassi of The Plunkett Group. Please go ahead.

Mike Smargiassi -- Investor Relations

Thank you, and welcome to the Systemax second-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. 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 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 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

Thanks, Mike. Good afternoon, everyone, and thank you for joining us today. We delivered another solid financial performance with second-quarter revenue of approximately $249 million, an average daily constant currency sales of 7.8%, all of which was organic growth. We maintained gross margin rates consistent with both last year and the first quarter as we actively managed through the current market and tariff environment.

Operating margin increased 10 basis points and operating income was up 9.3% as we delivered improved leverage, while making investments in our strategy to drive growth. On a non-GAAP basis, adjusted operating income grew 17.1% to $21.9 million, a margin of 8.8%. We had excellent cash generation and ended the quarter with approximately $91 million in cash. Across the organization, our management and associate teams have embraced the strategy and strategic pillars we announced at the start of the year.

As a reminder, these pillars 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 finally, pursuing potential acquisitions to drive synergies and expand capacities, customer and product growth. At the heart of our growth pillars is a focus on the customer experience. The way we operate the business is undergoing a fundamental change, and we are already seeing the initial benefits. These include: improved service levels in our distribution network with sequential year-over-year gains in same-day shipping rates and a reduction in customer service calls as we provide a greater end-to-end transaction transparency.

As we continue to execute on our strategy, we recently launched a formal voice of customer communications process to engage our customers more closely and actively listen to their needs. In select product growth verticals, we are significantly enhancing the value we bring to market by broadening our content offering and adding product expertise to enhance the customer experience. Within our distribution network, the new facility in Dallas is on plan to commence customer shipments early this fall. A full Dallas management team is in place and completing their training.

The facility will allow us to better service customers and provide additional capacity as we invest now to support future growth. Next week, on August 8, we will host the Global Experience National Trade Show in Nashville, Tennessee. This will be our largest customer show with more than 1,000 customers registered and 150 vendor partners exhibiting. The trade show provides the opportunity to engage customers face-to-face and will allow us to highlight our leadership and innovation.

New to the show will be a live video broadcast experience with show floor interviews, product introductions and vendor demonstrations. This content will be posted on Youtube allowing all of our customers to experience the event and provide valuable content beyond the show. To reiterate, in the first half of 2019, we implemented a new strategy and are arriving execution against our strategic growth pillars. I'm pleased with our progress.

We are championing a stronger customer-centric culture across every facet of our company and becoming more relevant to our customers and sensitive to their needs. This is allowing us to improve the customer experience, and we are seeing the initial benefits in our operating and financial performance. Our associate team is the key to our success. And I'm proud of how they engaged our customers and managed the current market environment.

We will continue to make investments in our strategy and our people. All of these efforts will allow us to grow customer engagement and position us to drive customer satisfaction and long-term financial performance. 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 had one fewer selling day in Canada in the second quarter of 2019 versus the year ago period due to the later Easter Holiday this year. In the second quarter, revenue increased 7.5% on a GAAP basis and 7.8% on an average daily sales constant-currency basis over Q2 of last year. Revenue was approximately $249 million with growth in the U.S.

of 7%, while Canada delivered its 10th consecutive quarter of strong double-digit revenue gains with growth of more than 16% in local currency on an average daily sales basis. Revenue performance was broad-based across product categories with growth continuing to be led by newer product lines, while we are investing in subject matter expertise, sales training and an expanding offering. We did see a slower ramp in HVAC, historically one of our top second-quarter categories, due to the cooler weather pattern, which several of our peers have also noted. HVAC sales returned to normalized levels in late June and continue to perform well.

We also had growth across sales channels, specifically managed sales, where we continue to invest in sales productivity and training initiatives. Gross profit for the quarter increased to $86 million, up from $80 million last year. Gross margin was 34.6%, unchanged from the prior year, reflecting proactive management of our inventory, purchasing and pricing to address the first round of 10% tariffs enacted in September of 2018, which have fully worked through our inventory. We are managing the latest round of tariff increases, which were enacted in June 2019, with a similar approach to how we have operated the business over the last year.

We are monitoring sale prices in the market, continuing to work with our suppliers both domestic and abroad to mitigate costs and actively reviewing our supply chain. Selling, distribution and administrative spending for the quarter was $66 million or 26.5% of net sales. This included $400,000 of executive separation and transition expenses. Excluding those expenses, SD&A improved 30 basis points as a percentage of sales from the prior year.

The improvement of SD&A leverage was primarily the result of improved efficiency across our operations, including marketing spend. Our DC network delivered better performance, have had increased cost pressure as we incurred approximately $400,000 in costs associated with our new distribution center in Dallas. This new facility is receiving product and is currently expected to commence customer shipments toward the end of Q3. This facility remains on plan and on budget.

We expect to see increased operating expenses in the second half of the year as we bring this facility online and ramp operations. This additional DC will help drive several improvements to our customers. And in 2020, we anticipate that much of the variable expense profile of Dallas will be absorbed by spend reduction in our other centers. On a GAAP basis, operating income was $20 million and operating margin expanded 10 basis points from the year ago quarter.

Excluding recurring and nonrecurring adjustments, non-GAAP operating income for the quarter was $21.9 million, an increase of 17.1%, and non-GAAP operating margin was 8.8%, a 70-basis-point improvement from the second quarter of 2018. Total depreciation and amortization expense in the quarter was approximately $1 million. Capital expenditures for the second quarter were $1.4 million and $2.4 million for the first half of 2019. Total free cash flow from continuing operations was $24.9 million in the quarter.

In 2019, we expect capital expenditures in the range of $6 million to $8 million. Let me now turn to our balance sheet. We have a very strong and liquid balance sheet with a current ratio of 1.7 to 1. As of June 30, we had approximately $91 million in cash and cash equivalents, essentially no borrowings and over $125 million in working capital.

Further, we have approximately $72 million of excess availability under our $75 million credit agreement. This strength of our balance sheet and our cash flow generation allows us to continue to invest in 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 second-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 your continued interest in Systemax.

Questions & Answers:

Operator

[Operator signoff]

Duration: 12 minutes

Call participants:

Mike Smargiassi -- Investor Relations

Barry Litwin -- Chief Executive Officer

Tex Clark -- Vice President and Chief Financial Officer

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