Q1 2020 Earnings Call

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Good afternoon, ladies and gentlemen, and welcome to systemax Inc. First quarter 2020 earnings call at this time. I would like to turn the call over to Mike's office a group, please. Go ahead.

Good afternoon, ladies and gentlemen, and welcome to systemax inks first quarter of 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 Chris and welcome to the system acts first quarter 2020 earnings call today's call will include formal remarks from very little in chief executive officer and tax, senior 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 system contact details can be found in the press release issued today and that system.

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 option under risk factors in the company's and report on form 10-K and quarterly reports on form 10-q. The press release is available in the company's website and will be filed with the SEC and they form a k this call is the property of and is copyrighted by System. I think I will now turn the call over to mister Barry Lynn.

Thanks, Mike. Good afternoon everyone and thank you for joining us today. Since our last call so much has changed is the covid-19 virus impacts every facet of our personal lives economic landscape during this time the safety and well-being of our Associates their families our vendor partners and our customers have been our first priority to ensure business continuity for customers. We initiated the first remote Workforce strategy of our entire back office in both North America and Asia in mid-march, and we did it within 24 hours are found a job as an e-commerce Centric business is a competitive advantage that helps secure a smooth operational transition and positions us to continue to serve customers in the current environment wage. Remote Workforce is operating efficiently without loss of productivity. Our distribution network has remained operational and the team has settled into a new integrated work-life routine. I'm proud of him.

employees and the business response

As with most of central businesses, we have needed a temporarily closed certain distribution centers to ensure the continued safety of our employees and perform cleaning activities redundancy built into our distribution network has allowed us to reroute order fulfillment as needed with minimal delays to our customers.

Our sourcing and Supply chains are working tirelessly to secure high demand products for Medical Healthcare and business-critical operations equipment and intern highlighting our position as a reliable and veiny. We are taking customer orders in real time responding to and solving individual customer needs and constantly updating covid-19 specific landing pages and emails. So a lot of customers are made aware of changing or replenishing stock as companies consider their re-entry plans. We launched our our three restore returned and rebound initiative on April 20th. This customer focused program is designed to help companies plan for the eventual reopening of their businesses and facilities and to keep their operations running it provides guidance on a room-by-room best practices for working in the post covid-19 world including product solutions for cleaning and sanitizing requirements indoor and outdoor maintenance social distancing.

Such as signage and separators and how to configure floor plans for everything from bathrooms and break rooms to lobbies common areas and Supply closets initiatives like are 3 a.m. To deepen relationships and secure our position as a true partner to our customers. We are not sitting still as we move through this crisis. Our entire team is focused on servicing our customers you needs and building relationships for the long-term. Our first quarter financial performance reflects, the initial impact of covid-19 revenue for the quarter was down 2% but up mod early March at which point we started to see the impact of business shutdowns at this time. We also observed a shift in customer product demand into cleaning PPE and other covid related items and temporarily away from traditional core product lines.

We have seen an exponential increase in demand for these highly consumable items but due to constraints Supply availability worldwide. We were unable to fill most of these orders in March long. We anticipate this Supply constraint to continue but are proactively working with our vendors to Source product and remain cautiously optimistic that we will resolve a portion of this backlog in the second quarter while our top-line will continue to reflect the current economic environment Across the Nation our business is operating very effectively given these unprecedented circumstances this reflects significant progress. We are making in our multi year strategic roadmap to grow customer engagement generate operating leverage from current operations and investments from Champion a stronger customer-centric come back across our entire organization. We continue to proactively manage our cost structure and invest in our customer focus strategy, which will serve as well during this crisis and in the long term

We remain committed to delivering higher service levels and end-to-end transaction.

Transparency to our customers are expanded distribution net network is allowing us to continue to meet customer expectations around service and delivery and provide additional redundancy to our operations. We launched enhanced mobile and desktop order tracking that is removing friction from the transaction process for customers. And we continue to drive sales efficiency through new tools and technologies that will increase productivity over time as we look to broaden our customer Partnerships. We are expanding our product offering in new emerging and existing categories. I seen strong demand for PPE janitorial and sanitation consumables as we moved through the first quarter, we have been investing in these categories for a number of years in terms of product offering money and building knowledge expertise as we added subject matter experts that are OSHA safety trained giving us a competitive advantage in the market.

In conclusion, we continue to navigate the impact of covid-19 be challenging personal and economic environment for everyone. But one that is opening new opportunities for the business office. We have a strong platform and remade committed to driving our operating and customer-centric strategy. We are making investments in the business to enhance our competitive position as we emerge from the current environment and for the long term, we will proactively manage our cost structure while funding strategic Investments. I believe we are well-positioned to continue to serve customers during this crisis and emerge as an organization with a strong balance sheet and exceptional liquidity. We maintain significant financial flexibility. I hope you and your families remain healthy during this time. I will now turn the call over to text our Chief Financial Officer.

Thank you. Berry. I will now address our performance in more detail and would like to note that we had the same number of selling days in the first quarter of 2020 as we did in the year ago. In the first quarter Revenue age and 2.1% on both the Gap basis and an average daily sales constant currency basis over q1 of last year revenue is approximately 227.3 million dollars with the u.s. Decline a 2.5% while Canada grew 6.8% in local currency on an average daily sales basis Asbury noted. We had modest sales growth too early March but recovered we recorded low double-digit Revenue lines in the closing weeks of the quarter has businesses deemed non-essential were shut down by government mandates and many essential businesses reduce spending as they navigate the current environment Revenue declines, except it through late March and into early April as shelter-in-place requests and business shutdowns expanded across the country, but the rate of decline is stabilized in recent weeks. We currently anticipate these conditions to continue

You for the second quarter. However, as business is open up and our supply chain for PPE stabilizes, we expect to be able to offset some of these challenges.

In the quarter core product categories generally had negative results as customers priorities temporarily shifted. These results were partially mitigated by continued strength the categories such as safety packaging material and maintenance like many of our peers. We saw ordered demand for personal protective equipment search to record levels getting late in the quarter industry-wide scarcity of these items constrained our ability to fulfill any of these orders in the quarter, but our product sourcing teams have been scouring the globe to locate key product offerings for our customers. We have actively sourced local providers and ramped up our private label supply chain, which we currently expect will mitigate some of the declines in our core categories in the second quarter gross profit for the quarter was 76.7 million dollars down from 80.3 million dollars last year.

Gross margin was 33%

4% down 90 basis points from the prior year marks and clients in the. Were primarily associated with the product mix shift away from certain high-margin core product categories with a high concentration of private-label South towards more safety and products which typically carry a lower margin profile. In addition. There was an impact from the timing of care of cost realization in early 2019 as we captured price in a patient care of increases which were deferred until later in Q2 last year as all faithful benefits have been utilized now our inventory currently reflects the full tariff costs that were enacted throughout 2019. We remained focused on maintaining our gross margin profile, but expect to see margin pressure due to the current economic environment and changes in mix as a result of our customers strong demand of PPE and other related products.

Selling distribution and administrative spending for the quarter was 65.2 million dollars or 28.7% of that fills a 20 basis-point Improvement as a percentage of sales from last year with sdn, a leverage was primarily the result of improved advertising efficiency lower variable compensation and general topics discipline, which allowed us to absorb the incremental cost structure of our new Dallas distribution office in light of the challenging economic environment. The company is taking a number of steps to streamline is cost structure. We are actively managing our digital advertising to further optimize spend in light of changes in Kathmandu profile. We have reduced discretionary spending across all functions while also eliminating overtime and temporary labor where appropriate further we've had and expect to continue to have a natural production incentive compensation expense to lower sales and profit gaap operating income from continuing operations with 11.5 million dollars and operating margin declined sixty basis points wage.

Quarter driven by each of the areas previously discussed total depreciation and amortization expense in the corner was 1.1 million dollars Capital expenditures for the first quarter was 0.5 dollars and we continue to expect total 20/20 Capital expenditures in the range of 3 to 5 million dollars primarily comprised of Maintenance related Capital total free cash flow from continuing operations was thirteen point four million in the quarter. Let me now turn to our balance sheet liquid balance sheet with a current ratio of 1.7 to 1 as of March 31st, we had approximately sixty four million dollars in cash and cash equivalents essentially, no borrowings and approximately one hundred eight million dollars that are working capital in the first quarter. We returned over forty three million dollars to our shareholders via our current quarterly dividend of 49th and a special $1 dividend announced on February 25th. In addition. We repurchased approximately 233000 shares of stock at an average price of $16.84 in the quarter dead.

As of March 31st 2020 we had approximately 1.5 million shares remaining under our current repurchase authorization. We have an exceptionally strong balance sheet and cash flow generation has offered by our current cash position essentially zero debt and current availability of approximately 71 million dollars under our $75 credit agreement as a result. We maintain significant flexibility in a fully executed on our strategic plan continue to fund our quarterly dividend and successfully navigate through these challenging times. Our board of directors has declared its quarterly dividend of $0.14 per share of common stock and wage continuing that in the future.

this concludes

Prepared remarks. If you have any questions about first quarter 2020 earnings, please contact mix more at the Ponca group our investor and media relations adviser or system acts directly contact information can be found on this issue earlier today. Thank you for your continued interest in systemax.

And thank you, sir. The conference has not concluded. Thank you for attending today's presentation. You may not disconnect.

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