Q4 2020 Systemax Inc Earnings Call

Yes.

Good afternoon, ladies and gentlemen, and welcome to assist and Act Max Inc. Fourth quarter 2020 earnings call.

At this time I would like to turn the call over to Mike Smart Jossey of the Plunkett Group. Please go ahead. Thank you and welcome to the system ex fourth quarter, 'twenty and 'twenty 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 followed by a question and answer session.

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 other risk.

Risk factors and the Companys and the 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 and excellent and U K.

This call is the property of and is copyrighted by system Ex 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 and sales a significant milestone and.

Growth in the quarter was once again led by our global industrial branded product offering pandemic related supplies and equipment and continued recovery and core product categories.

Profitability was strong and the quarter as we delivered year over year improvements and gross margin S D and a leverage and operating margin, which increased and resulted in 46% improvement and 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 40.

14 to 16 <unk> per share the fifth increase and as many years.

The past year has been life changing for all of us and at times. It was trying personally and professionally.

And 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 and.

As a result of their efforts 'twenty and 'twenty was a resounding success for our business with.

With the strong execution of our strategy and the deliberate and Swift actions, we took and an unprecedented business environment, we were able to be there for our customers and generate industry leading growth.

As we look to 'twenty 'twenty. One we are focused on the continued execution of our strategy and building upon our financial performance at the core of our efforts is our multiyear rate strategy, which guides our actions across the business and specifically and our customer end to end purchase service and delivery experience.

And the year ahead will be making further investments within the core pillars of our strategy. This.

And this includes investments in automation and technology and 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.

<unk> the further evolution of our ecommerce platform and strengthen our overall competitive position.

We will also continue to invest and 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 differentiate 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 quality of Hughes to the newly created position of Chief sales officer expands our leadership team and will help us drive our digital and multichannel sales model.

And 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.

And our efforts to strengthen and deepen connections with our customers.

In conclusion, we are investing and our growth and believe our strategy is tremendous relevance and 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.

We believe we are well positioned to continue to capitalize on the acceleration of B to B e-commerce environments and.

And to capture additional market share and a highly fragmented industrial distribution marketplace.

While the current environment remains unpredictable the commencement of Covid vaccinations and signs of improving economic demand and are promising.

As we start the new year I'm pleased with the momentum and excitement we have and the organization and remain optimistic for 2021.

Across the company, we are driving operational excellence and 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 on.

Turn the call over to text.

Thank you Barry I will now address our performance in more detail and we will like to note that we had four additional selling days comprised of the new year's holiday week, and the fourth quarter of 2020 as compared to the year ago period.

And the fourth quarter revenue grew 23, 3% over Q4 of last year.

<unk> 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 four per cent and local currency.

Growth was stable as we move through the fourth quarter and rates of growth continued to outperform the industrial distribution industry.

This growth continued into January however, and a lower rate and the fourth quarter.

We recorded double digit growth across all sales channels led by E Commerce, which again accounted for more than 55 per cent 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 and 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 Spice made up roughly 9% of sales and the fourth quarter past compared to approximately two percentage of sales and the same period last year.

Well this was a reduction and a percentage of sales as compared to the third quarter. We did see these categories increased as a percentage of total share as we move through the period and we continue to believe they will have some per permanent moving forward.

Gross profit for the quarter was $93 $1 million and increase of $24. One per cent from last year gross margin was 34% up 20 basis points from the prior year, primarily driven by improvements in price rationalization as well as our private label offering and being a larger share of their sales mix.

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

We did see a number of margin pressures during the quarter, primarily related to free promotions increased parcel shipping cost 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 transition to a new third party logistics partner and an F.

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 and sourcing channels and improving operational excellence.

Selling distribution and administrative spending for the quarter was $72 million or 26, three percentage of net sales and 100 basis point improvement as a percentage of sales from last year.

Improved SG&A leverage primarily reflects continued up and the optimization and marketing spend as well as fixed cost leverage our sales volume growth.

I would note S. DNA 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 on the quarter and for the year.

Bottomline profitability was strong as operating income from continuing operations was $21 $1 million.

46, 6% improvement compared to the year ago period operating.

Operating margin expanded 120 basis points to seven 7%.

Total depreciation and amortization expense and the quarter was $1 million cash.

Capital expenditures for the fourth quarter were $1.5 million and $2 $7 million per the full year, primarily comprised of maintenance related capital.

Operating cash flow from continuing operations was over $25 million from 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 current ratio of one point 401.

As of December 31, we had approximately $22 million net cash zero debt and availability of $72 million of our $75 million credit facility.

Our cash position at year and reflects the payment of our special $2 per share and 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 <unk> 16 cents per share of common stock and increase of approximately 14%.

We anticipate continuing on a regular quarterly dividend and the future.

This concludes our prepared remarks, operator, please open the call for questions.

And I will now prepare the price or we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing Nike Inc. To withdraw your question. Please press Star then Q.

Our first question today will come from Ryan Merkel with William Blair.

Hey, everyone nice quarter.

Ryan how are you hey, Ryan Thank you.

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.

Well tough a P. P E comparisons be a headwind and if so how much.

Yeah, I mean, a couple a couple of things like and I can tell you on that Ryan and I think from a PPE perspective, and when you take a look at we do so we do believe that P. B will continue to be a permanent you know and 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, you know I think you know we're gonna be I think our outlook for the year continues to be.

Above market growth rate for the business and certainly as as we start to look through the first half and the second half.

You know our our performance against those those comps have been adjusted and measured accordingly, So we do see a continued market beating performance.

Okay, and then you mentioned a inflation and a few areas are you planning on a price increase or is it too early to think about that yet.

You know, there's there's certainly overall market impact from the suppliers right now I mean, we obviously you hear about that and and the news and the way we look at pricing as we have to be competitive and the market. So we definitely see spots, where there are there's pricing coming through and where we can pass it we do it but if it means that we're going to be on <unk>.

Profitable, you know or I would say on competitive price wise.

Well, we'll manage against it I think that's where our and <unk>.

Private label performance has been helpful for us in terms of providing.

Providing value and price because where he can be a little bit more competitive there, but certainly we're seeing a supplier price pressure on certain commodities and adjusting accordingly.

Okay, and then maybe just lastly, and I'll turn it over and you mentioned accelerating customer acquisition retention and the release and I know you've made a lot of investments and that area, but can you just put some numbers to that and and then I'm curious what what happened and the returns on digital marketing.

Yeah, I mean, it's so it's good good point I think a couple of things you know 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 on our digital marketing strategy around paid search we've generated.

Some optimization that has helped us both and a growing new customers and.

And creating some leverage we have made some shifts and our SG&A to reinvest into retention efforts, particularly around customer on boarding.

And driving incremental campaigns that are continue to.

Trigger promotions and offers to customers along the lifecycle and we've been testing and expanding there over the last a year and a half on particularly with the expansion of our marketing team and the Clos Warner who who leads our marketing function. So we're starting to definitely see improvements and our retention rates, which has been a big.

On big support to the business and certainly on the acquisition side, we continue to test pretty aggressively.

Outside of just a paid search as you guys know we expanded our we've created a new bra brand proposition for global industrial this year and.

And we just launched that and the period and it was really well received I think that's helping us to create more awareness out and the market for our customers to be attracted to our global industrials brand.

Very helpful. Thanks, I'll pass it on.

Sure.

Our next question comes from Anthony and let it didn't scale with Sidoti and company.

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

So first as far as this quarter you guys just about and expanded it could could you give us a sense when.

And when we look at the average daily sales growth kind of a breakdown roughly speaking between.

A L b.

Versus transaction volume growth.

Okay.

Yeah, I think I can I can I can tell you.

And I'm on that one I'm, sorry, I had trouble hearing on that yeah, and then I think your question was thinking about the the growth rates, how much was broken down between price and volume is that the primary question.

Yeah, Alright, perfect Yeah actually as we highlighted.

And so as we highlighted we grew about 23% in the period, we did have the extra four selling days.

And if there's four selling days, where that new year's week. So so every handful of years, we had that 50.

Third weekend and the fiscal year. So when you think about pricing clearly there were some and some pricing opportunities.

And as you just talked about with inflation and at the same time, we had some from negative.

Negative pricing comps and as we thought about it suddenly come on some of the P. P. He's been commodified and 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 and on some of that product. So overall I think the growth rate was it was pretty consistent.

And the split between price and price and volume so while it was a small increase.

Primarily and what he was going to be generally volume related driving that growth.

Got it yeah. Thank you for that tax and then.

Uh huh.

Hearing some more issues from from company was talking about the.

Their imports.

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Shipping containers and of course, you know.

Rates going up as well can you talk about that is and also.

As far as your inventory position and did you think you have.

Adequate and inventory here for the for 'twenty and 'twenty one.

Yeah, and I could take a couple a couple of questions on Anthony This is Barry.

Clearly from an import perspective, you're right I mean, we hear you know, what's what's happening and the market related to a pandemic and weather disruptions that are.

Challenge the imports on containers and certainly the cost you know as it relates to Ocean freight you know has been significant as well some of the L. T. L costs and I think we've been we've been managing that are fairly well I think our inventory positions on much of our core products. So we've been we've been managing well see ourselves.

It was fairly flush and 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 and more critical to us so we're.

And we're managing customer expectations, ratatouille and 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.

Yeah, and Anthony items, how we had about $130 million I don't know about $130 million of revenue at the end of the quarter roughly flat with where we were on Q3 last day or I'm sorry in Q3. This most recent year.

And so again there there's obviously, 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 and the company and something we focused on to make sure we have the right product and the right time.

Got it Okay and then.

Last question from me, so and your prior Investor presentations, you guys talked about long term operating margin goals of 10% plus.

On a longer term.

And now with the 2020 and the Rearview Mirror and you know looking ahead to 'twenty, one and and beyond how do you guys feel about the those previous operating margin goals.

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

We see a few areas that I think will help us achieve that one as you know continuing expansion of our private label brand business that drove that drives a premium margins to us and our customers love the product. So the more we mix into that 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 and 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 opera News nation. So you look at overall and <unk>.

<unk> and 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 and getting us to our long term goal.

Yeah.

Got it thank you and best of luck.

Thank you and 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.

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