Q1 2021 Systemax Inc Earnings Call
[music].
Good afternoon, ladies and gentlemen, and welcome to assist the box Inc. First quarter of 2021 earnings call.
At this time I would like to turn the call open of micro small and draw seat of the pocket group. Please go ahead.
Thank you and welcome to the system ex first quarter 2021 earnings call leading.
Leading today's call will be Barry Litwin, Chief Executive Officer, and Tex Park, 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. The actual results could differ materially from those projected due to a number of factors, including those described under the forward looking statements caption and at our.
Our risk factors and the company's annual report on form 10-K, and quarterly reports on form 10-Q the.
Press release is available and the company's website, that's been filed with the SEC form 8-K.
And this caused the property of and is copyrighted by system Ex Inc. I will now turn the call over to Barry Logan.
Thanks, Mike Good afternoon, everyone and thank you for joining US today, we extended our strong top line performance into the new year with first quarter revenue up 10, 5% to 251 million and and average daily sales growing almost 9%.
Sales reflect the continued recovery in core categories, which finished the quarter with the strong March and solid demand for our global industrial branded products. We've been very pleased with the core category performance and with the signs of an improving economy, we remain optimistic about the demand environment.
We were disappointed in our Q1 profitability results, but believe that many of the drivers of gross margin erosion are temporary and will ease as we move through the summer.
Domestic and ocean freight pressures as well as the impact of of write downs totaling $2 $7 million of certain PPE products contributed to our performance that was below our expectations. This.
And this was partially offset by improved product margins and S DNA leverage.
The inventory write down is the result of the normalization of demand for certain inventory positions, we took to service customers during the pandemic.
We believe we manage our inventory well during a turbulent period of demand and pricing fluctuations.
And our investment and key PPE categories allowed us to respond to our customers' urgent needs, while strengthening our relationship with them.
This write down was a small fraction of the gross profit. These categories contributed during the past year. The quarter was further impacted by a sort of February during which significant winter storms affected both customers and our distribution network as noted on our last call. We also incurred additional costs associated with the transition to a third party logistics provider.
These events impacted freight performance and text will provide additional details and discuss actions we've taken to drive improvement.
During the quarter, we continue to execute on our strategy and make strategic investments across the business. These efforts will help us deliver and an unrivaled customer experience. Our mission is to provide the right products solutions and advice to help customers succeed and grow and where the customer centric and continuous improvement mindset, we are anticipating the needs of the.
The market and driving customer loyalty.
We are advancing our digital transformation to further capitalize on the huge shift and B to B e-commerce adoption as electronic orders made up more than 56% of total orders in the first quarter and continue to pace all sales channels for growth.
Our leading ecommerce capabilities and functionality continue to improve the sales and marketing teams are driving core category growth, increasing conversion and accelerating retention.
We have a number of initiatives underway that highlight the product knowledge expertise and solutions, we provide during the quarter, we enhanced the global industrial website with a broad range of engaging and informative content from.
From in depth articles and tips to Webinars videos.
And our new senior space Interactive virtual room by room experience, we are sharing our expertise and thought leadership to create a more engaging customer experience.
And the recent introduction of our planned procure and execute program is another great example of the value we are bringing to market. It is designed to help customers put of robust plan in place procure the products they need and execute their strategy to fully reopen and manage their businesses and.
And positions global industrial as a true partner and their success.
We also continued to expand our line of global industrial branded products, which are of significant point of differentiation and the marketplace. Recent product line expansions include bottle filling stations outdoor drink and thumbs and medical refrigerators and we've been pleased with our customer engagement for these products, which is the direct recognition of the exceptional quality and value they provide.
Efforts to enhance operations and drive DC fulfillment and product delivery excellence are ongoing and.
And the recent expansion of the New Jersey distribution Center provides additional capacity for stock products and will help us better meet customer delivery expectations in the northeast.
In conclusion, we believe we have a powerful customer growth model, that's allowing us to build deep and loyal customer relationships by continuing to invest and our growth. We are redefining the <unk> e-commerce experience and strengthening our platform and competitive position for the long term.
Across the business, we are focusing on optimizing operations managing our cost structure and building a scalable infrastructure that allows us to leverage the business as we continue to grow we.
We are utilizing our entrepreneurial nature and spirit to deliver and exceptional customer experience.
The additional value to customers and drive overall satisfaction and I'm excited by the progress, we're making and the opportunities we have to strengthen our position as an indispensable business partner to our customers.
I will now turn the call over to Texas.
Thank you Barry I will now address our performance in more detail and we'd like to note that we had one additional selling day and the U S and the first quarter of 2021, <unk> compared to the year ago period.
And the first quarter revenue grew 10, 5% over Q1 of last year revenue was $251 $1 million with average daily sales growth of eight 9%.
U S average daily sales growth was six 8%, while Canadian average daily daily sales growth grew 38, 6% and local currency.
Growth in the quarter was highlighted by mid teens growth in January and March offset by the top February which saw a slight decline year over year and was impacted by significant winter weather across the country.
We once again recorded growth across all sales channels led by e-commerce, which accounted for more than 56% of our transaction count up almost 500 basis points from the prior year.
Sales benefited from the rebound of core product lines, including storage and shelving material handling HV AC and outdoor equipment.
We also saw our private label offering increase as a percentage of total sales.
Consumable products within the pandemic of assortment, including PPE and sanitizing supplies made up five 6% of sales and the first quarter as compared to seven 5% of sales and the same period last year.
We recorded improvement and our ability to acquire and retain targeted business customers as we further leverage data analytics and <unk>.
Drove higher order values and the quarter and aligns with our disciplined execution of our strategy.
Gross profit for the quarter was $77 3 million and increase of approximately 1% from last year gross margin was 38% of 290 basis points from the prior year driven by a combination of factors, including a $2 $7 million write down of certain PPE supplies of <unk>.
Margin performance also reflects the transition to a new third party logistics partner the impact of the February storms and continued ocean freight pressures.
This was partially offset by favorable product margins as the private label offering and capture a larger share of our sales mix and price rationalization.
The winter storms in February of touch the large sections of the country and had a significant impact on our Texas distribution Center.
This included of weather related closure of the facility as well as limiting carrier availability across the entire distribution network.
As a result, we incurred additional costs to reroute customer orders to utilize non optimal carriers ahead of availability and to expedite shipping shipping to maintain customer delivery expectations.
In the quarter, we shifted to a new <unk> partner, which will allow global to directly manage carrier relationships long term cost and service delivery levels.
While there were both transitional and inflationary pressures and the <unk> market. We believe this transition was the right decision to drive continuous improvement of the customer's experience.
As of this week, we have completed the transition and are now and the process of optimizing the routing of product within the carrier network.
We've taken a number of recovery actions and are working closely with our partners to improve freight performance. We have seen some freight margin recovery of the ended the first quarter and currently expect sequential quarterly improvement in the second quarter.
We believe freight pressures, which include the impact of the new therapy and relationship alteon cost port congestion and container availability will remain elevated over prior year and the near term.
We continue to actively manage our gross margin profile remain focused on driving higher margin and sourcing channels and will be proactive and our approach to capture price.
Selling distribution and administrative spending for the quarter was $70 7 million or.
We're 28, 2% of net sales of 50 basis points of improvement as a percentage of sales from last year.
Improved SG&A leverage primarily reflects continued optimization and marketing spend as well as fixed cost leverage of sales volume growth.
While managing our cost structure is always the priority during the period and throughout the year, we will continue to invest and growth initiatives, including our E Commerce optimization project.
The investments will help us drive long term improvements and customer retention and conversion rates.
Operating income from continuing operations was $6 6 million.
And the operating margin declined 250 basis points from last year's first quarter ex.
<unk> and the write down of the inventory costs operating income would have been $9 3 million or three 7% of sales.
Total depreciation and amortization expenses in the quarter was $1 million.
Capital expenditures for the first quarter, whereas the <unk> $9 million and we expect total of 2021 capital expenditures and the range of $5 million to $7 million.
Primarily comprised of maintenance related capital as well as investments related to a 100000 square foot expansion of our New Jersey distribution Center.
Operating cash flow from the from continuing operations was $8 $9 million in the quarter.
Let me now turn to our balance sheet.
We are of very strong liquid balance sheet with the current ratio of one five to one as.
As of March 31, we had approximately $36 9 million cash zero debt and availability of $72 5 million of our $75 million credit facility.
Our cash position reflects the receipt of $12 million net of contingencies within our discontinued operations from a previously disclosed legal matter.
We maintained significant flexibility to fully execute on our strategic plan and continuing to fund our quarterly dividend.
As a result, our board of directors declared a quarterly dividend of <unk> 16 per share of common stock and we anticipate continuing a regular quarterly dividend and the future.
This concludes our prepared remarks, operator, please open the call for questions.
Okay.
Thank you.
We will now begin our question and answer the question 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 the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Ryan Merkel with William Blair. Please go ahead.
Hey, everyone couple of questions from me.
First off you listed several drivers of the lower gross margin. It sounds like freight margin was the biggest negative how much of an impact was that.
Yes, so there were a Ryan it's good good to hear you.
Few areas in terms of freight overall and the period that we talked about.
Primarily optimization around our three PL relationship that we brought on brand new.
And that relationship has a significant long term cost benefit to us.
And as well as an improvement and our overall customer experience. So we believe we can do a better job on managing cost long term and also managing our service levels better through direct carrier relationships. So.
We've completed that transition and.
Certainly had saw some increased costs due to that.
We also saw some elevation in our LPL costs through the period, so given the constraints and the market in terms of the carrier networks.
And that had that had an impact as well and.
Certainly with the.
The supply chain side, given some of the widespread reports around port congestion and container availability.
And continuing to impact us and we're continuing to optimize around that but we think of lot of those factors.
What kind of ease throughout the summer and many of which we've been able to.
Continuing to mitigate.
Okay. That's helpful.
If I add back the one time items that you are mentioning what would gross margins have been and the first quarter.
Yes, Barry ill jump in there. So it was the right. Obviously, we identified we identified the 110 basis points that came out of the the inventory adjustments. So that was right and that was the right answer that says of the discrete one time event and the balance of events. We didn't enumerate. The the balance obviously there are as Barry highlighted a number of moving parts.
All typically around our freight profile.
And while those are the transitional in nature, we believe that we can obviously mitigate those costs and say one thing that you're thinking about when you have increased our EBIT inflationary costs and the LPL market.
The pricing is very important so really being able to manage the pricing on the on the freight side as well as the optimizing that network.
The the rate carried and the right location and that's one thing that we have much more ability to do going forward. So it's hard to identify the specific one time nature of those costs. We do think that they will ease as we move through the.
The coming months and we already started to see some of that.
<unk> of our sequential improvement from the early part of the quarter into into where we're at now.
Okay.
If I can sneak one more and so youre seeing some recovery and gross margin.
Can you provide a little bit more details and sort of the cadence through the year it sort of sounds like sequentially there'll be a small lift and the <unk> and then maybe more lift and the second half of that the right way to think about it.
Yeah.
Yeah, I would say that's that's that's the right Ryan I think and as we start to talk about the the easing we have several factors. So we think the LPL three PL optimization will really help to start improve on the freight margin side and it is texts of mentioned we are seeing sequential improvement and we certainly see.
<unk>.
Quarterly improvement through through the full <unk> as well so.
We're working through.
And the optimization piece.
But I think the one areas that we're continuing to.
<unk>, obviously and port congestion and container availability, which we're taking actions to help improve.
But I think those are those and some of the major areas that where we'll start to see improvement.
Got you thanks for the details and pass it on.
Sure.
Our next question comes from Anthony <unk>.
Led by <unk> and <unk> with Sidoti and company. Please go ahead.
Good afternoon, and thank you for taking the question so.
So first of all.
Looking at the first quarter cash.
Can you give us a sense as to how much of your revenue growth.
Driven by your core.
The non pandemic merchandize.
Yes sure Anthony.
It's good to hear from you.
When you take a look at our our overall growth and the quarter, we definitely saw.
Improvement and overall core mix so that has been.
Change relative to the 2020 profile, where everyone saw quite a bit of PPE and safety. So we've been we've been pleased with the overall growth of core products.
Particularly in our storage and shelving material handling HVAC and the outdoor supply. So I think of the economy starts to come back and there are obviously clear signs of growth companies are coming back and looking for those products, whereas they didn't so we're going to be certainly relying on core growth continuing.
And Thats what.
And we'll continue to see a higher balance of the sale of that volume throughout the year.
And let me add a little bit of color to that as well. So Anthony is we did highlight that the kind of PPE supplies as we've identified those throughout the throughout the last year. They made up of about five 6% of sales this quarter versus about a little over 7% seven 5% last year and the same first quarter. So you can do a little bit of of reverse engineering on that on that.
Matt, but PPE supplies actually and we saw a decline and those year over year, which would mean the aggregate increase and our core supplies increase so we definitely saw that continue to accelerate as we move through the quarter and as we highlighted we saw mid teens growth in both January and March.
It's actually a small decline in February based upon those winter storms.
Yes, thank you for that color and then.
Yes in terms of the true.
Transition costs and the new logistics provider.
And just well just wondering if there was any additional cost and the second quarter that we should be aware of.
Yes.
Go ahead of ahead, Barry I'm, sorry, I'll take it.
Sorry, Anthony.
So yes, I mean, as we think about the transitional costs and I'll tell you, we and we did I'll call, we completed the transition and actually.
Recently this week in terms of really aligning on our new carrier relationships. So obviously the there was transitional costs. There were some duplicate duplicate of costs. There were some some increased costs as we move through the period.
Those are the ones that obviously now that we have the relationship we're locked in with our new network, our new carrier relationships.
Optimizing that will continue to take some time to get that at an optimal level. So yes that will continue into the second quarter, but we think of them and at a muted level compared to the first quarter and we do expect to see improvement and those those costs as we move forward.
Yeah.
Yeah.
Got it okay and two more questions for me as far as the inventory position now.
Is that.
And so just wanted to get a sense as to how much of your current inventory has pandemic related products and I know you took the write down and I assume you took the right value.
Everything that you can give it to where the just wanted to get a better sense about the.
Yeah I'll jump in there so if you're thinking of any of the write down and obviously an inventory reserve that you take based upon net realizable value and start getting a little of accounting on the and urban so yeah. We look at the sell price look at the sell through of the product and determine and what we believe the appropriate level of realizable value on that inventory and so yes based upon our Q1 close.
And obviously as we move through the closing period, we identified what we believe the appropriate levels of inventory reserve and that's not to say there isn't any possibility of that there'll be another one and the future, but but we did take what would the appropriate amount that we thought.
And then we reviewed and was necessary at the time.
Yes, that's right tax and the other thing Anthony too, Okay, and the last question Oh, sorry, sorry.
No I was just saying as we look out towards the middle part of the year.
Go ahead go ahead.
And I was just going to add that as the economy continues to come back and companies start to return.
And there's still opportunity for product and the <unk>.
Pandemic nature of that.
The exist and those facilities and they return so I think we've assess kind of what we need to get it through those periods.
Yeah.
Got it Okay and then the.
Last question from me the tax rate came in lower than what we had expected.
Just wondering.
How we should think about the tax rate for the rest of the year.
And that's definitely my question.
Yes, it definitely came in and came in at a lower level of combination of factors contributed to that.
The largest being the impact of.
The stock option expense benefit that you recognize on the exercise of options that were exercised and Q1, obviously given the the value of the options that were exercised and the overall kind of net income level of did contribute.
Does that level. We also saw of I'll say, our Canadian mutual you heard we mentioned and our Canadian business grew.
Roughly 38% on and average daily sales basis with the Canadian business operating with some Nols and its.
And at the balance sheet, we are able to there was a tax benefit there so and in the kind of long run. We do think 25% is still kind of that under the current tax code would be the right, 25% 26 and that would be the right tax rate to the model.
But it is short term if Canadian if Canada keeps performing very well there there could be and a little bit of favorability and that going forward, but again overall 25, 26% and still how we model our tax rate internally.
Got it alright, well, thank you and best of luck.
Thanks Anthony.
This concludes our question and answer session and.
The conference for today. Thank you for attending today's presentation you may now disconnect.
Yeah.
And Mike.