Good afternoon, ladies and gentlemen, and welcome to Systemax Inc.'s Fourth Quarter 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 and welcome to the Systemax fourth quarter 2020 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. 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 other risk factors in the company's Annual 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 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 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 average daily sales growing over 15%. For the full year, revenue increased over 8%; and we exceeded $1 billion in sales, a significant milestone. Growth in the quarter was once again led by our Global Industrial branded product offering, pandemic-related supplies and equipment, and continued recovery in core product categories. Profitability was strong in the quarter, as we delivered year-over-year improvements in gross margin, SD&A leverage, and operating margin, which increased and resulted in a 46% improvement in 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 $0.14 to $0.16 per share, the fifth increase in as many years. The past year has been life-changing for all of us. And at times it was trying personally and professionally. 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. As a result of their efforts, 2020 was a resounding success for our business. With the strong execution of our ACE strategy and the deliberate and swift actions we took in an unprecedented business environment, we were able to be there for our customers and generate industry-leading growth. As we look to 2021, we are focused on the continued execution of our strategy and building upon our financial performance. At the core of our efforts is our multi-year ACE strategy, which guides our actions across the business and specifically in our customer end-to-end purchase, service and delivery experience. In the year ahead, we'll be making further investments within the core pillars of our strategy. This includes investments in automation and technology in 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 in 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, drive the further evolution of our e-commerce platform, and strengthen our overall competitive position. We will also continue to invest in 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 differentiates 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 Claudia Hughes to the newly created position of Chief Sales Officer expands our leadership team and will help us drive our digital and multi-channel sales model. 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 reflects our core values and continuous improvement mindset. It has generated significant excitement across the organization and represents another step in our efforts to strengthen and deepen connections with our customers. In conclusion, we are investing in our growth and believe our strategy has tremendous relevance in the marketplace today. We are looking forward to adapting to the needs of our customers and moving the business to where it needs to be tomorrow. We believe we are well positioned to continue to capitalize on the acceleration of B2B e-commerce environments and to capture additional market share in a highly-fragmented industrial distribution marketplace. While the current environment remains unpredictable, the commencement of COVID vaccinations and signs of improving economic demand are promising. As we start the New Year, I'm pleased with the momentum and excitement we have in the organization and remain optimistic for 2021. Across the company, we are driving operational excellence in 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. I'll turn the call over to Tex.

Thank you, Barry. I will now address our performance in more detail and would like to note that we had four additional selling days comprised of the New Year's holiday week in the fourth quarter of 2020 compared to the year-ago period. In the fourth quarter, revenue grew 23.3% over Q4 of last year. Revenue 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 43.4% in local currency. Growth was stable as we moved through the fourth quarter and rates of growth continued to outperform the industrial distribution industry. This growth continued into January; however, at a lower rate than the fourth quarter. We recorded double-digit growth across all sales channels, led by e-commerce, which again accounted for more than 55% 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 deepened relationships with existing accounts. Sales performance continued to benefit from investments in 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 supplies, made up roughly 9% of sales in the fourth quarter, as compared to approximately 2% of sales in the same period last year. While this was a reduction in the percentage of sales as compared to the third quarter, we did see these categories increase as a percentage of total share as we moved through the period and we continue to believe they will have some permanence moving forward. Gross profit for the quarter was $93.1 million, an increase of 24.1% from last year. Gross margin was 34%, up 20 basis points from the prior year, primarily driven by improvements in pricing and rationalization, as well as our private label offering being a larger share of our sales mix. On a consecutive quarter basis, gross margin was down 180 basis points, which primarily reflects the comparison against an exceptional third quarter performance and seasonal changes in quarterly mix. We did see a number of margin pressures during the quarter, primarily related to freight promotions, increased parcel shipping costs 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've transitioned to a new third-party logistics partner in an effort to further improve service levels and enhance our customers' experience. We continue to actively manage our gross margin profile and remain focused on driving higher-margin sourcing channels and improving operational excellence. Selling, distribution, and administrative spending for the quarter was $72 million, or 26.3% of net sales, a 100 basis point improvement as a percentage of sales from last year. Improved SD&A leverage primarily reflects continued optimization and marketing spend as well as fixed cost leverage as sales volume grew. I would note, SD&A 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 in the quarter and for the year. Bottom line profitability was strong, as operating income from continuing operations was $21.1 million, a 46.6% improvement compared to the year-ago period. Operating margin expanded 120 basis points to 7.7%. Total depreciation and amortization expense in the quarter was $1 million. Capital expenditures for the fourth quarter were $1.5 million and $2.7 million for the full year, primarily comprised of maintenance-related capital. Operating cash flow from continuing operations was over $25 million in 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 a current ratio of 1.4:1. As of December 31, we had approximately $22 million in cash, zero debt, and availability of $72 million of our $75 million credit facility. Our cash position at year-end reflects the payment of our special $2 per share 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 $0.16 per share of common stock, an increase of approximately 14%. We anticipate continuing a regular quarterly dividend in the future. This concludes our prepared remarks. Operator, please open the call for questions.

We will now begin the question-and-answer session. Our first question today will come from Ryan Merkel with William Blair.

Hey, everyone. Nice quarter.

Hey, Ryan. How are you?

Hey, Ryan.

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 will tough PPE comparisons be a headwind, and if so, how much?

I can share a few insights on that, Ryan. From a PPE standpoint, we expect that PPE will remain a permanent component of our overall sales mix, and we have a clear understanding of what this will look like for the year, with positive trends so far. Regarding revenue, our outlook for the year remains above the market growth rate for our business. As we evaluate the first and second halves of the year, we have adjusted our performance metrics accordingly. Therefore, we anticipate continued strong performance that exceeds the market.

Okay. And then you mentioned inflation in a few areas. Are you planning on a price increase? Or is it too early to think about that yet?

There's certainly overall market impact from the suppliers right now. I mean, we obviously hear about that in the news and the way we look at pricing is we have to be competitive in the market. So we definitely see spots where there's pricing coming through. And where we can pass it, we do it. But if it means that we're going to be unprofitable, I would say uncompetitive price-wise, we'll manage against it. I think that's where our private label performance has been helpful for us in terms of providing value and price because where we can be a little bit more competitive there. But certainly, we're seeing supplier price pressure on certain commodities and adjusting accordingly.

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

Yes, that's a good point. There are a couple of things to mention. We usually don't share our acquisition rates, but I can tell you that we've experienced some benefits over the last few years that have positively impacted our acquisition efforts. We’ve adjusted our digital marketing strategy, particularly around paid search, leading to optimizations that have helped us grow our customer base and create efficiencies. We've also made changes to our selling, general and administrative expenses to reinvest in retention strategies, especially focusing on customer onboarding and implementing additional campaigns to offer promotions and incentives throughout the customer lifecycle. Over the past 1.5 years, we've been testing and expanding these efforts, particularly with the growth of our marketing team led by Klaus Werner. We're beginning to see improvements in our retention rates, which has greatly supported the business. On the acquisition front, we continue to conduct aggressive tests beyond just paid search. As you know, we've developed a new brand proposition for Global Industrial this year, which we just launched. It has been very well received, helping to raise awareness and attract customers to Global Industrial's brand.

Very helpful. Thanks for the answer.

Sure.

Our next question comes from Anthony Lebiedzinski with Sidoti & Company.

Yes, good afternoon, and thank you for taking the question. Regarding the fourth quarter, could you provide insight into the average daily sales growth, specifically the breakdown between average order value and transaction volume growth?

Yes, Barry, I can take that one…

I had trouble hearing him on that one. I'm sorry, I had trouble hearing him on that one.

Yes, Anthony. I think your question was thinking about the growth rates, how much was broken down between price and volume. Is that the primary question, Anthony?

Yes.

Sure. We experienced a growth of about 23% during the period, benefiting from an additional four selling days during New Year's week. This year included a 53rd week in the fiscal year, which is something that happens every few years. Regarding pricing, we found several opportunities due to inflation, but we also faced some negative pricing comparisons because certain PPEs have become commoditized, leading to lower prices. Overall, costs and prices have decreased, resulting in reduced price capture on some products. The growth rate remained relatively stable, driven by a balance of price and volume, with the increase in average order value being small and primarily volume-driven.

Got it. Yes, thank you for that Tex. And then hearing some more issues from companies talking about their imports as far as the shortage of ocean, shipping containers and, of course, rates going up as well, can you talk about that? And also as far as your inventory position, do you think you have adequate inventory here for 2021?

Yes, let's take a couple of questions about Anthony. This is Barry. From an import perspective, you're absolutely right; we're aware of the market conditions related to the pandemic and weather disruptions which have impacted container imports. The costs associated with ocean freight have been significant, along with some of the LTL costs, but I believe we've managed those challenges quite well. Our inventory levels for much of our core products are in good shape, and we feel confident in our ability to support the projected volume for the year. With our private label strategy, this becomes increasingly important. We're actively managing customer expectations regarding delivery times and keeping them informed as products arrive, and we believe our inventory position across our core products will support our revenue moving forward.

Yes. Anthony, we had about $130 million in revenue at the end of the quarter, which is approximately the same as Q3 last year. There are always gaps and areas to manage regarding our inventory around the upcoming Chinese New Year. This has consistently been a key strength of the company, and we focus on ensuring we have the right products available at the right time.

Got it. Okay. And then last question for me. So in your prior investor presentations, you guys talked about long-term operating margin goals of 10% plus, kind of, longer term. Now with 2020 in the rearview mirror and looking ahead to 2021 and beyond, how do you guys feel about those previous operating margin goals?

I mean, I would tell you we're still fairly consistent in terms of our long-term operating margin goal at double-digit 10%. I mean that's what we've had in our investor deck and we continue to move in that direction. We see a few areas that I think will help us achieve that. One is considering expansion of our private label brand business that drives premium margins to us, and our customers love the product. So the more we mix into 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 at 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 optimization, so you look at overall improvement in 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 in getting us to our long-term goal.

Got it. Thank you, and best of luck.

Thank you, Anthony.

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.