Good afternoon, ladies and gentlemen, and welcome to Systemax Inc. First Quarter 2021 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 First Quarter 2021 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 under 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 extended our strong top line performance into the new year with first quarter revenue up 10.5% to $251 million and an average daily sales growth of almost 9%. Sales reflect the continued recovery in core categories, with a strong March and solid demand for our global industrial branded products. We've been very pleased with the core category performance, and with signs of an improving economy, we remain optimistic about the demand environment. We were disappointed in our Q1 profitability results, but we 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 a write-down totaling $2.7 million of certain PPE products contributed to a performance that was below our expectations. This was partially offset by improved product margins and SDNA leverage. The inventory write-down is a result of the normalization of demand for certain inventory positions we took to service customers during the pandemic. We believe we managed our inventory well during a turbulent period of demand and pricing fluctuations. Our investment in key PPE categories allowed us to respond to our customer's 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 soft 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 Tex will provide additional details and discuss actions we've taken to drive improvement. During the quarter, we continued to execute on our ACE strategy and make strategic investments across the business. These efforts will help us deliver an unrivaled customer experience. Our mission is to provide the right products, solutions, and advice to help customers succeed and grow. And with a customer-centric and continuous improvement mindset, we're anticipating the needs of the market and driving customer loyalty. We are advancing our digital transformation to further capitalize on the huge shift in B2B 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 e-commerce 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 in-depth articles and tips to webinars, videos, and our new 'See Your Space' interactive virtual room by room experience. We are sharing our expertise and thought leadership to create a more engaging customer experience. The recent introduction of our 'Plan, Procure and Execute' program is another great example of the value we are bringing to market. It is designed to help customers put a robust plan in place, procure the products they need, and execute their strategy to fully reopen and manage their businesses. It positions global industrial as a true partner in their success. We also continue to expand our line of global industrial branded products, which are a significant point of differentiation in the marketplace. Recent product line expansions include bottle filling stations, outdoor drinking fountains, and medical refrigerators. We've been pleased with our customer engagement for these products, which is a direct recognition of the exceptional quality and value they provide. Efforts to enhance operations and drive DC fulfillment and product delivery excellence are ongoing. 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 allows us to build deep and loyal customer relationships. By continuing to invest in our growth, we are redefining the B2B 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 are utilizing our entrepreneurial nature and spirit to deliver an exceptional customer experience, bring additional value to customers, and drive overall satisfaction. I'm excited about 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 Tex.

Thank you, Barry. I will now address our performance in more detail and would like to note that we had one additional selling day in the U.S. in the first quarter of 2021 as compared to the year-ago period. In the first quarter, revenue grew 10.5% over Q1 of last year. Revenue was $251.1 million with average daily sales growth of 8.9%. US average daily sales growth was 6.8% while Canadian average daily sales growth grew 38.6% in local currency. Growth in the quarter was highlighted by mid-teens growth in January and March offset by a soft February, which saw a slight decline year over year. It 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, HVAC, and outdoor equipment. We also saw our private label offerings increase as a percentage of total sales. Consumable products within the pandemic assortment, including PPE and sanitizing supplies, made up 5.6% of sales in the first quarter, compared to 7.5% of sales in the same period last year. We recorded improvement in our ability to acquire and retain targeted business customers as we further leveraged data analytics. This drove higher order values in the quarter and aligns with our disciplined execution of our ACE strategy. Gross profit for the quarter was $77.3 million, an increase of approximately 1% from last year. Gross margin was 30.8%, off 290 basis points from the prior year, driven by a combination of factors, including a $2.7 million write-down of certain PPE supplies. Gross 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 a private label offering captured a larger share of our sales mix and price rationalization. The winter storms in February touched large sections of the country, and had a significant impact on our Texas distribution center. This included a 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 that had availability, and to expedite shipping to maintain customer delivery expectations. In the quarter, we shifted to a new 3PL partner, which will allow global to directly manage carrier relationships, long-term costs, and separate delivery levels. While there were both transitional and inflationary pressures in the LTL market, we believe that this transition was the right decision to drive continuous improvement in the customer's experience. As of this week, we have completed the transition and are now in the process of optimizing the routing of products within the carrier network. We have taken a number of recovery actions and are working closely with our partners to improve freight performance. We have seen some freight margin recovery at the end of the first quarter and currently expect sequential quarterly improvement in the second quarter. We believe freight pressures, which include the impact of the new 3PL relationship, LTL costs, port congestion, and container availability will remain elevated over the prior year in the near term. We continue to actively manage our gross margin profile, remain focused on driving higher margin sourcing channels, and will be proactive in our approach to capture price. Selling distribution and administrative spending for the quarter was $70.7 million or 28.2% of net sales, a 50 basis point improvement as a percentage of sales from last year. Improved FTNA leverage primarily reflects continued optimization in marketing spend as well as fixed cost leverage as sales volume grew. While managing our cost structure is always a priority, during the period and throughout the year, we will continue to invest in growth initiatives, including our e-commerce optimization project. These investments will help us drive long-term improvements in customer retention and conversion rates. Operating income from continuing operations was $6.6 million and operating margin declined 250 basis points from last year's first quarter. Excluding the write-down of the inventory costs, operating income would have been $9.3 million or 3.7% of sales. Total depreciation and amortization expense in the quarter was $1 million. Capital expenditures for the first quarter were $0.9 million and we expect total 2021 capital expenditures in the range of $5 million to $7 million, primarily comprised of maintenance-related capital as well as investments related to a 100,000 square foot expansion of our New Jersey distribution center. Operating cash flow from continuing operations was $8.9 million in the quarter. Let me now turn to our balance sheet. We have a very strong liquid balance sheet with a current ratio of 1.5:1. As of March 31, we had approximately $36.9 million in 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 maintain significant flexibility to fully execute on our strategic plan and continue to fund our quarterly dividend. As a result, our Board of Directors declared a quarterly dividend of $0.16 per share of common stock and we anticipate continuing our regular quarterly dividend in the future. This concludes our prepared remarks. Operator, please open the call for questions.

Our first question comes from Ryan Merkel with William Blair.

Everyone, a 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?

Ryan, it's good to hear you. A few areas in terms of freight overall in the period that we talked about, primarily optimization around our 3PL relationship that we brought on brand new. That relationship has a significant long-term cost benefit to us as well as an improvement in our overall customer experience. So we believe we can do a better job of managing costs long-term and also managing our service levels better through direct carrier relationships. So we've completed that transition and certainly saw some increased costs due to that. We also saw some elevation in our LTL costs through the period. So given constraints in the market in terms of the carrier networks, that had an impact as well. And certainly with supply chain side, given some of the widespread reports around port congestion and container availability, those continue to impact us and we're continuing to optimize around that, but we think a lot of those factors will kind of ease throughout the summer and many of which we've been able to continue to mitigate.

Okay. That's helpful. I guess if I add back the one-time items that you're mentioning, what would gross margins have been in the first quarter?

Yes. Barry, I'll jump in there. So Ryan, obviously we identified 110 basis points that came out of the inventory adjustment. So that was a write-down. So that's a discrete one-time event. The balance of events, we didn't enumerate the balance. Obviously, there are, as Barry highlighted, a number of moving parts, but all typically around our freight profile. While those are transitional in nature, we believe that we can obviously mitigate those costs. Obviously one thing that you think about when you have increased or even inflationary costs in the LTL market, pricing is very important. So really being able to manage your pricing on the freight side as well as optimizing that network to get the right carriers in the right location. And that's one thing that we have much more ability to do going forward. So while 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 coming months. And we already started to see some of that sequential improvement from the early part of the quarter into where we're at now.

Okay. If I could sneak one more in. So you're seeing some recovery in gross margin as you get into Q2. Can you provide a little bit more details on sort of the cadence through the year? It sort of sounds like sequentially there'll be a small lift into Q2 and then maybe more lift in the second half. Is that the right way to think about it?

Yes, I would say that's right, Ryan. I think as we start to talk about the easing, we have several factors. So we think the LTL, 3PL optimization will really help to start improve. On the freight margin side, as Tex had mentioned, we are seeing sequential improvement and we certainly see quarterly improvement through the full Q2 as well. So we're working through the optimization piece, but I think the one area that we're continuing to fight through is obviously on port congestion and container availability, which we're taking actions to help improve. But I think those are some of the major areas that we'll start to see improvement on.

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

So first, looking at the first quarter, can you give us a sense as to how much of your revenue growth was driven by your core non-pandemic merchandise?

Yes, sure. Anthony, it's good to hear from you. When you take a look at our overall growth in the quarter, we definitely saw improvement in overall core mix. So that has been a change relative to the 2020 profile where everyone saw quite a bit of PPE and safety. So we've been pleased with the overall growth of core products, particularly in our storage and shelving, material handling, HVAC, and the outdoor supplies. So I think as 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 that's what we'll continue to see a higher balance of sale of that volume throughout the year.

Barry, let me add a little bit of color to that as well. So Anthony, as we did highlight that the kind of PPE supplies as we've identified those throughout the last year, they made up about 5.6% of sales this quarter versus about a little over 7% to 7.5% last year in the same first quarter. So you can do a little bit of reverse engineering on that math, but PPE supplies actually, we saw a decline in those year over year, which would mean the aggregate increase in our core supplies increased. And we definitely saw that continue to accelerate as we moved through the quarter. And as we highlighted, we saw mid-teens growth in both January and March with actually a small slight decline in February based upon those winter storms.

And then in terms of the transition costs to the new logistics provider, just wondering if there was any additional costs in the second quarter that we should be aware of.

I'll take it. Sorry, Anthony. So yes, I mean, as we think about the transitional costs, we did, I'll call it, we completed the transition actually as recently as this week in terms of really aligning on our new carrier relationships. So obviously there were transitional costs, there were some duplicative costs, and there were some increased costs as we moved through the period. Those are the ones that obviously now that we have the relationships, 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 at a muted level compared to the first quarter. And we do expect to see improvement in those costs as we move forward.

Got it. Okay. And two more questions for me, as far as your inventory position now, just wanting to get a sense as to how much of your current inventory has pandemic-related products. I know you took the write-down, I assume you took a write-down for everything that you needed to, or just wanted to get a better sense about that.

Yes. I'll jump in there. So yes, if you think, Anthony, the write-down is obviously an inventory reserve that you take based on net realizable value. Sorry, getting a little accounting on you in there. But so yes, we look at the sell price, look at the sell through of the product and determine what we believe the appropriate level of realizable value on that inventory is. So yes, based on our Q1 close, and obviously as we move through the closing period, we identified what we believed was the appropriate levels of inventory reserve. That's not to say there isn't any possibility that there'll be another one in the future, but we did take the appropriate amount that we reviewed and was necessary at the time.

Yes, that's right, Tex. And the other thing, Anthony, too…

Got it. Okay and the last question, oh, sorry.

No, I was just saying, as we look out towards the middle part of the year…

Go ahead.

No, I was just going to add that as the economy continues to come back and companies start to return, there's still opportunity for product in the pandemic nature that exists in those facilities as they return. So I think we've assessed kind of what we need to get us through those periods.

Got it. Okay. And then last question for me, the tax rate came in lower than what we had expected. Just wondering how we should think about the tax rates for the rest of the year.

Yes, that's definitely my question. So yes, it definitely came in at a lower level, a combination of factors contributed to that, the largest being the impact of stock option expense benefit. Now that you recognize that on the exercise of options that were exercised in Q1, obviously given the value of the options that were exercised and the overall kind of net income level, it did contribute to that level. We also saw, obviously our Canadian operation, which you heard we mentioned grew roughly 38% on an average daily sales basis with the Canadian business operating with some NOLs in its balance sheet, we were able to, there was a tax benefit there. So 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% to 26% would be the right tax rate to model. But in the short term, if Canada keeps performing very well, there could be a little bit of favorability in that going forward. But again, overall 25% to 26% is still how we model our tax rate internally.

This concludes our question-and-answer session and our conference for today. Thank you for attending today's presentation. You may now disconnect.