Standard Motor Products Inc (SMP) 2011 Q1 法說會逐字稿

Good day, everyone, and welcome to be Standard Motor Products first-quarter earnings call. (Operator Instructions). Please note that this conference is being recorded. It is now my pleasure to turn the conference over to Mr. Jim Burke. Please go ahead.

Okay. Thank you. Good morning and welcome to Standard Motor Products first-quarter 2011 conference call. In attendance from the Company are Larry Sills, Chief Executive Officer, and myself, Jim Burke, Chief Financial Officer.

As a preliminary note, I would like to point out that some of the material we will be discussing today may include forward-looking statements regarding our business and expected financial results. When we use words like anticipate, believe, estimate or expect, these are generally forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they are based on information currently available to us and certain assumptions made by us, and we cannot assure you that they will prove correct.

You should also read our filings with the Securities and Exchange Commission for a discussion of the risks and uncertainties that would cause our actual results to differ from our forward-looking statements.

I will begin with a review of the financial highlights and then turn it over to Larry followed by Q&A.

Our first-quarter 2011 was a great launch into the new year on the back of a strong finish in 2010. Consolidated net sales in Q1 2011 were $220.2 million. Compared to Q1 2010, consolidated net sales were favorable $40.9 million or 22.8%. By segment Engine Management net sales were $164.2 million, up $27.1 million or 19.8%, and Temperature Control net sales were $54.1 million, up $14.1 million or 35.1%. Larry will discuss his thoughts on the sales picture in Q1.

Our consolidated gross margin dollars in Q1 improved $9.3 million, but down 3/10 of 1 point. By segment Engine Management gross margin was up $6.9 million or 2/10 of 1 point to 24.4%.

For the 12 months 2010, the Engine Management margin was 25%, and we believe we can match those levels or better in 2011. The reason for the reduction in Q1 2011 against the 2010 run-rate was due to inventory reduction efforts.

Looking forward, gross margins will improve as planned price increases are achieved in the third-quarter 2011.

Temperature Control gross margin was up $2 million, but off 1.6 points to 19%. Two items primarily impacted the margin this quarter. First, we offered a preseason discount in 2011, which lowered the margin slightly but had a positive impact on sales. Second, product mix was also a factor.

Similar to last year, we anticipate gross margins will improve as we enter the summer season.

Consolidated SG&A expenses increased $4 million or roughly 11% on a robust 22.8% sales increase. As a percentage of net sales, SG&A expenses were reduced 1.9 points to 18.5% compared to 20.4% last year. Consolidated operating profit before restructuring and integration expenses and other income net was $12.5 million or 5.7% of net sales versus 4% last year. Both segments improved operating profit leverage.

Engine Management achieved 9.2%, up 1.9 points, and Temperature Control achieved 2.3%, up 1.4 points. The Temperature Control operating margins move up as we move into the summer season.

Overall we were able to convert the roughly 23% sales increase into a roughly 75% operating profit increase. The net effect of our operational results as disclosed on our non-GAAP reconciliation had diluted earnings per share of $0.31 versus $0.14 last year. We are very pleased with the greater than 100% EPS improvement in the quarter.

Looking at the balance sheet, accounts receivable increased $34.7 million from December 10 on strong quarterly sales. However, this is a reduction of $2.7 million from March 10 levels, despite roughly a $41 million sales increase. Our ability to utilize A/R draft programs provided by our largest customers has kept our DSO below 60 days.

Inventory was essentially flat with December 10 levels; however, this masks the nice reduction in Engine Management of roughly $10 million, offset by Temperature Control preseason inventory build of $9 million. We anticipate an overall inventory reduction in both segments for 2011.

Total debt increased slightly to $72.7 million at March 11 versus $65.6 million at December 10 to support the working capital requirements.

On April 15 we redeemed the remaining 12.3 million convertible debentures we had outstanding with a coupon rate at 15%. Based on existing LIBOR rates, we will save approximately 12% borrowing costs or $1.5 million per year.

In April we completed the acquisition of the Engine Controls business from BLD for approximately $27 million. Larry will further discuss the attributes of this acquisition, which we believe will be accretive to earnings in year one, excluding restructuring and integration expenses.

After reflecting the $27 million acquisition on our March debt levels, total debt would approach $100 million. On a pro forma basis, our debt to equity ratio would be at a very comfortable 45% level, and we would still maintain in excess of $100 million borrowing capacity under our revolver.

Lastly, CapEx spending was $2.4 million in the quarter, and our depreciation and amortization was $3.4 million.

I will turn it over to Larry.

Good morning. My comments will be brief. Jim reviewed the numbers, and much of what I would say mirrors what we said two months ago at our last conference call. Then we will open for questions.

First, sales. The aftermarket remains strong and healthy, driven mostly, I believe, by positive demographics. We have the aging car population, we have the closing down of car dealerships, and as a result, we are seeing very healthy results from all the public companies that are reporting.

Now our sales numbers are also quite strong. As Jim pointed out, our overall net sales were roughly 23% ahead -- 20% ahead in Engine Management, 35% ahead in Temperature Control. Now, as the earnings release pointed out, we believe that these numbers will moderate somewhat during the year towards industry averages because they include some short-term growth in customer inventories and strong preseason orders for Temperature Control.

But still our customers continue to report nice sales increases out the door, so overall we believe the business remains quite healthy.

As for earnings, again, as we said in the last conference call, we are seeing the results of the cost reduction efforts over the last several years where we move manufacturing to low-cost countries, redirected purchases to low-cost countries, reduced overhead. And so when we combine the sales increase with the lower cost base, the results are good and our profits more than doubled, and we are quite pleased with that.

Finally, two subjects, other subjects mentioned in the earnings announcement. One, as Jim said, we paid off the final $12 million of the $90 million debenture. Jim reviewed that, so I will not go into more detail.

I would say a word about the acquisition of BLD engine management, which is a basic manufacturer of various engine management products. We feel this is going to be an excellent acquisition for the Company.

First of all, they are profitable. Secondly, we will now be a basic manufacturer of these products, and these products are still in the growth cycle. That is one of our basic goals. Third, we anticipate achieving additional cost savings when the bulk of the manufacturing relocates to Reynosa, Mexico. And fourth and not least, the manager has agreed to stay with the Company, and that will, we believe, help in a smooth transition. So we feel good about that BLD acquisition.

In summary, we are pleased to how things are going, and now we shall open it for questions.

(Operator Instructions). Robert Smith, Center for Performance Investing.

Congratulations on the quarter. The BLD acquisition, I mean it seems small in a way, but would you call this an opportunistic acquisition? Are there possibilities of additional such moves?

Okay. Well, opportunistic? Well, we know the company, so -- and we felt this would be a good addition to Standard Motor Products.

Are there others planned? That is your question? Well, we are always looking but looking carefully. We know this industry. It is not a big industry. And we know it pretty well. So we are continually looking and evaluating and planning, but we do so, in my opinion, very conservatively. We try to stay within our own market. We try to stay with products that we are familiar with. We feel by doing so this will maximize our gain and minimize the risk, which is very important here. So we have nothing imminent, but we are always looking within those criteria.

Larry, when you say the product line is in a growth phase, what specifically do you mean by that?

Well, because parts fit cars, and you can either fit a car that is 15-years-old and you know it's in the downcycle, or it will fit cars that are seven- or eight-years-old, and it is still in the plus cycle. So these are more towards the front end.

Gotcha. Okay. Would you say that the dividend may be under review later this year for uptick?

Mr. Burke will answer that.

Well, as everyone knows, our board is responsible for reviewing and approving any dividend changes, but again, we are very pleased that we were able to increase the dividend which was just paid on March 1, annualized from $0.20 to $0.28. Our stated payout ratio is 1/3, and I'm sure that we will be evaluating this as we go forward into the future.

Thanks. Good luck.

(Operator Instructions). Brian Sponheimer, Gabelli & Co.

I just want to look from 30,000 feet here at the competitive environment in light of pricing on material cost increases, in light of recent currency moves, and how you are competitive from a cost basis versus, say, Chinese competitors. And what has changed in the last three and 12 months?

Let me make sure I understand your question. Are you referring primarily to Chinese competitors or competitors of all kinds?

Mostly your competition coming from China.

All right. Well, obviously China is a factor. We feel that the best way for us to compete against China, which we are working at very, very diligently, is to keep our costs down. And we feel that the more we can manufacture in low-cost countries, especially Mexico and Poland, we can do okay against them. So -- and, of course, we are watching Chinese inflation coming up. We are watching gas prices come up. We are watching the currency appreciate a little bit. So we feel we can hold our own against China. It is not so easy, but we think we can hold our own against China.

Would you say that the environment has improved on a competitive basis versus, say, 12 months ago?

I would say we deal in longer cycles than that. I would say I cannot say there is much of a change in the last 12 months.

And Jim, could you talk for a second about how we should think about gross margin for the remainder of the year on Temp Control particularly?

Okay. On Temp Control the key is in looking at the sales also. You have to really look at a minimum of -- it should be the full season, but a minimum of six months. You have got to get into Q2, Q3. The pricing for temp control, our pricing is in the street already, so there's changes on pricing for the balance of the year.

So how are we going to improve the margin that is in there? We have low-cost sourcing where we continue to pull through the material cost savings. We move -- we are continuously moving manufacturing hours down to our Mexico plant that we have in place. And normally our first quarter would be our lower margin within Temperature Control because the amortization of the variances is really coming off the back of the fourth quarter of the prior year when we have lower production levels. So now we are ramped up in the first quarter, and the benefits of those variances we look for better margins going forward. So overall we think the margins will obviously improve from this level.

One deterrent on the margins, we have product mix, which we experienced a little bit of in the first quarter, and that is between new compressors and remanufactured compressors. So that impacts us slightly. We have some background noise I apologize for. Hopefully it will stop in a second.

Are they power-washing the windows?

This is part of working in a building where they are renovating the floor below us.

I understand. Nice quarter.

And on the -- if I just quickly on the Engine Management margin, what I stated earlier was that the third quarter we have planned price increases going through, and then three other drivers would be the low-cost sourcing on material parts. We established the Hong Kong sourcing office last year and low-cost manufacturing hours to Mexico and Poland. Lastly, May 1 buy as we have engineering projects that we bring to fruition. So -- (technical difficulty)-- (multiple speakers)

I apologize. All right. I think we have got it shut down.

Could you hear us all right during that?

Yes.

Okay, sorry about that. Okay.

That is it for me. Nice job.

(multiple speakers) -- all the gross margin questions?

Yes, that helped. Thank you.

(Operator Instructions). Gentlemen, it looks as though we have no more questions at this time.

Okay, very good. All right. I want to thank everyone for joining our conference call today. Thank you and bye.

This concludes today's conference. We thank you for your participation and hope you have a nice day.