Standard Motor Products Inc (SMP) 2011 Q2 法說會逐字稿

Good day, everyone, and welcome to today's program. (Operator Instructions). Please note this call may be 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 second-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. 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 ensure 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 could cause our actual results to differ from our forward-looking statements.

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

We are very pleased with our second-quarter performance. Consolidated net sales in the second quarter were $244 million, up $13 million or 5.6%, and the six months year-to-date were $464.2 million, up $53.8 million or 13.1%. By segment Engine Management net sales in Q2 were $159.9 million, up $7.1 million or 4.6%. Engine Management sales were up 19.8% in Q1, which included some customer inventory buildup. After a 4.6% Q2 increase, we are still ahead double-digits at 11.8%. For the balance of the year, we think it is reasonable to assume we will mirror the results of our distributors.

Temperature Control net sales in Q2 were $79.7 million, up $5.8 million or 7.8%, and in the six months year-to-date were $133.8 million, up $19.8 million or 17.4%.

Looking back 2010 was a very good season for Temperature Control, and 2011 is developing to be the second consecutive year of very warm temperatures. In 2010 customers were more cautious, stocking their shelves in the first half, which was reflected in the 7.6% first-half 2010 increase. That cautioness led to a third-quarter 2010 sales increase of 20.6%.

Looking at our 2011 comparison, our six-month sales are up 17% versus 7% increase in 2010. We believe customer inventory levels are higher than a year ago as we enter the third quarter, and customers will be reducing their inventory as the season winds down in a few more weeks.

To summarize, revenues to date have been very strong with Engine Management sales up 12% and Temperature Control sales up 17%. Consolidated gross margin dollars in Q2 improved $4.8 million to 25.9%, up 0.6 points. By segment Engine Management gross margin improved $2.5 million to 25%, up 0.5 points. The six-months margin is at 24.7% with further improvements planned in the second half as price increases are implemented in Q3. We continue to make good progress towards our stated goal to improve Engine Management gross margins to 27% to 28% levels.

Temperature Control gross margin improved $1.9 million to 24.6%, up 0.6 points. The six months margin is 22.4% and also within reach of our targeted margins of 23% to 24% on an annual basis. Consolidated SG&A expenses were $40 million or 16.4% of net sales in Q2. However, during the quarter we announced the termination of our retiree medical benefits program. The plan was previously amended back in 2005, and this amendment will cease employer contributions after 2016. Our liability has been reduced from $23 million to $7 million and will be less than $1 million by 2016. The actuarial valuation resulted in a one-time curtailment gain in the quarter of $3.6 million, which was recorded in the All Other segment of SG&A expenses.

Excluding this curtailment gain, Q2 consolidated SG&A expenses were $43.7 million or 17.9%, favorable 0.2 points. And on a year-to-date basis, consolidated SG&A expenses were $84.3 million or 18.2%, again favorable 0.9 points. Consolidated operating profit, excluding the postretirement gain, restructuring and integration expenses and other income net, in Q2 was $19.5 million or 8% of net sales favorable 0.8 points. For the six months, operating profit was $32 million or 6.9% of net sales favorable 1.1 points. A combination of higher gross margins and SG&A leverage allowed us to increase our segment operating profit margins for the six months year-to-date in Engine Management to 8.9%, up 1.6 points, and for Temperature Control 7.6%, up 0.5 points.

The net effect of our operational results as disclosed on our non-GAAP reconciliation was diluted earnings-per-share of $0.49 versus $0.38 in Q2 and $0.80 versus $0.52 for the six months year-to-date. We are very pleased with our results in Q2 as we converted a 5.6% sales increase into a 29% earnings-per-share improvement and for the six months converted a 13% sales increase into a 54% earnings per share increase.

Looking at the balance sheet, accounts receivable increased $47.6 million since December 10, but is actually down $20.9 million against June 10 levels. Inventory decreased $4.7 million since December 10 and actually decreased $8.5 million, excluding the $3.8 million from the BLD acquisition. We anticipate further reductions in the second half.

Goodwill and other intangibles increased $18.9 million since December 10, comprised of an increase of $20 million from the BLD acquisition less $1.1 million of amortization. Other assets decreased $9 million, primarily related to a reduction of $6.2 million in deferred taxes. This deferred tax reduction is for the postretirement amendment discussed earlier, which was also the primary reason for the $18.7 million reduction in other long-term liabilities.

Total debt at June 30, 2011, was $68.2 million, essentially flat with December 10 level at $65.6 million, despite our $27 million expenditure for the BLD acquisition. Debt levels are down $19.4 million since June 10 and would have been down roughly $46 million without the acquisition. Closing out our debt analysis, we currently have in excess of $125 million borrowing capacity under our revolver.

Lastly, from our cash flow statement, CapEx spending in the second quarter was $2.2 million and $4.6 million for the six months, and depreciation and amortization in the quarter was $3.6 million and $7 million for the first six months.

With that, I will turn it over to Larry.

Good morning, everybody. Obviously we are pleased with the results. Jim has covered the numbers. Let me just emphasize a few key points, and then we will open for questions. First, let's talk about sales.

As we predicted in the last call, our sales increase moderated in the second quarter. We had a first-quarter increase of 23%, but that was aided by the preseason orders in Temperature Control and some inventory buildup in Engine Management. In the second quarter, these factors no longer existed. Plus, we think some of these inventories were worked down. However, we still showed a 5.6% increase for the quarter and a 13% increase for the six months, and we believe these are nice healthy numbers.

I think Temperature Control requires a bit more explanation. From a customer point of view, the selling season is very short. In many parts of the country, it's only a few months. However, the buying patterns can vary significantly year to year, which means that quarterly comparisons can be quite misleading. We believe a more meaningful way to look at the business is to look at it on an annual basis.

Now, last year 2010, was the first hot summer in many years. As a result, many of us were caught short in terms of inventory, and there were significant loss sales at every level. To rectify that, in 2011 we offered a preseason program. Many people took us up on it, and that is probably the major reason why the first-quarter sales were so high.

Now our customers continued to report sales increases out the door in this line, and the recent hot weather can only help. However, as Jim said, customer inventories are in much better shape than they were a year ago, and as a result, we believe customers are going to start scaling back on their inventory in the next few weeks as the season starts to wind down. On an annual basis, however, we believe we will show a solid increase in Temperature Control for the year.

Now that is about sales, but now let's cover a few other things. The industry continues to do well as you see from the other public companies. The demographics remain strong with older car population, fewer car dealers, and these factors are going to continue in the years ahead.

Next, our margins continue to improve. As Jim showed, the result of increased volume, plus all the cost reduction efforts over the last few years, are coming to fruition.

Number four, our cash flow is strong. In the last quarter, we acquired BLD for $27 million. We redeemed the last remaining bonds for $12 million. Yet despite that, our bank borrowings remained relatively flat, which means our operating cash flow is very strong.

Finally, integration of BLD is proceeding smoothly. We maintain all the third-party accounts, and we are in the process of building bridge inventory for relocation to Reynosa, Mexico, which will provide additional cost improvements.

So, again, we are pleased with the results, we are pleased with how we are doing, and now let's open for questions.

(Operator Instructions). Tony Cristello, BB&T Capital Markets.

Larry, I just wanted to make sure I am clear, the impact on working down inventory from a seasonality standpoint only impacts the Temperature Control side of the business. The normal seasonality patterns experienced are seen on the Engine Management side should continue?

Yes, that is correct. The Engine Management is a much steadier quarter to quarter business. Yes, I was referring to Temp, not Engine Management.

Yes. As we progress through what has been a phenomenal cycle, is there anything that you think has changed dramatically across the supply chain in terms of how your customers are viewing keeping in stocks or managing levels of inventory? And I say that within the context of the second half of this year was a very, very strong point of sales or sales sell-through for many of your customers last year. So I'm just trying to understand how you may be factoring that in in terms of your planning for the second half of this year.

Well, as I understand your question, as I said, the Temp is a unique situation, and the Engine we don't see anything changing in the months ahead. (multiple speakers) Does that answer your question?

It does. And I guess, within the context if you think about the same store sales numbers in the face of rising gas prices and just lack of consumer confidence, is there anything that causes you some concern on a lack of visibility basis outside of what would be normal seasonality?

No, we don't see that. As I said, the basic demographics are strong. At least in terms of our line, we don't think the effect of gas prices is significant. We are not that mileage related, and we are not discretionary. So we feel okay with that.

Okay. When you look at the steps and measures you have taken on the core business to continue to manage the SG&A and the margins, if we talked about the gross margin side of the business, is it such that you still continue to think that that number moves higher up nicely year over year, and you are certainly up nicely sequentially from the first quarter? Are there any specifics that we should be paying attention to as we move into the second half of the year? Can you still show good gross margin expansion, and on a full-year basis, do you still think you can get to the goals that you mentioned before into the high 20s on the gross margin side of the business?

Yes. We think many of the points that will drive the key drivers for the gross margin -- and I will split them up between Engine and Temp -- are there and that we will be able to get further improvements. On Temp the pricing is always in at the beginning of the season, but the volume helps with the absorption, and we will always have cost reduction efforts, and that means that we are sourcing overseas and our move to Mexico.

Similarly with Engine Management, we have Q3 pricing going in, which will help the margins in the second half, and we have been more aggressive in building up our engineering talent to be able to achieve savings both from a make first buy and from global sourcing. So we think the initiatives that we have to drive margin are all positive, and we believe we can move towards the stated goals, 27% to 28% for Engine and 23% to 24% for Temperature Control.

And you mentioned the investment into engineers and such. Has that been an ongoing expense that you have just absorbed, or is there a period where we need to think about an incremental addition on perhaps the SG&A side? Because I mean the SG&A line you continue to do a pretty solid job of keeping costs in check, and I'm imagining as more and more of the processes and improvements are reflected from Reynosa and such that those numbers could continue to move lower?

Yes, we continue to always work on SG&A there, and there are variable expenses in there with sales. But then there is more of the fixed, call it, finance costs and other costs that are in there. But our engineering efforts and to deliver products make first buy, we have that all classified in our costs of goods sold. We basically started seeing the program at the beginning, the end of last year to beginning of this year. There is always a pipeline to be able -- you are incurring the costs ahead of time. So we see that as improvements coming forward. But we have gradually built that in, and we are absorbing those costs as we are today. We will continue to fund those costs, and we will get the savings in gross margin.

Okay and maybe one last question on the acquisition side of things. Is the environment just as good today as it was a few years ago, or has the supplier base strengthened given the strong results of the underlying customers such that it is a little bit tougher to get acquisitions done right now?

Well, we probably are always being contacted. There's always things in the marketplace, but we stayed within our two major product lines. We are very pleased with the BLD acquisition. We are always evaluating and looking at items. But I don't think the environment is any tougher. We continue always to look at things, and we are very prudent and conservative, and if we are able to complete any and it builds for the future, that is what we will do.

(Operator Instructions). At this time it does not appear that we have any further questions.

Okay. With that, I would like to thank everyone for joining our conference call today. Thank you.

This concludes today's teleconference. Thank you for your participation. You may now disconnect.