Standard Motor Products Inc (SMP) 2011 Q4 法說會逐字稿

Good day, everyone, and welcome to the Standard Motor Products fourth quarter earnings call. (Operator Instructions). It is now my pleasure to turn the call over to Mr. Jim Burke, Chief Financial Officer. Please go ahead, sir.

Okay. Thank you. Welcome to Standard Motor Products fourth quarter 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 included 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 expectation 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 they will prove correct.

You should also read your filings with the Security 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 highlight then turn it over to Larry followed by Q&A.

We are very pleased to report 2011 financial results having achieved record sales and profits for our stakeholders. Consolidated net sales in Q4 were $174.2 million up $1.2 million or 0.7%. And full year were $874.6 million up $63.7 million or 7.9%. Larry will go into more detail about sales. By segment Engine Management net sales in Q4 were $139.4 million up $5.5 million or 4.1%. Full year Engine Management sales were $628.7 million up $51.3 million or 8.9%. Inclusive in the Engine Management sales for the full year were $11.8 million sales from acquisition. Excluding the acquisition sales of $11.8 million the 2011 full year Engine Management sales increased $39.5 million or 6.8%.

Temperature Control net sales in Q4 were $31.8 million down $4.6 million or 12.6%. Throughout 2011 we stress the fact that our Temp Control business was seasonal and quarter to quarter comparison may not paint the overall picture of the business. This was especially true when we cautioned back in Q1 with a new spring promotion program when sales were up 35%. For the full year 2011 Temp sales were $233.7 million up $11.6 million. The 2011 Temp Control season was very good up 5.2% considering this increase followed one of the hottest seasons on record in 2010 when sales increased almost 13%.

Consolidated gross margin dollars in Q4 improved $2.9 million to 27.8% up 1.6 points. For the full year it improved $21.5 million to 26.2% up 0.6 points. By segment Engine Management gross margin in Q4 improved $3.4 million to 26.6% up 1.4 points. And the full year improved $16.8 million to 25.6% up 0.6 points.

We believe the two acquisitions completed during 2011 along with savings from make first buy projects and low cost sourcing will further benefit gross margin percentage improvements in 2012. Our stated target is to achieve 27% to 28% gross margins in Engine Management. We are within 140 basis points of the 27% low end of the range. Temp Control gross margin in Q4 was down 600,000 due to a sales decrease. However, the margin percent improved 1.3 points. Full year Temp Control gross margin improved $3.6 million to 23.5% up 0.4 points. Our stated targets in Temperature Control is to achieve 23% to 24% gross margins. In 2010 and 2011we were within that range at 23.1% in 2012 and 23.5% in 2011. Looking to improve further on our 23.5% in 2011 our plans to transfer new compressor assembly to Mexico, and look for additional low cost sourcing opportunities.

Consolidated SG&A expenses in Q4 were $41.5 million or 23.8% of net sales unfavorable 1.3 points. The fourth quarter SG&A expenses increased $2.5 million versus Q4 2010. Primarily from our Engine Management acquisition inclusive of $0.5 million intangible amortization. For the full year SG&A expenses were $163.8 million or 18.7% of net sales favorable 100 basis points. 2011 SG&A expenses benefited from our post retirement amendment midyear generating a $3.6 million curtailment gain. Excluding the 2011 curtailment gain, SG&A expenses would have been 19.2% of net sales or 0.5 points favorable. As we look to 2012 SG&A expenses, I want to highlight a few non cash incremental items that will increase 2012 expenses. The one I just mentioned the post retirement curtailment gain of $3.6 million. Of the post retirement amortization of $2 million and additional intangible amortization from our acquisitions in 2011 another $2 million. So there will be $7.6 million over the 2011 expenses for non cash incremental expenses.

Consolidated operating profit before restructuring and integration expenses and before other income net were $65.3 million for the full year. However, adjusting for the post retirement curtailment gain of $3.6 million consolidated operating profits were $61.7 million or 7% of net sales compared to 2010 $48.2 million or 5.9% of net sales. This reflects a 110 basis points improvement. The net effect of our operational results as disclosed on our non-GAAP reconciliation was diluted earnings per share of $0.17 in the quarter versus $0.11 in Q4 last year and a $1.57 year-to-date versus a $1.07 for the full year 2010. This reflect converting a roughly 8% sales increase into a 46.7% diluted earnings per share increase.

Our GAAP to non-GAAP reconciliation included some significant items in Q4 and full year. They included reductions in restructuring and integration expenses , post retirement curtailment gain, gain from a sale of a joint venture interest, gains from sales of buildings, and lastly a significant tax provision benefit of $24.3 million in Q4 and $24.7 million for the full year. This tax provision benefit is a nonrecurring, non cash benefit primarily related to the reversal of a significant portion of our US deferred tax valuation allowance and other tax adjustments.

Looking at the balance sheet. Accounts receivable in inventory were in line with 2010 considering the acquisitions 2011. The two acquisition; BLD products completed in April and Forecast Trading Corp. completed in October accounted to the increase in Goodwill and other intangibles of $45 million and also the increase in debt. Total debt was $73.3 million at December 2011 versus $65.6 million at December 2010. Excluding the $70.5 million spent on acquisition we would have reduced debt roughly $63 million during 2011 to below $3 million. Our year end debt of $73.3 million reflects a debt to EBITDA ratio of a very comfortable 1 to 1. On August 29th, we announce a share buy back program for $5 million. To date we have acquired roughly 320 shares at an average cost of $12.84 and have roughly $900,000 remaining available against our $5 million authorization limit.

As we previously stated, we amended our bank facility in Q3 2011 reducing our borrowing cost a 100 basis points and extending the maturity to March 15. At December 11, we had $73 million outstanding against this $200 million facility with $83 million additional borrowing capacity available. Lastly our CapEx for the quarter was $4.3 million and $11 million for the full year. Depreciation and amortization was $3.7 million for Q4 and $14.1 million for the full year. Thank you. I will turn it over to Larry.

Good morning. Jim has gone over the numbers, and I will cover a few of the highlights and then we will open for your questions. We are obviously quite please would 2011. We had record sales. We had record profits . We had improvement in both division Engine Management and Temp. We had improvements in nearly every category; sales, gross margin, operating profit, cash flow all showed nice improvement.

We made two fine acquisitions in April. We acquired BLD, a basic manufacture of significant emission control products. This business has now been relocate to two of our facilities. One in Reynosa, Mexico. One in Independence and we are now a basic manufacturer in this important group of products. That is going very smoothly. In October we acquired Forecast Trading Company. They are the leading supplier to the after market of an economy line Engine Management products, because of the aging car population economy lines are increasingly important and they are the number one line in the business, and we are happy to have them as part of our Company. Both of these acquisition will make us stronger, both are now fully integrated and up and running, both will be accretive to earnings in 2012.

Cash flow from operations was very strong it was roughly $75 million. This enabled us to make these two acquisitions with a minimal increase in debt, and we were able to close out the year with a very healthy 1 to 1 debt to EBITDA ratio. The cash flow enabled us to increase our dividend from $0.07 to $0.09 a quarter, and enabled us as Jim mentioned to initiate a stock buy back program for up to $5 million. So added all together 2011 was very strong.

Now looking ahead to 2012. We are optimistic going into the year, but we did mention two points of caution, so why don't I start with them. First, the first quarter is going to have quite difficult comparisons with last year's first quarter. Last year, if you recall, we were ahead as a Company 23% at the end of the first quarter at the time we announced this was not normal it was the result of some higher than usual pipeline orders in both Engine Management and in Temp. Our customers worked these inventories down during the balance of the year, and we wound up with an 8% increase. So that was the last three quarters work down from the 23% down to 8%.

This year the pipeline orders are more in line with historical levels, and this will obviously effect the first quarter comparisons. That is really a one time event. The second thing we pointed out was that one of our major retailers has begun purchasing certain air conditioning products direct from China. We estimate this is going to have a negative impact in sales for the year, something between $15 million and $20 million. However, this is balanced by some new Engine Management business that we have gotten that is going to begin in the second quarter, roughly $8 million to $10 million annualized, plus we will have the benefits of our two acquisitions for the full year.

So overall we are optimistic going into 2012. The industry demographics remain very strong. Our customers continue to do very well in our product lines. We continue to make improvements in cost reduction, and we will have the full year benefit of the our two acquisitions. With that, we are happy to take your questions.

(Operator Instructions). We will go first Aditya Oberoi with Goldman Sachs. Please go ahead.

Great. Thanks a lot, guys. My first question is a more of a housing keeping one. What was the normal tax rate in the fourth quarter excluding all those one time items?

I'm looking it up. It was probably in the 39.5%.

Okay. Which was a little bit lower than your guidance of 40% to 42%, right. How should we think about it going forward?

I would say we would be targeting a 40% tax rate consolidated.

Great. Very helpful. I had a question, Jim, you outlined a couple of factors that should help your margins further in 2012 on the Temperature Control side like shifting the compressor assembly business to Mexico and looking for other sourcing opportunities. Can you highlight some factors that would drive margin in the Engine Management side?

On Engine Management we are going to get the benefits of the two acquisitions, and the BLD one was even completed. Larry mentioned we transfer that. The bulk of that went to Mexico and also to Independence. Those two acquisitions will help. The Forecast Trading which is more of a economy line that is fully sourced will be coordinating with the vendors from Forecast and from Standard Motors taking the best end of either on and also looking to bring in house manufacturing that will benefit us also. But an ongoing basis you can always think about we have a pipeline of projects we are always working on from engineering to bring in house manufacturing and that is an ongoing basis. So we will get savings from make first buy and the other one is from a procurement savings in the Far East. A number of initiatives in Engine Management.

Very helpful. On the Engine Management, again, will you guys see some SG&A benefits as well as you (Inaudible) to acquisitions?

Yes. As the sales grow over the last couple years we gain significant leverage on the business, so we will be looking for additional savings in there. The non cash items I pointed out were significant enough for 2012 to think about those as a percent will incur additional expenses for the acquisitions on incremental sales of about $30 million to $35 million, but then we will be looking for other savings throughout the organization.

Great. And maybe this last one is for Larry. Larry, you mentioned that you guys lost one of the Bay customers to the customer deciding to source their products from China. How much do you think this has a spill over effect on other customers also starting to think on those lines. Basically what I am trying to get at is traditionally you moved out of some of the business that were really low key in technology and I'm trying to understand if it the whole technology landscape (Inaudible) coming from China has moved up?

Okay. That is a very good question, and we were expecting that question. First of all, as we have said many times China is a competitor. They are a competitor more in Temp than in Engine Management because the Engine Management line is more spread out. There is a lot more part numbers, and it is a lot more high tech. Air conditioning is more concentrated and relatively fewer part numbers and these are easier parts to manufacture. Temp we see more competition in Temp than in Engine. Now, this is not a new phenomena. Temperature Control products have been coming out of the China form many years. In the past several of our customers have attempted to do that and frankly, in a year or two they decide to come back because they have come to the conclusion that the issues of long lead times and returns and all this stuff tends to eat up their potential savings . Our strategy -- we are not going to ignore China. It is a obviously a major competitor for us now as for most American companies. Is that it is two-fold really to just be the best possible supplier we can be in terms of quality , in terms of customer service, in terms of fast turnaround on orders. And to keep working on costs, so that if -- we feel that if we can get to within 10% to 15% of the China cost and we can do that. We feel between a combination of automation and manufacturing in our low cost facilities in Poland and Mexico if we can get to within 10% to 15% of China costs to balance against all the benefits we offer, we are confident going forward. That is basically our strategy with China.

Great, very helpful. Thanks a lot guys.

Thank you.

We will go next to Greg Garner with Singular Research. Please go ahead.

Good morning , gentleman. A question about the Forecast Trading. Did you mention that the manufacturing is sourced already? I just want to understand what exactly you mean by that. That is not something in other words that you can source to Mexico and improve the margins on that?

Let me just say Forecast Trading is a total purchase product and resale, so our opportunities choices will be to consider vendors that we have, vendors they have, and also the product families that we have where we are manufacture . So, yes, we will be looking for product to go into our low cost manufacturing locations which we identify as both Mexico and Poland. So we will get benefits from that and also the combination of volume with our vendors.

And the $8 million to $10 million in Engine Management business expected to start in the second quarter is that associated with Forecast Trading or is that something else?

No, it is different. That is just overall product category that we gain new business in 2012.

Okay. And the way the gross margin were strong in the fourth quarter. It is safe to assume there is no price discounting from volumes, and as I remember in the last -- first quarter of 2011there was with the higher volume in the first quarter there was some volume discounts given and since we are going back to a more normal order pattern it looks like for 2012 it seems to me that margins would be stronger than they were last year as result?

Yes, let me. Really what we did last year and it is focused on the Temperature Control line, we implemented a spring promotion program. So it was really if they ordered early and they had the product available so this way the repair could be done as needed there was a discount offered on the Temperature Control line. That was really the only discounts that were offered in there. That program will continue in place this year. There should be no disparity quarter-over-quarter on pricing or adjustments on that.

Okay. And what can you tell me to understand how Forecast Trading fits into the product line. This is a totally new segment, but apparently it a higher growth area than the traditional high end products, and is this an area where you might be looking for additional acquisitions, is this an area that you see more opportunity here? I just want to better understand your thinking.

Let me try to explain it. We already have an economy line.

Okay.

But the belief was , and it was a proper belief, that these guys were really the experts at it. And they had developed some excellent sources, they had product differentiation, and we felt this was a good vehicle to ride on, a good horse to ride on, in this growing part of the market. We don't envision any further acquisitions here because these guys are covering their landscape very well. That was the benefit. So we had an economy line they had an economy line, frankly, we like there economy line a little better. And as we are looking at combining some of the purchasing for cost savings that will be even a further improvement. So does that answer your question?

Yes, it does. Are there opportunities with the acquisitions for some product line extensions too?

No. It is a pretty broad line as it is.

Okay. Okay. All right. Thank you.

Thank you.

We will go next to Walter Schenker with MAZ Partners. Please go ahead.

Hello. For a change I'm not traveling on your call.

Good to hear from you.

Your thoughts on what sort of the target you might have this year on raising prices if any?

Okay. Well, let's put last year and this year I will give you both, how is that? We have had to make some adjustments again due to competition from China, and the pricing in 2011 netted out to about a 1% increase. We feel that again, we have to deal with the pressures we are forecasting of similar increase in 2012 for both lines.

Okay. I won't get into our discussion about allowing the tail to wag the dog. I will just leave it at that. In regard to the customer you lost for air. You lost the whole account or just the high volume items in the account?

Yes. The latter. We certainly did not use lose the account, they are still a very large account. They don't make all the products in China, so you lose the more popular ones the easier ones for them to make. And not all the product categories either. It was a part of the line that is all. A part of the line.

So they cherry picked a piece of line?

Correct.

And decided to source in China?

Correct.

And lastly what is going on -- I mean for years you talked about -- I know you made some small acquisition , but they really haven't been the significant type of opportunity you had hope for, and, oh, yes, obviously the suppliers are all doing a lot better now, the auto companies are doing better now, although this is still tertiary to the main thrust of what they are doing. Is this something sort of is always out there on the horizon, but will probably never be fulfilled? Meaning a significant acquisition of OES.

That is the question.

That is the question. I am sorry.

No, that they will never be fulfilled I can't answer that. But we still look upon this as a growth category for us. It is a good extension of our regular business. We are looking. We are going to be prudent about it. When we see something that is good, we will do it. If we see something that is not, we won't. We continue to look, if that is your question.

Okay. I won't waste time on what people look at and what they actually do. And, lastly, on air. Given your ability to re manufacture and your cost in Mexico. Why is China meaningfully then you can bring stuff in from Mexico all in including the re manufactured piece?

All right. I over simplified. Segment the line into new compressors and rebuilt compressors. We can rebuild a compressor in China and do that for about an average of 15% to 20% below a new compressor coming in from China that we can do. And as long as we continue to do that our rebuilt business will be quite strong. And we still sell roughly have of the compressors we sale are rebuilt, and that will always be a major edge for us.

The other half it the of the business is new compressors and that is the one where they China stuff is cheaper. Now, it is not as cheap the rebuilt, but it is cheaper than US rebuilds and customers do like a new compressor if they have a choice and the price is close. So the competition that we have been discussing here is about new compressors. And here we say we are beginning to manufacture them. Heretofore all we have done is buy them. We can manufacture and assemble them in Mexico. This is a process that is just starting, and with that we can get within close enough to the cost of bringing one in from China that we feel comfortable that we are going to hold the vast majority of business. Does that answer your question?

It generally does. Although I am sort of surprised given the history of air and returns and I know that at least one of your customers had a big problem with that is not another major negative factor in bringing in from China.

Right. These are the things on our side, and we are pretty comfortable that we are knowing to be able to do fine. There are a lot of the issues in buying from China returns is a big one and the fact that it is a highly seasonal business is another one. So we are okay with this.

Okay. Okay. Thanks a lot, Larry.

Okay.

We will go next to Adam Brooks with Sidoti & Company LLC. Please go ahead.

Yes, good morning. Just a few housekeeping questions at this point. If we look at SG&A , can you take out -- you mentioned about $0.5 million intangibles any other costs in SG&A that were associated with the acquisitions because SG&A did seem a bit high? Usually there a sequential decline from 3Q to 4Q .

Well, the total amount that increased was $2.5 million. A $0.5 million was intangibles, and then there would have been incremental expenses for the acquisitions that were in there. So besides that it is just a little bit of noise with timing.

Okay.

Nothing significant . No incremental cost or any change in the dynamic of the SG&A expenses.

And can you give us a sense of how much revenue you got from BLD and Forecast in the quarter?

It was approximately $7 million.

Okay . And real quick going back to China. You mentioned you will be happy if you can get to within 10% to 15% of the China costs. Can you give us a sense of how far you are from that at this point?

Well, it varies by product but we are getting better and better.

Okay. Thank you.

Your welcome.

(Operator Instructions). We will go next to the site of Robert Smith with the Center for Performance Investing. Please go ahead. Your line is open.

Good morning, thanks for taking my call. Also grateful for the dividend increase . Just wanted to reassure myself that your policy is a third of earnings to the dividend?

Yes. Thank you ,Bob. Our policy is with a target of one-third of earnings per share. We are obviously under that right now, and we will continue to evaluate it as the year goes on. But that is our stated target, one-third.

Larry, looking at the future where you are now in a few years you could be a $1 billion top line Company . The question is where would the margin target be on a longer term basis? I know we spoke of the gradual increase in margins and you were kind of (Inaudible) high end.

I think Jim has mentioned our margin targets.

Right. I think to think of it the overall picture where the industry is a very competitive industry and we are a very large player in it. Right now in the Engine Management we are at , I think I said 140 points at the low end of the range there and roughly 2.5 points on the high end. We continue to strive to make that, and hopefully at some point be able to move that range up. Temperature Control we have had two very good seasons. We are right in that mid range. We don't stop. That was just guidance we wanted to provide going back 2 or 3 years because this is where we felt we could bring the business. We are very close, and we will continue to look for cost reductions.

On the acquisition front what is most important to you looking at a perspective acquisition? What are the criteria that you use?

I have a pretty simple criteria. It either has to make us better or we have to be able to make them better. Therefore the key thing we look at is synergy's. And in these last two they both made us better and they both had synergy's. The BLD made us basic in a key product group, and then we were able to have additional savings as we relocate it to our factories especially in Mexico. And the Forecast OEM made us stronger in this growing segment of the business, and we anticipate synergy's there as well especially in the cost of good (Inaudible). So that is what we look at. These were two in my mind ideal acquisitions, and that remains our criteria.

And the opportunities out there?

Yes, there are opportunities out there.

Okay. Thanks much. Good luck going forward.

Thank you.

We will go next to Efraim Levy with S&P Capital IQ. Please go ahead.

Good morning. As far as the impact of the air conditioning parts shift is that an immediate effect or is there a lag before the actual sales and also is that a little lower margin business that you are losing and you will replace some of that $8 million to $10 million it would be higher margin than you lost?

That number we gave you was our estimate for the net effect in the year 2012. Okay.

But would you see it in the first quarter. Did they drop the business already?

You will see a bunch of it in the first quarter, yes. A year ago their were heavy pipeline orders and this year there are not. So, yes, a hunk of that will be seen in the first quarter. I forgot your second half.

Turns in margin. Is that margin improvement --

It had a slightly lower margin than much of the line because we were really buying them and selling them. So it had somewhat lower margin then some of the rest of the products, yes.

I think the other part there you can look at the loss business it would mirror think of it as the margin on Temp and the 23% and the gains on Engine that we are getting which is a 1 point or 2 point higher. So if you look at it they would mirror the margins that we report for the Engine Management and Temperature Control. So the new business i.e. had a better 1.5 or so margin on it then what is going out.

That is what I suspected. I wanted to confirm. And as far as you mentioned the gas price as a potential negative. Is that because of the fewer miles driven and less wear and tear and thus less replacement? What is the role of gas prices?

Our feeling on that and you are hearing that when you are hearing any of the public companies in our industry they are always mentioning effective gas prices, so here is just our personal beliefs. Our personal belief is that unless there is a dramatic spike higher than today say in excess of $5.00 a gallon something like that people will not significantly change there driving habits. So if the amount of mileage drops 1% to 2% say because of the higher prices which is roughly what it drop in the year 20011 for our particular product groups there is essentially no impact. So our feeling is that unless it really gets high, the impact on our business on our product lines will be minimal.

All right. Thank you very much.

Thanks.

(Operator Instructions). And it appears we have no further questions.

Okay. With that, I want to thank everybody for joining our call today. Thank you.

This does conclude today's teleconference. You may now disconnect and have a wonderful day.