Standard Motor Products Inc (SMP) 2012 Q1 法說會逐字稿

Good day, and welcome to today's Standard Motor Products first-quarter earnings conference call. At this time all participants are in a listen-only mode. Later you will have the opportunity to ask questions during our Q&A session. Please note that this call may be recorded. It is now my pleasure to turn the conference over to Mr. Jim Burke. Please go ahead, sir.

Thank you. Good morning, and welcome to Standard Motor Products first-quarter 2012 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. While 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 could cause our actual results to differ from our forward-looking statements. I'll begin with a review of the financial highlights and then turn it over to Larry, followed by Q&A.

Our sales were behind in the first quarter as we predicted in our last earnings call, primarily for two reasons. First, Q1 '11 sales growth was up 23% due to customer pipeline orders in both Engine Management, Temperature Control; and second, a large Temperature Control customer elected to source some products direct from China.

While discussing top-line revenues, we are pleased to have completed our CompressorWorks acquisition earlier this week, which will add $60 million annualized volume to our temp business. Larry will discuss this acquisition in more detail after I review the financial highlights.

Consolidated net sales in Q1 '12 were $211.7 million. As a comparison against 2011 consolidated net sales were down $8.5 million or 3.9%. By segment, Engine Management net sales were $163 million, off $1.2 million or 0.7%. However, excluding 2012 sales from BLD and Forecast trading, which occurred after Q1 last year, adjusted net sales were $151.7 million, off $12.5 million or 7.6%.

Again, we believe this is the impact of very strong pipeline orders in Q1 '11 and expect the balance of the year to be favorable as our customers continue to report positive comparable same-store sales.

Temperature Control net sales were $45.3 million, down $8.8 million or 16.3%. The reduction is primarily related to a single customer's efforts to source direct from China. We estimate the 2012 impact at roughly $20 million reduction.

The CompressorWorks acquisition, with roughly $60 million annualized sales, should add approximately $35 million sales to our 2012 revenues.

Consolidated gross margin dollars in Q1 improved $1.4 million, up 1.7 points. By segment, Engine Management gross margin was up $3 million, or 2 points to 26.4%. Part of this improvement, $1.3 million, or 0.6 points, resulted from costs classified in SG&A expense in the quarter. That previously impacted gross margins.

The remaining 1.4 point improvement in gross margin reflects savings from purchase cost reductions and May 1 buy savings.

Temperature Control gross margin was down $1.7 million or 0.1 points to 18.9%. The margin percent held up reasonably well against last year considering the sales reduction. We anticipate returning to our targeted margins in the low 20%'s and look for further synergies as we begin to rationalize our CompressorWorks and Four Seasons businesses. However, the bulk of any savings from this effort will be in 2013 as we are already halfway into the air-conditioning season this year.

Consolidated SG&A expenses increased $4.1 million to $44.8 million versus $40.6 million last year. This increase was primarily related to Engine Management costs that benefited gross margin that we discussed of $1.3 million; non-cash intangibles amortization from 2011 acquisitions of $0.6 million, non-cash post-retirement amortization of $0.4 million. In essence more than half of the increase relates to a reclass and non-cash amortization totaling $2.3 million.

The balance of the increase of $1.8 million relates to 2011 acquisition-related SG&A expenses. In other words, our core SG&A expenses were flat.

Consolidated operating profit before restructuring and integration expenses and other income net was $9.8 million, or 4.6% of net sales versus Q1 '11 of $12.5 million or 5.7% of net sales.

Operating profits for both Engine Management and Temperature Control were down $1.2 million each. We anticipate improvements as we head into the selling season from improving sales and further cost reductions. In addition we look for incremental profits from our CompressorWorks acquisition.

The net effect of our operating results as reported on our non-GAAP reconciliation was diluted earnings per share of $0.23 versus $0.31 last year. Again, we believe this shortfall is temporary due to the prior year's 23% sales growth and expect to improve against prior-year results the balance of the year.

Looking at the balance sheet, accounts receivable increased $18.3 million from December '11 levels as sales are higher in Q1 versus Q4 last year. A/R decreased $17.9 million against March '11 levels as sales were down $8.5 million this year.

Inventories increased $11.8 million from year-end and increased $19 million versus March of last year. We will be working diligently to reduce inventory levels over the balance of the year.

Accounts Payable offset the bulk of the working capital increase and accounts receivable and inventory as accounts payable increased $21.6 million from December '11 levels.

Total debt, at $79.3 million, increased slightly, $6 million from December 11 and only $6.6 million from March '11 levels.

Over the last 12 months from April '11 to March '12, we've invested in the business and returned cash to investors by two acquisitions, BLD and Forecast in 2011 totaling $71 million, dividends of $7 million, share repurchase of $4 million, and capital expenditures of $11 million. This totaled the use of funds of $93 million over this periods, while our total debt only increased $6.6 million. As I mentioned earlier, this week we acquired CompressorWorks for roughly $37 million.

On a pro forma basis our debt level would have increased to approximately $116 million since March. This debt load is well below a 2-to-1 debt to EBITDA ratio, and we still retain roughly $75 million excess availability under our bank revolver.

From our cash flow statement, in the quarter, CapEx spending was $2.4 million and depreciation and amortization was $3.8 million. With that, I'll turn it over to Larry Sills.

Good morning. Jim has reviewed the numbers. I'm just going to cover a few key points, and then we'll open for questions.

The first is sales. Now I think the main thing to keep in mind is that in the short run, our sales are impacted by customer buying patterns, their plans for their inventories, do they want to increase it or decrease it or so on. That's in the short run, but over the course of the year, it balances out. And the main factor is how well the business as a whole is doing and how well our customers are doing.

Last year, as Jim said, we were up 23% in the first quarter, but we wound up the year 8% ahead, basically in line with customer sales. Now this year, our customers continue to do well. Industry demographics are favorable. The average age of vehicles are now over 11 years. Customers are reporting sales increases in our lines, so we are confident that by the end of the year our sales will mirror our customers' sales. And we expect our industry to do well. So that's the issue on sales.

Now I'd like to talk about the recent news, which is the acquisition of CompressorWorks. CompressorWorks is a relatively (technical difficulty) company, roughly 10 years old. But they have been very successful. They sell to some of the top accounts in the industry. They are the unquestioned leader in the US of the manufacture of new compressors, which is the fastest growing part of the business. And we have been pleased to see they have some very talented people and we are happy to welcome them to our company.

Now we see some substantial benefits in this merger. First of all it's going to give us a very strong product offering. Four Seasons is the leader in rebuilt compressors. CompressorWorks is the leader in new compressors. Put those together, that's a very strong combination.

We also see the benefit of -- for significant savings, savings in purchasing, lower manufacturing costs, synergies and SG&A, but as Jim pointed out most of these we won't see until the following year. But we do believe that they are there. So overall we are confident that CompressorWorks is going to turn out to be a very valuable addition to our company.

Now this marks our third acquisition in slightly over a year, and we are pleased with the results. First of all, as Jim pointed out, we have been able to finance them essentially out of cash flow, and at the end of this third acquisition our debt to EBITDA ratio is still below 2 to 1.

More important, they are integrated and doing well. BLD and Forecast are achieving their targets, and we are confident that CompressorWorks will do at least as well.

What all three of these have in common we believe is that they are what we call bolt-on acquisitions. In other words, they are closely related to existing product lines. These are products that we know, markets that we know, customers that we know, and we think that gives these a very high chance of success, so that sums up the first quarter.

The industry is doing well; our customers are doing well; we are pleased with our acquisitions; and we look forward to the balance of the year. And with that we open to questions.

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

Good morning, guys. Congratulations on the CompressorWorks acquisition. It looks like a great one here. Speaking about acquisitions and just how active you've been over the course of the last year, what do you think has changed within the marketplace where you're getting to prices that you find attractive? Have multiples compressed? Have you guys decided to pay more? What's going on?

Well, one thing, I haven't changed, Brian. I try -- it gets competitive as we sell products. We buy and sell -- there's many businesses that are for sale. Our coin it sweet spot, what we look for, as Larry said, are bolt-on acquisitions, and the last three that we did are right in our Engine Management, Temperature Control programs, what we believe to be fairly priced. And again, products we sell to the customers we know, and we look to get the combined sourcing and leverage on new products that we can bring to market with it. So no change. the health of our balance sheet affords us the ability to do these type of acquisitions and we are very pleased to be able to grow the top line.

Okay. So that's the good news. The bad news is it looks -- or you said you lost a Temperature Control customer just from direct sourcing. Can you talk about that for a second, what were the circumstances that led to that decision for the customer to leave and maybe how big that was?

Okay, well we really talked to you about that at the previous call. But what led the customer to make that decision, we believe, what they told us, is they saw the opportunity to buy cheaper. So our response to that has to be that we have to minimize the price differential between buying from us and buying from China. And we are working very diligently to do that. We are confident we can do that.

The acquisition of CompressorWorks, because that's the big one, is new compressors -- will help us do that. And we believe that as long as we can remain price competitive with China, all the benefits that we offer, the quality, the customer service, returns, sales support, etc. will help us keep that business. And the proof of that is that no one has followed them. So that's the story there.

Okay, great. And if I can ask just one more, we've seen a pretty strong shift out of some of the other aftermarket manufactures towards value-line products, which you guys have obviously talked about for a while now. What does a new compressor sell for relative to a remann'ed one?

Well, that's a very good question. The gap is narrowing, which is why new compressors are rising and rebuilt compressors are falling.

The sort of a rule of thumb in the industry is that a rebuilt needs to be at least 30% below the price of the new. Otherwise people are going to go to the new. That is diminishing now. It's 15% to 20%, I'm guessing -- it varies by part, obviously. But the gap is narrowing, which means the ratio of new to rebuilt is switching in favor of the new. This is an area where CompressorWorks will help us, because they're the leader in that. They have very low cost manufacturing. And as the market tends to switch to new, away from the rebuilt it's going to put us in a much better position than we would have been. Does that answer your question?

That's great. Thanks for the color, guys.

Robert Smith, Center of Performance Investments.

Good morning. What are the opportunities for expansion of CompressorWorks? Are they geographically if any -- one of the opportunities or --?

Well they happen to be very conveniently located; they're about a half-hour from Four Seasons. So we anticipate a lot of help as we go back and forth with each other. And again we have very high hopes for this combination.

What's been their approximate growth rate over the last few years?

I don't know; it's been the last few years.

It has been significant. As Larry had said, they are a young company. They started from scratch only about 10 years ago (multiple speakers) $60 million now.

They've gone from $0 to $60 million. That's the -- to use a car phrase. They've gone from 0 to 60 pretty fast.

All right. Okay. Hey, guys, when you look at the dividend, what's going to -- what are you going to have to see to kick the dividend a little?

Well, we just raised it from $0.07 to $0.09. And we will continue to look at it with our Board of Directors.

Well, so you have a target of about a third of a payout, so what would you have to see this be comfortable to, say, go to a $0.40 annual rate?

Well actually I have to continue to grow the earnings. And we will -- and as I say we will continue to monitor that with our board. Yes, that remains our target -- one=-third. We have been under that and we like being a little under that, but, yes, that is our stated target.

Thanks much. Good luck.

Adam Brooks, Sidoti & Company.

Good morning, guys. Just a few quick questions here -- with CompressorWorks can you talk about the margins maybe comparing it to your Temperature Control segment right now?

Hey, good morning, Adam. You can look at the margins, gross margin, SG&A. It would be mirroring our existing Temperature Control business.

Okay. And then if we look at SG&A as a whole, is it fair to assume that core SG&A remains flattish year over year for the remaining three quarters or is there something that could cause that to pick up?

The only thing we pointed out in our earnings call at the end of the year was that there were two items that were increasing there.

Right.

One was a one-time curtailment of $3.2 million in post-retirement expense. And then the other amortization costs were going up about $2 million on an annual basis. So you need to adjust for those two facts when you look at the SG&A.

And then the volume-related as we have factoring fees with our customers that is charged in SG&A. Other than that we continuously work on the core expenses within. We'll get increase for the acquisition-related expenses that we did. Again, Forecast trading didn't happen until the end of the October last year, so that's incremental to this year, and now CompressorWorks will be incremental.

And if we talk about the value-line products for a second, I know you made a recent acquisition to kind of expand into that line. There was another aftermarket compare that talked about a negative product mix as being more value lines hurting them on the margin side, but you guys talked to it being pretty similar.

Does it really break down to different product lines? There's a different margin differential from the premium to the value for you guys; is it pretty much net neutral whether it's the value line or the premium line?

Well, the trend is there; there's no question. The trend is there as I believe the car population continues to get older, so you're driving a 13-year-old car, you want to save money on your parts. So that trend will continue, we believe. And yes, we think that the -- two of our most recent acquisitions are helping us in that field.

Forecast in Engine Management, and CompressorWorks for Temp, are both proving successful in competing in this economy line, lower-margin area -- so -- lower price area, I should say. So yes, the trend is there, and that is really one of our motivations for these acquisitions. It's going to be there; we want to do well with it. These two acquisitions will help us.

And just if I could sneak one more before I hop in the queue, can you maybe give us a sense for what year-over-year revenue comps would look like in 2Q, maybe by segment?

Yes, Adam, we don't put out specific guidance on that. Again, I think what -- we are looking to hopefully improve the balance of the year, mirror our customers and then it's just adjusting for the acquisitions that we had.

Okay. So 2Q will look more normalized basis versus the negative impact from the kind of inventory build last year.

Yes.

Okay. Thank you.

You're welcome.

Aditya Oberoi, Goldman Sachs.

Great, thanks a lot. Hi, guys.

I just had a follow-up question on the CompressorWorks acquisition. You guys said that you guys will benefit from lower manufacturing costs after you fully integrate the businesses. Is it primarily like just achieving synergies in the business, or you will probably think of a manufacturing footprint change as well, making it more in sync with your footprint of shifting stuff towards low-cost countries?

Well, we really have not formalized the plans as yet. We're just getting started with these people. But what we see immediately is that they are more basic than we are in new compressor manufacturing. And that is going to be a help.

Now how much of that help will be achieved in the year 2012, as Jim says, the season is half over already. So I think there are some important benefits from the cost side, but we will not -- and we will see them but we will see them in 2013.

Got it. And I just wanted to drill down a little bit on the mix shift towards more value product. I know part of your SG&A is tied to the revenue of -- or the revenue that your distributors or your selling associates generate. Is it somehow tied to the mix of the products they sell or no?

In our SG&A expenses?

Yes, yes.

No, no. Virtually very little. Again, a large part of our SG&A to understand is sales and marketing, so there will be a little bit of variable expense in there. Our distribution costs, which is indifferent if the part sells at a center, 20% premium or discount, and then our G&A costs.

Okay, great. Thanks a lot, guys.

(Operator Instructions). Adam Brooks.

Real quickly, I think last quarter you talked about a $15 million to $20 million impact from that customer leaving for direct sourcing. Can you tell us how much of that hit in 1Q?

You could figure roughly half of the -- we are figuring targeting $20 million now and figure half of it.

And Adam, I just wanted to point out -- I was going to call you afterwards -- you asked me on the SG&A expenses; the incremental I pointed out was the post-retirement. The other item that I wanted to mention that came back to me would be the intangibles amortization from our acquisition. So I'll have an increase in that area also within SG&A expenses.

Okay and just --

Both be in non-cash.

Right, and just to kind of summarize, what would be the quarterly run rate for those non-amortization charges?

We are probably somewhere with the latest acquisition, we'll probably be in the $500,000 range per quarter. That may be a little on the high side.

Okay, thank you.

All right. You're welcome.

(Operator Instructions). Another follow-up from Adam Brooks.

Hello, again. I guess could you talk maybe about possible international expansion long term? The aftermarket seems to be very tough in Europe because of the scrappage programs. Is there any opportunity to maybe pick up an asset on the cheap tent of the market, or is that not something that you've considered?

Well, we look at everything and we will continue to look at everything. We've been to Europe. We had a company called Intermotor and we were there for I'm guessing 10 years. We did well for a while, but then we sold it.

And we think that we do best in markets that we really know and understand. And that's more important to us than the fact that the initial purchase price is low. What really matters is how well you do with it. But I don't want to say no to anything at this point. We will continue to look.

Okay. Thank you.

(Operator Instructions). And it appears, gentlemen, we have no further questions at this time.

Okay. With that I'd like to thank everyone for joining our call today. Good bye.

This does indeed conclude today's teleconference. Thank you for your participation. You may now disconnect.