Standard Motor Products Inc (SMP) 2012 Q2 法說會逐字稿

Good day and welcome to the Standard Motor Products second-quarter earnings release conference call. It is now my pleasure to turn the conference over to Mr. Jim Burke. Please go ahead.

Thank you. Good morning and as Clint mentioned, it is our second-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 such 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 will begin with a review of the financial highlights and then turn it over to Larry, followed by Q&A.

Overall we are very pleased with our Q2 results. Three key highlights from Q2 2012, revenues up 10.2%, the benefit of recent acquisitions; operating earnings per share up 20.4% from $0.49 to $0.59; and debt reduction of $25 million from operations. However, total debt increased as we made two investments in quarter two, $5 million share repurchase program and $38.6 million acquisition of CompressorWorks. Larry will go into more detail on our recent acquisitions after I review the financial highlights.

Our consolidated net sales in Q2 2012 with acquisitions were $268.9 million, up $24.9 million or 10.2%; without acquisitions, $245.1 million, up $1.1 million for 0.4%. By segment, Engine Management net sales in Q2 2012 with acquisitions were $172.6 million, up $12.7 million or 8%; without acquisitions, $162.5 million, up $2.6 million or 1.6%.

Temperature Control net sales in Q2 2012 with acquisitions was $93 million, up $13.3 million or 16.7%; and without acquisitions, $79.4 million essentially flat versus $79.7 million last year. We are pleased with the Temp sales performance. First, the organic sales growth from the start of the warm summer season offset any loss from a major customer that elected to direct source. Second, with the acquisition of CompressorWorks, Temp sales grew $13.3 million or 16.7% from the impact of only two months in the quarter from the recent acquisition.

Consolidated gross margin dollars in Q2 improved $6.2 million at 25.8% versus 25.9% last year and for the six months improved $7.6 million at 25.8% versus 25.1% last year. By segment, Engine Management gross margin dollars in Q2 were up $6.3 million, up 1.8 points to 26.8%. For the six months, dollars were up $9.3 million or 1.9 points to 26.6%. We are essentially moving within our stated goals for Engine Management gross margins of 27% to 28%.

Temperature Control gross margin dollars in Q2 were essentially flat and dollars for the six months were down $1.5 million. Temp Control gross margin percentage in Q2 was 21.4% and for the six months, 20.6%. Negatively impacting the Temp Control gross margin percentages were the amortization of manufacturing variances from Q4 last year and Q1 this year as we were reducing production volumes to cut inventories. However, production levels have increased significantly with the demand from the warm season and we expect margins to improve in Q3 and Q4. Also temporarily reducing Q2 margins was the impact of CompressorWorks acquisition due to stepped up inventory valuations that will be amortized over the months May, June, and July.

Consolidated SG&A expenses in Q2 increased $6.6 million to 17.3% of net sales versus 16.4% last year and for the six months increased $10.7 million to 19% of net sales versus 17.4%.

In the prior year, Q2, we recorded a curtailment gain of $3.6 million from the amendment of our post-retirement plan. The $10.7 million year-to-date SG&A increases comprised of a curtailment gain for post-retirement of $3.6 million, other post-retirement amortization of $1.1 million, amortization for intangibles from recent acquisitions $1.4 million, and a cost of sales reclass discussed in the first quarter of $1.6 million. So of the $10.7 million, $7.7 million of it was non-cash and a reclass.

Incremental acquisition SG&A expenses were $5.2 million, leaving a net all other SG&A expense reduction of $2.2 million favorable for controlling expenses. In addition, we anticipate further savings from the acquisition incurred SG&A expenses in 2013 as we integrate the operations.

Consolidated operating profit before restructuring and integration expenses, the prior year post-retirement curtailment gain of $3.6 million, and other income net, in other words operational operating profit in Q2 2012 was $22.7 million or 8.5% of net sales favorable 0.5 points and for the six months, operating profit was $32.5 million or 6.8% of net sales, down 1/10th of a point.

The net effect of our operational results as reported on our non-GAAP reconciliation was diluted earnings per share in Q2 2012 of $0.59 versus $0.49 last year and six months of $0.82 versus $0.80 last year.

As we stated during our Q1 conference call, we expected improved results over the balance of the year against the prior year. To date we made great strides in Q2 to catch up year to date and look for additional improvements in the second half of 2012.

Looking at the balance sheet, accounts receivable increased $53.6 million from December 11, a combination of our seasonal business and our CompressorWorks acquisition at the end of April. AR is up only $5.1 million against June 2011 inclusive of two acquisitions, Forecast Trading in October 2011 and CompressorWorks in April 2012.

Inventories increased $17.9 million since December 2011, reflecting the acquired inventory from CompressorWorks less roughly $5 million reduction from operations. Goodwill and intangibles increased $16.9 million. Again, the CompressorWorks acquisition less some amortization. Accounts payable increased $30 million since December 2011, primarily to seasonal nature of our business and CompressorWorks.

Looking at total debt, it increased $23.9 million since December 2011. In Q1 2012, debt increased $6 million related to the seasonal nature of our business. In Q2 2012, we spent $38.6 million on CompressorWorks acquisition. We spent $5 million on our share repurchase program and debt was reduced $25.6 million from operational cash flows for a net increase of $24 million.

Without the three acquisitions in the last 14 months totaling $110 million spend, debt would have been zero with an additional $13 million cash surplus. However, we are excited about these three acquisitions and their contributions to grow our business.

Lastly from our cash flow statement, CapEx spending in the quarter was $2.9 million and for the six months $5.3 million. Depreciation and amortization in the quarter was $4.1 million and $7.9 million for the six months.

With that, I will turn it over to Larry Sills.

Good morning. Jim has covered the results very well. There's not that much to add. I will just review a few of the highlights and then we will open for questions.

We are obviously pleased with the second quarter. Sales and profit were both well ahead of the second quarter of 2011. Acquisitions certainly played a major role and I will review them shortly.

Excluding the acquisitions, sales were marginally ahead in the second quarter and slightly down for the six months. But as we have stated before for the purposes of sales comparison we were up against two major events in 2011. First, an extremely strong first quarter of that year, we were up 23%, mostly the result of one-time pipeline orders. Second was the loss of certain temperature control product groups from a major account. Now both of these events are behind us. We have made up the bulk of the sales shortfall and the comparisons should be looking better as we proceed in the months ahead.

Okay, let's talk about the acquisitions for a second. As Jim said, we have now made three acquisitions over the last 14 months, BLD, Forecast Trading, and CompressorWorks. All three are performing very well.

We have maintained all the major accounts. Sales are achieving expectations. The integration is proceeding on schedule. We are starting to see some of the savings in product cost and in expense reduction. We will see some of it this year but we anticipate that most of the benefits in 2013. And all three have been profitable in year one.

Perhaps even more important, each of them are helping us to achieve strategic goals. BLD has helped us to become more basic in some very important Engine Management product groups. Forecast Trading were the industry leader in economy line engine management and as the vehicle population ages, economy lines become more important.

CompressorWorks is the industry leader in manufacturing new compressors, which is the fastest growing part of the Temp business, so as we say, all three are not only doing well but they are helping us achieve strategic goals.

Financially thanks to our healthy operating cash flow, we have absorbed all this acquisition cost and we anticipate ending the year with better than a one to one debt to EBITDA ratio.

So to summarize, we are pleased with the first half of the year. We are optimistic looking ahead. July, as you would imagine, was a very strong month for Temperature Control. In addition, the vehicle population continues to age. Our customer is doing well and we look forward to the balance of the year.

Now we look forward to your questions, so with that we will open it to questions. Thank you.

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

Good morning, guys. Nice quarter. You noted some pickup in activity over the last six weeks because of the hot summer. Comparing this year to maybe a year ago or some other hot summers that we have had, where is the industry as it relates to inventory overhang? To what degree can the summer be better than others you have seen?

You have asked two questions. One of them you are asking are our customers inventories in good shape? I take it you are asking that. And yes, to the best of our knowledge they are. Are we seeing a better -- second question are we seeing better than prior years for the weather, is that what you're asking?

Yes, just degree of weather this year or how this year stacks up to maybe some others that you've seen.

It's pretty good. It's pretty good.

And Jim, what prompted the share repurchase activity relative to what you have done before?

This is our second year for the share repurchase program. We had $5 million last year, another $5 million this year. It is our intent to have this as an ongoing program to match any equity programs, equity compensation programs that we have in place.

All right, so this is just offsetting option dilution for the most part?

We basically -- option dilution but options we are out of for the last number of years, but we have very few left, but restricted stock program that we replaced options with.

Okay, can you talk a little bit about the pricing environment that you are seeing?

Okay, well, we are in a highly competitive pricing environment because we have to compete increasingly with product coming in from China and the Far East. We analyze all this very carefully. Some of the prices go up, some of them go down. On balance we have been able to achieve net increases somewhat better -- or equal or better to than inflation. That has been our pattern for the last few years and that is our pattern for the year 2012.

Okay, guys. Very good execution. Keep it up.

Bret Jordan, BB&T Capital Markets.

Good morning. A couple quick questions and one talk on the savings from the acquisitions as we progress through 2012 and into 2013, if there was a little over $5 million of incremental SG&A from the acquisitions between the SG&A and potential cost savings on the production side, what do you think the magnitude of pickup you could see next year from that could be?

We're not -- we haven't disclosed what would be the specific from the individual acquisitions. The timing on them, we intend to integrate our product offerings and where we can gain leverage on the SG&A expenses. So I think really what we would look towards is we say Engine Management will be focused on getting between 27% and 28% gross margins and we believe that in second half Temp margins will improve and we will work on getting those to the mid-20s to improve the gross margin versus the 21% or so that we are sitting at now.

Okay, then a question on organic growth in the quarter. I guess we did have the large customer that was not in the mix but the core demand was strong enough to come in flat in Temperature Control. That was, refresh me, about a $20 million annual volume with that customer? And I guess if we looked at it, how it rolled quarterly, I'm just trying to get a feeling for what the Temperature Control growth was in the quarter and what sort of magnitude of strength to offset the lost customer?

Right, we said previously that it was in the $20 million. It's somewhat difficult because they still -- customer buys from us. Best estimate now I would say is the season, it's proving $20 million to $25 million. I will expand that a little bit with the bulk of it being behind us now because most of that they buy in the first half of the year. There will be a little bit more in the third quarter and then that should be it for the season really. It's negligible for amount for the fourth quarter.

Okay. And then I guess one last question on use of cash. By year end, you are down to one to one. Where do you see using cash going forward? Would you do a bigger backpack dividend or just continued acquisition?

Right, the three items that we look at and we address the dividends would be a key item that we look at. We will review that at the end of the year, so dividend is one. The share repurchase program I envision to keep that roughly in the same dollar amount dependent or number of shares may increase slightly as we move forward. And then hopefully if there is -- we continue to look and if there's opportunities, with acquisitions.

Okay, great. Thank you.

Greg Garner, Singular Research.

Thank you. Nice quarter, gentlemen. A question on the CompressorWorks. Did I hear that right that was $13.3 million contribution from CompressorWorks in the quarter?

It was the bulk of our sales increase there. Hold on one second. I think that number was -- yes.

Okay, is it safe to assume that the margin compression in Temperature Control was all to do with the inventory write up with the acquisition for CompressorWorks?

No, I would say it was split. There were two items. One it's the impact of the write-up in amortization of those costs, which the bulk of it was in May and June, a little bit more in July. The other part relates to the production levels and our cost of production. So with the loss of that customer's volume we were in an inventory reduction mode at the beginning of the year, so we are cutting production. Hence our cost per unit would be higher and that's what's hitting the P&L now.

The good news is with the warm summer season, our production levels are up significantly from when they were in the first half and that's why I feel comfortable stating that our margins will be better in the second half, the Temperature Control.

Okay, when you say they are going to be better in the second half, does that mean on a sequential basis or are you comparing to last year's quarters?

Sequential basis.

Okay, CompressorWorks, is the production going to move to Mexico there or for some reason I am thinking that this is a little bit different that that might not occur?

Yes, that is going to go to Mexico and that has been announced. We will start moving after the season and it's a pretty straightforward move, so we are confident we will be in good shape, ready for the next season. And with this again, we are very confident of our ability to compete on cost with China.

Okay, so that would be the primary driver for the margin improvement from CompressorWorks next year?

Yes, as we integrate the product costs and look for savings there, yes. Both in manufactured and in purchase costs, because we will gain leverage there also.

And the inventory write up would be totally completed by end of July?

Yes.

All right, great. Thank you.

(Operator Instructions). Adam Brooks, Sidoti & Co. LLC.

Good morning, guys. Just a few quick questions here on the Engine Management side, I'm guessing about 60 to 80 basis points of gross is due to the change in higher expense in that one item. The rest, given flat organic sales, anything big to point out as far as that big improvement?

These are efforts that have been -- its pipeline working on engineering projects to bring in-house to manufacture and low-cost sourcing from overseas. So these are really ongoing cost reduction programs that we have been working on, but it's a combination of everything that we have there including pricing.

Can you give us a sense maybe the magnitude of the cost difference once you had moved CompressorWorks down to Mexico or is that something you don't want to divulge?

We would not disclose that type of information. Again, I think what we will look to see is you will see the margin improvement in Temperature Control as we go into 2013 and gain the savings there.

Okay, great. I'll hop back in the queue. Thank you.

Walter Schenker, MAZ Partners.

Two questions, one of which is could you restate your dividend policy and what objectives of it are? Secondly, in regard to the industry trends by your customers to extend the dating of virtually everything, I guess, what if anything can you do to offset that or what can you do in pricing to sort of try and adjust your pricing a little bit for the cost of having to extend the receivables more than they might have been a couple of years ago?

Okay, Walter, I will answer the first and Mr. Burke will answer the second. The first is the dividend policy. You see we just announced the current quarter at $0.09 a share. As we have stated, our long-term goal is to achieve one-third of earnings per share. We were obviously running somewhat below that number. Our Board will evaluate this -- is constantly evaluating it and we intend to work in that direction.

To the second one, I will give that to Mr. Burke.

Okay, Walter, we look at the customer terms. Everything that you read everybody is asking for extended terms and improve their payables to inventory ratio, so that pressure is a given. It's no different than anything else with pricing. It's a competitive environment.

What we do, there's a balance that has to be had for both the buyer and the seller. We negotiate, work on those items and again any increases from customer extension of terms or factoring, that's no different than any other commodity costs or increase that we would have in there and we would look to negotiate any of our costs to be transferred over to -- as our costs increase to the buyer.

Okay, just one last question and sort of just a long-term question, we've been trying to address this for a long time. Even though you are a manufacturer, your inventory turn is about 3 times, give or take, closest round number. Is there anything that you can do to enhance that over time or is that just the nature of the large number of SKUs you guys have to work with?

Yes, Walter, we are working aggressively to improve that number. We have actually asked for some outside consulting help to give us some advice on techniques that we could be doing better on. I think one of the biggest ways we can accomplish this and also become a better supplier is to enhance our collaboration with major accounts. Some of our accounts are very willing to work with us in this area. This can help us both improve shipping level and reduce inventory and yes, we are not satisfied with the current number and we are working very hard to improve it.

Okay. Thanks a lot, Larry.

(Operator Instructions). Adi Oberoi, Goldman Sachs.

Thanks a lot, guys. Congrats on a great quarter. My first question was on working capital. Can you talk about a little bit how it's going to pan out in the back half? Is there going to be any other impact from acquisitions or it's going to be the regular seasonality there?

I may have broke up in the beginning but I will repeat. Was it my forecasts or any significant items in working capital for the second half of the year?

That's right.

At this point while we continue to look at acquisitions, I don't foresee anything happening that's imminent. So I think it would be again, we get the seasonal nature of our business. Sales are up. Receivables if it holds will probably maintain through the third quarter and then we should be able to turn those receivables back into cash as the Temperature Control season winds down.

Again, a large part of it is also covered with the factoring that we do also, so the peak and trough is not as great as it was a few years back.

Right, so excluding any other acquisitions that you announced, working capital should be the same seasonality as what we have seen in the past few years, right?

Yes.

Okay, great. Can you talk a little bit about the mix that you guys are seeing? Is it still that the customers are looking for medium grade products and you've not seen a shift towards premium stuff again?

Okay, yes, that's an ongoing event. We believe as the vehicle population ages, when you're driving a 15-year old car, you are looking to save money on parts. So the -- there is a continued push for economy lines and this is where the Forecast Trading acquisition was so helpful because they are the experts in that. They are the leaders in that. So yes, we view this as a permanent process and we think we are in good shape for it.

Got it. One last one, if I may. At what point does the debt reduction become one of the top uses of cash? I know you guys are focused on acquisitions right now and then secondly dividends/share buybacks or something that you are also contemplating. But at what point do you think you'll get into more the various strategies of your debt?

If I don't have the acquisitions, again the key focus is debt reduction followed by our dividend policy that will be in place. So I would expect debt to be a significant pay down in the second half of the year. Again, we are at a seasonal high point now at the end of June.

But debt reduction is a key item and again with anything that we do in acquisitions even with completing three of the acquisitions, we were still just barely over one to one on a debt to EBITDA ratio, so again very comfortable in that avenue.

As we do both on acquisitions, it's nice that the operating cash flows could basically fund them all.

Great. Thanks a lot, guys.

Jason Williams, Pinyon Pine Capital.

Thanks so much for taking my call. I just had a quick question. I heard you give CapEx during the quarter but I didn't hear cash flow from operations. I don't know if I missed it, but I was just hoping to get cash flow from operations through the quarter.

I don't have it for the quarter in front, but we will be filing our Q by later this afternoon or tomorrow morning.

Okay, good enough. Thanks so much.

(Operator Instructions). Efraim Levy, S&P Capital IQ.

As far as the new business wins you have been able to largely offset the losses of that major customer. What's the outlook for new business win progress in the second half and into 2013?

New business is pretty difficult to forecast. I can only say that we are working aggressively in all areas but new business is new business. We're just working towards it and we will do our best.

So there's not a whole lot of visibility on the pipeline. In the last quarter you were able to say oh we do have new business that will be largely offset (multiple speakers)?

I have no new business guarantees that we can announce or anything like that.

Okay, as far as acquisitions --

We keep pushing.

As far as acquisitions, is there a preference to which side of the business to add to or it will just be opportunistic?

We are looking for both. We think both of our divisions have growth potential and we are looking in both ways. And yes, it is somewhat opportunistic.

Thank you.

There are no more questions in queue.

Okay, very good. With that, I would like to thank everyone for participating in our earnings call today. Thank you. Goodbye.

This concludes today's conference. You may disconnect at any time.