Standard Motor Products Inc (SMP) 2012 Q4 法說會逐字稿

Good day, everyone and welcome to today's program. 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.

(Operator Instructions)

Please note today's call is being recorded. It is now my pleasure to turn the program over to Jim Burke. Please go ahead.

Okay. Thank you. Good morning and welcome to Standard Motor Products' fourth 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. 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 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're very pleased with our fourth quarter results and the culmination of an excellent year. Highlights for the quarter in the full year were revenue growth, primarily from acquisitions, gross margin expansion, solid cash flow generation. 2012 was the fourth consecutive year of continuous improvement, excluding special items dating back to 2009, with net sales of roughly $950 million; gross margins, 27.4%; EBITDA of $87 million; diluted earnings per share, $1.83; cash flow from operations, $94 million; and reducing our total debt to $41 million.

I'll walk through some of the specifics. Consolidated net sales in Q4 '12 with acquisitions were $192.4 million, up $18.2 million, or 10.4%; without acquisitions, $184 million, up $9.9 million, or 5.7%. By segment, Engine Management net sales in Q4 with acquisitions were $153.7 million, up $14.3 million, or 10.3%; without acquisitions, $151.2 million, up $11.9 million, or 8.5%. Some of the Engine Management strong fourth-quarter sales reflect customer inventory expansion programs to grow their commercial market channel. Our sales, moving forward, should mirror our customers' sales in the low single digits.

Temperature Control net sales in Q4 '12 with acquisitions were $35.2 million, up $3.5 million, or 10.9%; without acquisitions, $29.4 million, down $2.4 million, or down 7.6%. As our Temperature Control segment is seasonal, it only makes sense to review on an annual basis. Our Temperature Control for 2012, excluding acquisitions, were down $9.2 million. However, excluding the roughly $20 million loss from a single customer direct sourcing, our total Temp Control business was up roughly $10 million, or roughly 5%. Consolidated gross margin dollars in Q4 improved $9.6 million at 30.1% versus 27.8% last year. For the full year, gross margin dollars were up $30.5 million at 27.4% versus 26.2% last year.

By segment, Engine Management gross margin dollars in Q4 were up $10.1 million, or 4.1 points to 30.7%. For the full year, gross margin was up $26.8 million, or 2.6 points to 28.2%. Engine Management gross margin improvement reflects our efforts to expand low-cost manufacturing in Mexico and Poland, low-cost sourcing efforts, and acquisition integration benefits.

The fourth quarter gross margin percent reflected favorable product mix and favorable variances earned in the third quarter. Our fourth quarter, which reflects lower production levels, will amortize higher production costs moving forward. So entering 2013, we see our normalized Engine Management gross margin rate at 28% to 28.5%. Temperature Control gross margin dollars in Q4 were down $600,000 to 19.8%. The full-year gross margin dollars were up $3.7 million to 21.8% but down 1.7 points. The 2012 temp gross margins were impacted by the loss of a single customer direct sourcing, which caused the reduction in our production volumes at higher production unit costs.

However, looking forward, 2013 we anticipate gross margin recovery as we realized benefits from integrating CWI production into our low-cost Mexico production facility. In summary, we are pleased with our full-year consolidated gross margin increase of 1.2 points led by our Engine Management 2.6 point improvement and Temperature Control should improve for 2013.

Consolidated SG&A expenses in Q4 increased $3.7 million to 23.5% of net sales versus 23.8% last year. Full-year SG&A increased $23.7 million to $19.8 million versus 18.7% for 2011. Approximately $10 million of the increase reflected non-cash post-retirement medical curtailment and amortization, intangibles amortization, and a minor reclass from cost of sales. Another $11 million is directly associated with our three acquisitions, BLD, Forecast Trading, and Compressor Works. We anticipate some savings in 2013 as we complete the CWI integration into our Temperature Control business.

Consolidated operating profit before restructuring and integration expenses, prior-year post-retirement curtailment gain of $3.6 million and other income net, in other words, operational operating profit in Q4 '12 was $12.8 million, up $6 million at 6.7% of net sales. For the full year, 2012 operating profit was $72.2 million, up $10.5 million at 7.6% of net sales. This reflects a 0.6 point improvement over 2011. The net effect of our operating results, as reported on our non-GAAP reconciliation, was diluted earnings per share in Q4 '12 of $0.28 versus $0.17 last year and full year at $1.83 versus $1.57 last year. We're very pleased converting our 8.5% net sales increase into a 16.6% increase in diluted earnings per share at $1.83.

Looking at the balance sheet, accounts receivable decreased $5.6 million from December '11, inventories increased $19.4 million from December '11 and this increase is attributable to our CWI acquisition. Goodwill and intangibles increased $14.5 million, again, primarily attributable to the CWI acquisition less intangibles amortization. Total debt decreased $32.7 million to $40.6 million. From our cash flow statement in 2012, we generated $94 million cash from operations from which we invested $12 million in capital expenditures, $39 million in the CWI acquisition.

In addition, our financing activities included $5 million share repurchase, $8 million in dividends, culminating with a $33 million reduction in total debt. Finally, we are pleased to have announced additional returns to our shareholders with a 2013 share repurchase program increase from $5 million to $6 million and a 22% increase in our dividend rate from $0.09 to $0.11 per quarter. With that, I'll turn it over to Larry Sills.

Good morning, everybody. I believe the numbers speak for themselves. As Jim has reviewed, we had an excellent year in sales, gross margin, cash flow, earnings per share, all headed in the right direction. I believe this is the result of the efforts of our people over the last several years, gaining additional business, increasing manufacturing, controlling expenses, rationalizing production, integrating our acquisitions. Everyone performed well.

In addition to the results, we've taken steps to improve the Company in 2013 and for the years ahead. In the release, we mentioned two acquisitions we completed in the last year or so. The Forecast Trading Company and Compressor Works, we are pleased with our progress in both of these. We've maintained the customer base. We're achieving the plant cost savings. The key employees are staying and we believe they'll be making important contributions in the years ahead.

We also mentioned two transactions completed earlier this year. First, we acquired a minority interest in Orange Electric Company, a manufacturer of TPS -- TPMS sensors located in Taiwan; and second, we acquired the OE business from our former affiliate, SMP Europe. Neither of these will have a significant effect on 2013 results, but each of these, I believe, will be significant contributors in the future.

Go back to the Tire Pressure Monitoring Systems; this has been mandated on all new US car manufacturing for the last five years, so somewhat less than half of the cars on the road today have these. The market is still in its early stages, but everyone believes that it's going to grow significantly in the years ahead. A market research firm recently forecasted that there would be a 300% increase in the next five years. We think this is also going to be a competitive market. There are several players in it already and probably more to come, but we believe we have an excellent product and we have an excellent partner. We've been doing business with them for several years and we look forward to growing this product line with them in the years ahead.

The second event was we had purchased the OE business from SMP Europe. As we've said in the past, increasing OE and OES business is one of our key strategic goals for the future. In this case, the majority of products are coming out of our plant in Poland, which is a low-cost operation with high skills and high technology. We believe this will be a good base from which to grow this OE and OES business, which again is one of our future major goals.

So to sum, we're pleased with 2012. We look forward to 2013. We believe the market will continue to show slow and steady growth, which we are estimating in the low single-digits, driven by the continually aging car population. We'll also have the benefit of our recent acquisitions and of course, we look to continue to improve in all areas. With that, let's open for questions.

(Operator Instructions)

John Lovallo, Merrill Lynch.

First question would be on SG&A. Jim, we usually think about this as being a relatively fixed portion of your cost structure. Is there anything with the CompressorWorks acquisition that may make this more of a variable cost going -- more variable in nature going forward and perhaps not allow you to get as much leverage?

No. It's -- again, the -- when you think of the SG&A, it's a combination, we have distribution in there also. We have the fixed brick-and-mortar costs in that there's a little -- the little bit in SG&A that we have that's variable may have a little bit of selling expenses and picking and packing labor but it's fairly steady throughout the year. Our lowest point would be in the fourth quarter, but relatively steady throughout the year.

Okay. That's very helpful. And then have you -- do you guys see any effect from the delay in tax refunds this year? Do you that, think that had any impact towards the end -- in the fourth quarter?

Our parts are more failure parts than discretionary repairs. So, and we can't see down through the channel significantly enough on that, so we can't point to that.

Okay. Great. If I could just sneak one last one in here. The increase in the share repurchases is the $5 million to $6 million. Is the focus there to still offset stock comp dilution?

Yes. Exactly.

Brian Sponheimer, Gabelli and Company.

Very good quarter. As we're looking at your balance sheet, one of the things you've done very well is reduce working cap. I'm wondering how you're envisioning your expectations with your receivables versus your customer base going forward? One of your aftermarket supplier peers looking to improve their own terms, do you see any room for you, particularly on the commercial side?

Brian, the -- again, obviously, this is all a competitive marketplace. The major customers are the ones that can avail themselves of programs in the -- with the AR factoring. I don't see any significant changes there. Benefits for the large distributors and benefits from the manufacturers who accelerate the collections on those, so I don't see any significant changes.

All right. As far as mix, as we're going into 2013, this will be about the fourth consecutive year of fairly stagnant economy, overall. Do you see any change back towards some of your higher end products as you're going over the next couple of years?

Well, actually, what we've seen is a shift to the economy lines. We think that's somewhat a function of the economy but I think perhaps even more a function of the aging vehicle population. So if you have a 12-year-old car, you're not looking for the fanciest part. That trend has happened. We expect that it will continue, although not dramatically, but we think we're very well-positioned for it, with our low-cost manufacturing and our two latest acquisitions, CompressorWorks and Forecast Trading, are strong in that area, so we feel okay.

Okay. Just from a quality perspective, is any part of that the fact that your economy products are being made better than they ever were before?

Well, we are -- we differentiate the product. We will never degradate the quality. But the product is differentiated.

Okay, all right. Very well, congratulations on a great quarter.

Bret Jordan, BB&T.

Question on the Orange Electric deal, just to give us a perspective on the Tire Pressure Management Systems, is the distribution channel the same or do those products go more through a tire distribution channel than at a traditional parts distribution?

That's a good question. At this point, the majority are going through two areas. One, there's still a lot going back to the car dealerships because these are new products, new cars. And yes, at this point, a heavy percentage is going to the tire shops, which is natural, because it's -- it would be replaced as maybe when you change your tire.

But we think -- that is the majority of the business, those two, which is why today we have a relatively small market share. But we believe, as in most things, as they're out there longer and more and more and more out there and you get a 10-year-old, a 12-year-old car, they tend to migrate back to our channel. So at this point, it's heavily car dealer and tire shop, but we think -- and it's going to stay that way for a while. But in the long run, we think it will migrate back to ours.

Okay. Where does Orange stand in market share? So if you look at the market, where do they shake out?

Well, at this point, the business is concentrated on the OE guys. And they're really not OE players, but I think in the aftermarket we're going to do okay.

All right. And then I think, Did you throw out a gross margin target for Engine Management 28% to 28.5%?

Yes. Just wanted to point out that moving forward, we think that will be the base that we'll move off of for the 2012 ending the full-year number versus the fourth quarter number.

Did you throw out something for Temperature Control?

Temperature Control, again, I think we're targeting that we can move back towards our stated goal of 23% to 24%.

Walter Schenker, MAZ Partners.

Given the aging of the population, I've been somewhat surprised in listening to a number of your major customers, or at least the major sales channels, talking about qualitatively what appears to be increasing competition and talking about competition based on price. Given all of the dynamics of the aftermarket and the elasticity generally due to price, especially things like your products, do you want to comment on to what extent that's being reflected back at you? Is it just trading down to lower-priced lines? Since price competition, if you go back far enough, really wasn't the big issue in this industry?

Well, it remains a competitive business. I would say at this point the issue is more competition from other parts of the world coming in here. People feel they need to react to that. So that's probably the biggest thing pushing prices coming down. So it's a mix. We've got ups -- up, downs, that's what we have all the time.

You're not seeing any different response to your ability or you don't look at any different change in your ability to raise prices as you go into 2013 as you might have three or four years ago?

I think we were in a tough, competitive environment four years ago. I'm in a tough competitive environment today. That's where we are.

Okay. Jim, in the fourth quarter, I don't know if you break it out, the -- where you finished up the year on returns, this year was roughly -- and I realize it's a moving average, this year was basically somewhat positive from where you had been historically over the last couple of years. So there's going to be some slight forward improvement, about the same, or slightly worse?

I think you get a little bit mix in our consolidated results. So now that we've -- we have the CompressorWorks in Temperature Control, you get a little bit higher mix of Temperature Control. So that may bring our consolidated returns number up because it's more seasonal in nature and more of a return, so --. But I think on an individual basis, it's fairly steady.

Lastly, in we're -- going back to competition, competition is directly price? Or competition, which is always a significant component, is also significantly terms, which have a cost?

It's both.

Both.

Okay. So it continues both; it's not more push on terms as opposed to just straight pricing?

Right.

Yes. It's a combination of both in any of the discussions. So it's a full program when they're evaluating or working with the customers.

Greg Garner, Singular Research.

Nice quarter, gentlemen. First question about -- you mentioned that the revenue impact, there was a positive revenue impact in the fourth quarter for some pre-ordering for 2013. Any sense in quantifying the magnitude of that?

I don't think we said that.

What we pointed to was the customers looking to expand their inventories that are in there. Again, I think that is reflected in the Engine Management, where we said the sales increase were in the high single-digits. We envisioned we're going to mirror our customers, what they're reporting, that will be in the low single-digits going forward.

Perhaps I can clarify a bit. When we said they were increasing inventory, it wasn't depth, it was breadth. So they were adding coverage. It tends to be a one-time event.

Okay.

You're not taking business away from the next quarter, but it's also not repeated.

Okay. Thanks. I appreciate that. On the Orange acquisition, is there any sense you can could give us on quantifying the percent, minority interest or their total revenue? Even though it's a small contribution, just want to get an idea as to what impact it may have in 2013.

Right. It will be negligible. We're going to have a 25% minority interest in the business. We're already selling the product. So what we're doing here is being able to benefit in some of the growth within the business that we're taking a 25% interest in.

Okay. On the Forecast Trading and the CWI, these are in the value area product arena. Can you give us a sense for how much growth they've had organically after bringing them under the SMP umbrella, essentially, comparing their current revenues and last year, versus what they were prior to the acquisition?

Yes. Okay. Again, the -- as we move forward, these are really becoming just brands within our integrated businesses. I'd -- there was basically in line -- the performance for CWI and Forecast Trading, growing with the market. Nothing -- no significant changes one way or the other.

Okay. Growing with the value product? The same (multiple speakers) --

Yes. The same market, we would enjoy across our Standard and Four Seasons brands.

Okay. Could you just walk us through the thought process about going back into Europe after exiting Europe a few years ago? My understanding is that it was more aftermarket that you exited and now you're coming back into the Europe scene on an OE basis. Is that the right way of looking at it or perhaps, is there something else you could walk us through?

That is a good way of looking at it. What we exited was a distribution business, which, frankly, we -- it was a difficult business for us. We didn't understand it as well as we should. We were -- we had -- we were able to sell it to our managers there, which we thought was good for them and good for us. What's staying is something we feel very positive about, which is, essentially, manufacturing out of our Poland plant, which we think is an excellent operation. That gives us an opportunity to compete in the OE and OES business internationally. We feel that's a business we know quite well and are, hopefully, we're going to grow in. It's not related.

But that's from having the Poland plant which you've had all along, right?

We've had it for not that long. A few years and we continue to build on it.

Okay.

The product we were producing in Poland we were selling to the former company that we sold. This simplifies the supply chain and eases the coordination directly with the OE and OES so we're looking for opportunities and advantages here. So really, what we'll gain here because we reflected the sales already, we'll gain the margin that we were selling through to what was our sister division in Europe previously.

Okay. So does that mean, is it appropriate to look at it that this might be step one in what might be several OE acquisitions in Europe? Or line extensions perhaps?

No. I think this was product that we were already manufacturing. We were able to look at this as margin improvement for a product that we were already manufacturing and we look to grow out a little -- out of our Poland. We -- at this point, are not -- do not have a pipeline or anticipate going out to acquire other OE or OES businesses in Europe. We're just concentrating on our low-cost Poland manufacturing business.

Efraim Levy, Standard & Poor's.

Regarding the acquisition pipeline, are there other areas or acquisitions that you are looking to make and what areas would they be?

Well, we have made for us a pretty big number, big and small, about five in the last two years. That's a healthy number for us. They've all fit a similar pattern and it's a pattern that we like. It's a pattern that there were immediate cost savings because we were so similar. Their markets, we were either in or they were close to what we were in and these acquisitions have fit that mold. They're all three of -- they're all going to be fine. If we see any more that fit that mold, we continually look but within that mold is where we're looking.

As far as the margins that you're acquiring, how do they compare to the existing margins of the business? I know you're also trying to expand the market, just for example, CompressorWorks.

Right. On the big ones that we had done, which were Forecasting, CompressorWorks, those -- the margins, again, because they were competing in the aftermarket, also, are similar to our margins by the different product segments. So Forecast similar to the Engine Management and the same with CompressorWorks.

It appears we have no further questions at this time.

Okay. With that, I want to thank everybody for participating today. Good-bye.

This concludes today's program. You may disconnect at this time. Thank you and have a great day.