Standard Motor Products Inc (SMP) 2013 Q1 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 an opportunity to ask questions during the question and answer session. (Operator Instructions). Please note this call is being recorded. I will be standing by if you should need any assistance.

It is my pleasure to turn the conference over to Mr. Jim Burke. Please go ahead, sir.

Okay. Thank you, Tony. Good morning, and welcome to Standard Motor Products first quarter 2013 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 are very pleased with our first quarter performance to kick off 2013. Highlights in the quarter were revenue growth, gross margin expansion, significant operating EPS improvement, previously announced dividend increase paid March 1, and a share repurchase program.

Looking at our top line, consolidated net sales in Q1 2013 were $230.7 million, up $19 million or 9%. By segment, Engine Management net sales $175.5 million, up $12.5 million or 7.7%. In Q1 some customers broadened their inventory coverage, leading to the 7.7% increase. We would anticipate this trend to be more in the low to mid single digits going forward, in line with our customers' estimates.

Temperature Control net sales were $52.7 million, up $7.4 million or 16.4%. Recall we acquired Compressor Works at the end of April 2012. Incremental Compressor Works net sales were approximately $11.7 million in Q1 2013.

Our customers have already begun blending our CWI and Four Season brands, so after April we will report combined Temperature Control sales for are comparison purposes. To date the spring has been very cool, and we await warmer temps to determine the impact on our 2013 season.

Consolidated gross margin dollars in Q1 improved $11.3 million at 28.5%, up 2.7 points. Engine Management gross margin improved $8.7 million to 29.5%, up 3.1 points. This significant improvement builds off our base from 2012 when we finished the year at 28.2%.

In Q1 we experienced very good production absorption on higher volumes and favorable sales mix. We strive to improve margins year-over-year and target 28% plus margins for 2013.

Temperature Control gross margin improved $2.4 million to 20.8%, up 1.9 points. Temp margins tend to be a low point in Q1 and improve as production volumes expand into Q2.

Over the last six months we concentrated on integrating our CWI into our compressor manufacturing plant in Mexico and distribution into our Louisville, Texas, operations. We are very proud of the entire team completing this integration in time for the 2013 season. We anticipate savings over 2012 with margin improvements, and we continue to target 23% to 24% gross margins in Temperature Control .

Consolidated SG&A expenses in Q1 increased $4.8 million to 21.5% of net sales versus 21.1% last year. This increase was primarily driven by incremental CWI expenses in Q1 not present last year, higher accounts receivable draft fees on higher sales volume, and increased intangibles amortization expense from our recent acquisitions.

Consolidated operating profit before restructuring and integration expenses and other income net in Q1 was $16.2 million, up $6.5 million at 7% of net sales. This reflects a 2.4 point improvement in operating profit.

The net effect of our operating results as reported on our non-GAAP reconciliation was diluted earnings per share in Q1 2013 of $0.42 versus $0.23 last year. This reflects leveraging a 9% sales increase into a better than 80% improvement in operating earnings per share.

Looking at the balance sheet, accounts receivable increased $29 million from December 2012. This increase is seasonal in nature compared to our December quarter close, which is our low water mark. Inventories increased $26 million from December 2012.

While a large portion of this increase is seasonal, preparing for our summer season, we were very cautious to ensure that we had sufficient inventory levels during the CWI integration. As I stated earlier this integration is complete, and we will be able to reduce inventories over the balance of the year.

Total debt increased $35 million to support our accounts receivable and inventory build, partially offset by accounts payable. And also two investments;our Orange TPMS investment of $6.3 million, and our SMP Europe OE product line acquisition for $6.5 million.

Our cash flow statement reflects a $27 million cash use from operations from our accounts receivable and inventory build, versus a $9 million use in Q1 of 2012 last year. This investment in working capital will be reduced from these elevated levels by year end. Under investing activities, as I mentioned earlier, are two accession investments totaling $12.8 million.

Lastly in our financing activities, capital return to shareholders by way of, first, a share repurchase program. We spent roughly $600,000 in Q1 2013 for 21,600 shares at average price of $27.89, and in April an additional $550,000 for 19,700 shares at again an approximate price of $27.85. This reflects a 2013 spend to date of slightly less than $1.2 million, with $5.7 million Board authorization remaining open.

Our second component of shareholder returns reflects the quarterly dividend increase from $2.1 million to $2.5 million. This dividend payout was on March 1, as previously announced, reflecting a 22% increase from $0.09 to $0.11 per quarter. In our release we also announced our are Q2 dividend payout effective June 3 to stockholders of record on May 15.

In summary, very pleasing results; a combination of revenue growth and operational execution. Thank you, and I will now turn call over to Larry before we open for Q&A.

Good morning, everybody. There is really not much to add to what Jim has said. He has reviewed the numbers, and if you read the quarterly release, there was some more detail in that.

I will just summarize by saying we are quite pleased with how things are going, and I think what it shows is that all of the efforts of our people over the last several years have been bearing fruit. When I look back, I think we have accomplished a good deal over this time.

We have gained some additional business. We have worked very hard on cost reduction, which you see reflected in the gross margin improvement. We have increased our manufacturing, going from products from purchasing to manufacturing. We have increased production in the low cost areas of Mexico and Poland. And we he have been working hard on reducing purchase costs.

And then, third, we have made five acquisitions over the last two years. Just to summarize, BLD Manufacturing, Forecast Trading Company, Compressor Works. Orange Electric, which was basically an investment -- a 25% equity investment. That is the TPMS manufacturer in Taiwan. And then we acquired the OE business from our former subsidiary SMP Europe.

That is five deals. All are fully integrated. All are working well. And all have been essentially financed out of operating cash flow.

So you add these results to the fact that the industry is healthy, and industry demographics are strong, with the vehicle population keep getting older. Our customers are doing well. And all this adds up to good results, and so we are pleased. But as I keep reminding our people, we cannot afford to be complacent. We have to keep pushing to get better, and we are going to keep doing that.

So with that, let's open for questions.

Thank you. (Operator Instructions). We will take our first question he from John Lovallo calling from Bank of America Merrill Lynch. Please go ahead.

Hey, guys. Thanks for taking the call.

Sure.

Good morning, John.

First question would, aside from the typical seasonal patterns in the Temperature Control business and the margins there, what kind of benefit do you think you will get from Compressor Works being fully integrated now through the remainder of the year?

I don't understand what you mean? What do you mean, John?

The operating results that are in there. Again, John, I think we are going to get the favorable, we'll get absorption from the fixed costs. The key is when we acquired this business, it was a separate business. They had a single location located in Texas.

Eventually we will be able to exit that facility. A number of the fixed costs will be removed. The manufacturing is in our Mexico operation. So basically you can think of it as fixed costs getting removed both in manufacturing and again some savings in SG&A also.

Great. That is exactly what I was getting at, okay. And then the second question would be, with new vehicle sales increasing since 2010, I mean, the car [part] -- the four- to six-year-old car -- the vehicle part should start to rebuild again. Do you think this could lead to a shift away from the economy line of products and kind of into higher margin products over time?

Again, it is so difficult to be able to pin that down.

I have a thought on that. Yes, that area is growing, but that is balanced by the fact that the total average age is growing. More and more cars are older. More and more cars are past eight, nine, ten years.

So I think -- I don't think you are going to see a reversal of that trend. I think you are going to keep seeing a move to lower price, and -- but we can deal with that. And we dealt with it well by having cost reduction. So I don't see it going backwards, but I don't see it being a problem for us either.

Great. Thanks very much, guys.

Okay. Thank you.

Thank you. Next we move to Aditya Oberoi with Goldman Sachs. Please, go ahead, your line is open.

Great, thanks a lot. The first question is on the Temperature Control segment. Did you guys see any impact on your sales because of a much cooler March, so as to say?

Well, we are still preseason. Anything that happens in the first three or four months is not really a reflection of activity at the customer level -- or at the consumer level. What you have now is this is people just getting their inventories ready for the season. So you really can't tell anything yet.

The -- we will start to see in the next -- we will start to be able to tell what the year looks like in the next 30 to 60 to 90 days. That is when it tells. But as we said, we are off to a pretty cold start. It was 30 degrees -- 30-some-odd degrees in Dallas this week. So we'll see.

Got it. Maybe the other way to ask is, have your distributors or the guys who kind of stock up their inventory in March, have you seen any deferred purchases from them that might help in Q2 if the weather kind of warms up to normal temperatures?

Yes, I think they have been a bit cautious. I think they have been a bit cautious. They want to wait and see. So yes, they -- they certainly haven't overrode it, so we'll have to wait and see.

Got it. And my second question is on acquisitions. Obviously you guys have been very successful in getting the right targets and very successful in integrating them as well. What is your acquisition strategy from here? Are you guys still open to looking at new targets, or -- and on similar lines, how is the acquisition environment looking like right now? Thank you.

Okay, I will take a crack at that . We are continuing to look. First of all, our balance sheet is healthy, which is good. And I think we have shown that we have a pretty good track record here.

But we are going to maintain a disciplined approach. I think that is why we've had a good track record. We will only make deals, not for the sake of making deals, but only make them when we see true synergies and real cost savings.

Now, I mentioned five deals that we've made over the last two years. They are were all successful, and they were all successful because of that; because they were true, legitimate cost savings.

So we will continue to have a disciplined look, and that's what we're going to keep doing. Not going to go willy-nilly. But we think we have a good model and we are going to continue with it.

Got it. One last one from me. Can you guys update us on the percentage [low cost] for [print] that you guys have now versus what your long-term target is? And maybe I think you guys define it as percentage hours of production in low cost regions?

We are some what north of 50% in low cost areas. And as we have said in the past, we think we have gotten much of the low hanging fruit, but we have a few more to two yet. Do you want to add to that?

We are above that 50%, butagain, we have -- we are moving the opportunities. Where this past year we jumped up a bit was related to acquisitions. So a good example was like Compressor Works. Another one was Forecast Trading, which was when we acquired that business, they were -- it was fully purchase product.

Those offer us opportunities. While there are some products that we have in our existing US-based facilities that are candidates, it is of a lesser degree. But we still believe we can move that -- move the needle until small increments.

Very helpful, guys. Thank you so much.

Thank you.

Thank you. Next we will move to Bret Jordan with BB&T Capital Markets. Please go ahead, your line is open.

Good morning. A couple of quick questions. One, as you look at the Engine Management business and expanded inventory with a couple of major customers, is that market share gains?Are you becoming a category manager in lines that you weren't previously, or is that customers who are just building out their inventory coverage going into the spring season?

Okay, good morning, Bret. While we see and feel there are some small market share gains in there, we -- it looks more to be where a larger -- some large accounts are expanding and broadening their coverage, adding additional SKUs that are in there. We always are updating certain product lines and categories with new features and that, that they are adding on there, so theyidentify them as pipeline orders that are sizeable orders that we put in there. But I think it as combination of both.

Okay. And I guess to some extent -- and maybe this relates to the [ not really to the] TechSmart business initiative. I think you are doing more are product R&D and new products launch. Is that what is driving that, or is that something completely different?

Well, that is a separate business now, and we are really just getting started at it. So I don't think there is really enough there to have a noticeable impact on results.

Okay, and --

We are getting started.

How is TechSmart looking, I guess, in the early phases?

We are in an early stage. We have to educate, the big issue is to be able to educate our customers that we have these products, because it is different than our normal business. But slowly but surely we think we are making progress in this area.

All right, and one last question. On Orange Electric, I guess to some extent you talk about sales showing substantial increases. At some point do you want to -- [are you going to be] quantifying what the sales growth in pressure monitoring systems and what the margins of those categories are looking like?

Well, again, it is -- this product category is almost new for the aftermarket. Mostly at this time it was in the OE channel and the tire channel sectors that we believe. So our incremental sales are growing significantly, but it is again from a low base. And we do not on individual product categories wish to disclose for competitive reasons what our sales are that in there. Or margins.

Okay. Great, appreciate it.

Next we move to Brian Sponheimer with Gabelli & Company. Please go ahead, your line is open.

Hey, Jim, hi, Larry, how are you?

Good morning.

I want to send -- first of all, great quarter. Just spend a couple of minutes talking about Orange Electric and -- or Electronic rather -- and what you think you can do with that business, and whether the goal is to move up from the 25% stake to something larger over time?

Again, this is our initial investment in there. We look to grow the market here in North America where we are the primary distributor of the products. It is growing for our industry.

But the key is other parts of the world also, where our partners now in Taiwan can look to grow that market potentially in the Asia market and/or even for OE, OES. So we look for opportunities there. If there is an opportunity for us to size up our position, we will. But at this point we are just new, with new partners, and we are satisfied to be able to participate in this growth area with them.

Okay. Okay, thank you.

Thanks.

Thank you. (Operator Instructions). Meanwhile we will move to Walter Schenker with MAZ Partners. Please go ahead, your line is open.

Thank you. Two questions. First, a number of years ago one of the thrusts of enhancing the sourcing was to look to China. Obviously you have done more with Poland and with Mexico. Have you found that sourcing in China has lost some of its competitive advantage is the first question.

And secondly, a number of your customers have discussed price competition and pricing pressure. Given your large share -- and I know you always do have competition -- canyou give us some better feel for what you think is going to happen to your pricing that you sell at during the course of the year?

Those are two different subjects.

Yes.

It's actually three different is subjects. The manufacturing, the Poland and Mexico is manufacturing. So that is on the side.

When we were talking about purchasing products from China, yes, obviously the costs are going up. Their labor costs are going up. I just saw the other day anticipated reaching $4 an hour in the next couple of years, and that is not much less than Mexico.

So the costs are going up. We still acquire from there, because they do have a good manufacturing base, and they have is a lot of technical expertise. SoI don't think we switched much away from China to other lower cost markets like Bangladesh or something like that.

Now, you want to turn to pricing?

Let me just add one piece to that, Walter, is that when we add new products each year, our primary source initially is really an OE or [key one]. With China or Asia, low cost countries offer us significant advantages. We put a is significant amount of effort into low cost sourcing and generate significant savings. So that is still there despite the inflation increases that we are seeing in China.

Okay, thanks, Jim.

Okay. As to pricing, I think we have maintained our philosophy, and we are in a competitive environment. We do have to watch stuff coming from all over the world. But judiciously we have been able to have price increases roughly equal to inflation, and that is what we have managed to do the last few years, and we expect to be able to continue that.

And as a comment, which will not [get and] not a question, is your dividend policy still to pay out 30% of earnings?

Yes. It is -- we just raised it, Walter.

I know.

Give me a break. We just raised it. The -- yes, that remains our goal. We have a long-term goal of one third, and we watch the numbers all the time, and our Board watches all the time and -- but seriously, we did just raise it, but we will continue to look. That remains our long-term goal, absolutely.

I know you raised it. It just seemed there might have been room under that guideline to even add more.

Thank you.

So noted. Okay.

Thank you. Next we will move to Efraim Levy with S&P Capital IQ.

Good morning, gentlemen.

Good morning.

Questions on acquisitions. So with the five acquisition is that you have made, has that changed your long-term organic sales growth rate? Has that changed any mix that will drive your earnings -- your sales growth faster?

And also while you are being disciplined in acquisitions, what do you see in terms of like -- do you see many opportunities? And what is the pricing market out there? Thank you.

Well, the second part is what do we see out there. Why don't you [try] that one.

Well, I think -- let me start -- I think the first question was around organic sales, and that and our acquisitions. So our top line we have had obvious growth from the acquisitions that we have had in there. I think in the organic arena we look and continue to target that we would be in the low to mid single digits, because the demographics are favorable, and they are mirroring what the customers are.

So I think organic, again, is a change in product mix that goes on there, with older ignition going down and newer sensors going up. We look for the 1% to 2% to 3% improvement organic sales. That is there.

Acquisitions, we were fortunate with five in the last two years. We continue to look and moderate. Probably to most area that we can identify would be suppliers to us that we can look for savings. And that is what we are doing. They can be either domestic, or they could be international from the standpoint that if they are international there may be an opportunity for local market, but we consider really the source. We're majority in North America, and hopefully as we have done with many of the others, been able to integrate them into the existing facilities where you really save the fixed overhead.

Great. Thanks. That's very helpful.

Thank you.

Thank you. And our next question will come from Adam Brooks with Sidoti & Company LLC. Please go ahead, your line is open.

Good morning, guys. Just wanted to hop back to Engine Management margin. Just seeing all of the improvements you had the past year or so, could you maybe give us a sense of what inning you are in, and maybe if your target has been reset, as far as what you can hit on the gross margin side?

Well, there is no ceiling to our -- to what we were doing. The reason we put out the targets early was back when we were doing -- go back as far as our Dana acquisition and closing facilities, and we had a lot of heavy lifting and moving going on, and we wanted to put out a 27% to 28% where we felt we could get to.

During that period of time we also invested in engineering talent to bring more and -- develop strategic initiatives to bring more in-house manufacturing low cost sourcing, and they have paid off. So our investment in engineering has paid off. That is why we are north of 28% now.

So I'm going on record. It is not much of a stretch, but we are 28% and north of that. We will see -- the key, Adam, is going year-over-year looking for incremental improvements, so I can't specify it is going to be 30% or over 30%.

But we finished 28.2% last year, and I expect to do better than that for this year.

Okay. And can you give us what sense at this point of what you do in-house as far as what percentage of revenue is tied to in-house production?

All -- the way we look at it, all the top movers, all the volume that basically in our key product categories we manufacture. The key is we add about 3,000 parts per year to the line. 99.9% of those we purchase. They have low margins.

And then what do we he do next? We look to bring them in for manufacturing over the next couple of years or low cost sourcing. The good news, it is always a continuous pipeline that offers us opportunity for savings in there. So when you think of our business, we are as much a manufacturer as a distributor and logistics company, and look to expand the manufacturing.

Okay, and then just lastly on the Temperature Control side, as far as SG&A you mentioned some of the drivers for why it was a bit higher. As you've now worked Compressor Works in, is it reasonable to assume that starts to fade as a percentage of revenue over the next, call it, two or three years?

Compressor Works -- well, now Temperature Control, with the -- recall Compressor Works was about a $60 million annual business, so again,Temperature Control, the mix size is up for us. But we expect to be able with, again, organic volume that it would be in low single digits, continual with the demographics. And we think that would -- that brand, along with our Four Seasons, it will be blended brands, but we expect to maintain that volume and grow with the industry.

All right, thank you very much.

You're welcome.

Thank you. It appears we have no further questions at this time.

I want to thank everyone for joining our call today. Thank you.

Thank you. This does conclude today's conference. You may disconnect at any time, and have a great day.