Standard Motor Products Inc (SMP) 2013 Q2 法說會逐字稿

Good day everyone and welcome to today's program Standard Motor Products Second Quarter Earnings Release. At this time, all participants are in a listen-only mode. Later, you'll have the opportunity to ask questions during the question-and-answer session.

I will be standing by if you need any assistance. And please note this call may be recorded. It is now my pleasure to turn the conference over to Mr. Jim Burke. Please go ahead, sir.

Okay. Thank you, Erika. Good morning and welcome to Standard Motor Products second 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.

Overall we are pleased with our second-quarter performance. Looking at our top line, consolidated net sales in Q2 2013 were $270.1 million, up $1.2 million or 0.5%. For the six months sales were $500.8 million, up $20.2 million or 4.2%. However, the sales change by segment is more revealing to our Q2 performance. Engine Management net sales in Q2 2013 were $182.1 million, up $9.4 million or 5.4%. For six months sales were $357.6 million, up $21.9 million or 6.5%.

As stated previously, we anticipate that Engine Management should mirror industry trends in the low to mid single digits for the balance of the year. Temperature Control net sales were negatively impacted in 2013 by the cool and wet spring and also against a comparison of a very warm 2012. Temp Control net sales in Q2 2013 were $86.7 million, down $6.4 million or 6.9%. For the six months, net sales were $139.4 million, up $1 million or 0.8%.

2013 results also included a benefit from CWI sales from January to April, not present last year. The CWI benefit in Q2 for the month of April sales were $4.9 million and year-to-date, covering the four months, January to April, sales were $16.6 million. The key takeaway is despite the reduction in Temp Control sales, we were able to still deliver consolidated earnings improvement primarily from gross margin expansion.

Consolidated gross margin dollars in Q2 improved $8.5 million at 28.8%, up three points. The gross margin dollars year-to-date improved $19.7 million at 28.7%, up 2.9 points. Looking at engine management margin in Q2, dollars improved $8.1 million at 29.9%, up 3.1 points and year-to-date improved $16.8 million at 29.7%, up 3.1 points. Engine Management margin trends have shown steady improvement since 2009 improving 500 basis points from 24.7% in 2009 to 29.7% in 2013. We strive for continuous improvement year-over-year.

Temperature Control gross margin in Q2 improved $0.5 million at 23.5%, up 2.1 points and year-to-date improved $2.9 million at 22.5%, up 1.9 points. We are very pleased with the margin expansion which added incremental gross margin dollars. This reflects the benefits of integrating our CWI acquisition into Four Seasons. We are very pleased with the efforts by both the Engine Management and Temp teams to deliver overall 300 basis point gross margin improvement in the second quarter.

Consolidated SG&A expenses in Q2 increased $4 million to 18.7% of net sales versus 17.3% last year and year-to-date increased $8.8 million to 20% of net sales versus 19% last year. The increase primarily reflects increases for CWI and SMP Europe SG&A expenses in the period for Q2 of $1 million and $3.2 million for the year-to-date. We also had intangible amortization increase of $200,000 in Q2 and $600,000 year-to-date.

Sequentially, Q2 SG&A expenses were $50.6 million, up only $1 million over Q1 2013 SG&A expenses of $49.6 million despite almost a $40 million sales increase in Q2 over Q1.

Consolidated operating profit before restructuring and integration expenses and other income net in Q2 was $27.2 million, up $4.5 million at 10.1% of net sales and year-to-date was $43.4 million, up $10.9 million at 8.7% of net sales. Our operating profit improved 1.6 points in Q2 and 1.9 points year-to-date.

The net impact between GAAP and our non-GAAP adjustments in the quarter and year-to-date were negligible. Our non-GAAP diluted earnings per share in Q2 2013 were $0.70 versus $0.59 last year and year-to-date reflects the $1.12 versus $0.82 last year. While we would have liked to deliver a more robust sales increase, we are pleased converting 0.5% sales increase in Q2 into an 18.6% earnings per share improvement and for year-to-date a 4.2% sales increase into a 36.6% earnings per share improvement.

Looking at the balance sheet, accounts receivable increased $53.2 million from December 12, reflecting the seasonal nature of our business. Compared to June 2012 accounts receivable are down $6 million. Inventory increased $29.3 million against December 2012 and compared to June 2012 it's also up $30.9 million. We intentionally built inventory levels for the CWI integration which is now complete. We believe inventory will be reduced by year-end from these elevated levels.

Total debt increased $27.8 million from December 2012 for working capital needs and for $12.8 million in acquisitions. Total debt, however, decreased $28.8 million compared to June 2012 levels.

Our cash flow reflects a $12.4 million cash used from operations due to our accounts receivable and inventory build and partially offset by accounts payable and other liability increases. The change in operating activities for the first half 2013 versus 2012 is primarily the impact of inventory change.

Investing activities includes $12.8 million for acquisitions in 2013 versus $38.6 million in the prior year. The financing activities reflects the change in our debt to fund the operating and investing activities already discussed.

In summary, a good quarter reflecting gross margin expansion and earnings improvement for the quarter and year-to-date.

Thank you. I will now turn the call over to Larry before we open for Q&A.

Okay. Good morning, everybody. As Jim has said, we're pleased with the second quarter. Operating income and earnings per share are well ahead for the quarter and for the six months. The gross margin is up 3 points also for the quarter and the six months. This represents a continuing trend over the last several years of constant improvement, a result of increased manufacturing, our investments in R&D and capital investment are paying off, continued growth and improvement in our low-cost facilities in Mexico and Poland and our folks have done a good job in consolidating and streamlining our recent acquisitions.

Third we have had a nice increase in Engine Management sales, 5.4% for the quarter and 6.5% for the six months. The only disappointing area is Temp sales. Now if we factor in the CWI volume, which we have for the full year this year and only a partial year last year, we estimate the apples to apples we're down about 11% year-over-year. This is strictly weather related. It was a cold spring, especially in the South which is the heart of the business and we are comparing ourselves with a very strong and hot 2012.

So let's talk about the Temp division for a second. It's a weather-dependent business as we have said over and over. Sales can fluctuate plus or minus 20% in a given season depending on the weather. Given this, our strategy has been to structure this division such that we do well in a cool summer and do very well in a hot summer, and we believe we are well underway to achieving that.

So despite this cool weather so far, our gross margin is up 2 points for the year and our operating profit is down only slightly from 8.4% of sales to 8.0% in the second quarter and 5.7% to 4.7% for the six months and again this is compared to a very hot and strong 2012.

Now the CWI acquisition has played a big part in this. It's going very well. We have maintained 100% of the business. Our folks have done an excellent job in bringing together the two companies. We have fully integrated the manufacturing and the distribution in less than a year. The additional volume is helping us in our overall cost structure. For example, we have now doubled production of new compressors in Mexico and that also went off without a hitch. So overall, this will not be a great season for Temp but we are pleased with the direction that this division is taking.

So that's the story for the second quarter. Despite the decline in Temp sales, we are pleased with the results. The earnings are up, the cash flow is healthy, our customers are doing well, industry demographics remain positive and we keep working to position ourselves for the future. So with that thank you and let's open for questions.

(Operator Instructions) John Lovallo, Merrill Lynch.

Hi, guys. Thanks for taking the call.

Okay. Good Morning, John.

Good morning. First question on one of the comments that was in the press release. You had mentioned customer consolidation around the Four Seasons and the CompressorWorks brand. I just want to make sure I am understanding that. I mean, is that kind of cannibalization or what else could be going on there?

I'm not sure I understand your point.

That was where we talk about -- that's where our customers were carrying both brands.

Okay. Now I understand. It's about customer consolidation. You are talking about inventory. Okay. Yes. Many of the customers, not all, but a decent number had both of us. They had CompressorWorks and they had Four Seasons. They took this -- many of them have since restructured it because they didn't need two parallel lines. So they have tended to reduce one or the other to make a more balanced total approach. That's what I was referring to. And actually what that shows so there has been, we believe, some inventory reduction out there and it is demonstrated in a number that we looked at in that while their sales out the door were down, our customers, we get reports from all the big ones, they were not down as much as we were down and the difference would be inventory reduction. So that's what we were referring to, okay.

That's helpful. Thank you. And then the other question would be on the other revenue line and I think that encompasses your Canadian business and maybe some corporate functions. Now is there any reason on a year-over-year basis that this should be structurally lower? I mean, has anything changed there?

John, no. That's because when we're -- it relates to the Company sales that we're moving through. So that's just the change from shipments up to our Canada location that we would have in there. So, no that business we're distributing there, it's just the net impact of what we're moving up there.

Great. Thanks very much, guys.

You're welcome.

Brian Sponheimer, Gabelli & Company.

You guys would be happy to know for the second consecutive year on your call my car is in the shop for an air conditioning issue.

Thank you very much.

Just a couple of questions here. Going back to the inventory and some of the inventory reductions, does this mean that should we get a relatively hot summer or start to the summer next year that not only will you have increased sales but also potentially some inventory build out of your customers so maybe you get a double benefit?

Well it's hard to forecast that but that's not unreasonable what you're saying.

Is that typically what you see?

Yes, if they winds up -- obviously, if they winds up the year with less inventory than they had at the equivalent part a year ago that would be helpful. But again, last year was a very, very hot summer. So I'm not sure what the comparisons will be. But we will measure that and we will have a much better feel for that in a month or so.

Okay. And one of the larger aftermarket suppliers has gone out and said that they want to potentially reverse the table terms with their customers vis-a-vis how they get paid. How are you guys thinking about speaking to your customers now and potentially trying to reduce maybe days receivable outstanding? Are you comfortable where you are now?

Well, again, Brian it's a very competitive marketplace. The customers that have factoring programs in place, again they're carrying their inventories. We work within the industry with all of our customers there. And again, it's a balance. It's a menu list of many items that we work to put them in a competitive position but also for ourselves and any cost increases that we incur that becomes similar to like a commodity increase that we're going to have to work with our customers on.

Okay. But there's been no change in Company strategy within the last 12 months or so?

No.

Okay. And I guess finally, given where the balance sheet is right now and how the shares have performed, how are you thinking about returning capital to shareholders, buyback, dividends et cetera?

We have a authorization still outstanding for approximately $5.7 million so that we will consider again the market for a share buyback and dividends. We have a -- we usually review it on an annual basis. But again our Board -- for Board approval, please just announcing the dividend which has been steady at a quarterly dividend and we look to continuously to move that towards a one-third payout ratio.

Okay. Thanks, guys.

All right. Thank you.

Bret Jordan, BB&T Capital.

Hi. Good morning.

Good morning, Bret.

Couple of quick questions. I guess Engine Management is pretty strong. How do you look at that relative to the overall market performance in the category? Do you think you outperformed and I guess if you did was it market share gains or was it incremental products that you're offering in the category?

I think it's a whole bunch of things. I think we are doing very well. We broadened our coverage. We've improved our catalog. We do a lot of things in the marketing level to help. And I think we are doing [comparatively] well. So I'm pleased with that.

Okay. The second half, it sounds like you're guiding sort of in line with industry growth. Is there a reason that you wouldn't continue to outperform the industry?

Again, in our Engine Management category we have close to 40,000 SKUs with multiple different product categories that move in back and forth. So cautiously we feel that it should be within the -- should mirror the industry. Our product categories are doing better in hard parts, have been doing slightly better, we're just being cautious.

Okay. And then a question on regional performance, you noted that the south was the toughest. If you look around the market where your [product is] selling through, you talked certainly about relative areas of geographic strength or weakness. I guess the South was the weakest. But maybe talk about the Eastern, Central and Western markets, were markets that were less cold and wet actually up in Temperature Control?

Actually we've done that analysis. [Certainly] the heart of the business is the South. It's a southern business. I am not sure what percentage of our total they represent, but they are the biggest factor by far, and yes they were down. An increase in the Northeast can't compensate for a drop in the south because it's a much smaller -- it's a much smaller business and a much shorter season up here.

Well, [East, I will also provide too] I guess it was down, but was the West -- was the Western market up?

Yes, Bret, this is Jim Burke. Really at this time it's -- we're reflecting more or less customer inventory levels buying and it's still difficult -- we always say, on a quarter-over-quarter it's very difficult to measure. We have to look at the overall season. So we're looking at the April to June time frame when it's really just reflecting customer orders. Larry pointed out earlier that in the month of June was the first month that we saw our customer sales match the June of the prior year, again, when it was a very hot 2012.

Okay. Great. And one last question, you comment about the inventory consolidation between the Four Seasons and the CompressorWorks. Is that largely past, is that consolidation continuing or is that a consolidation that you saw in the second quarter?

No, that's happened. They restructured their inventories and that was a one-time event and it's happened.

All right. Great. Thank you.

Thank you.

Adam Brooks, Sidoti & Company.

Yes. Good Morning, guys. Just want to get a sense on the Engine Management segment. You've had about five years in a row now where you do 100 to 150 basis points versus [a lot] margin expansion and it looks like we're in track for even better than that in this year. Can you give us a sense of when that starts to slow [and I am not asking for] every quarter, but kind of what inning we are in as far as all the improvements you are making, increased basic manufacturing and shipping to low-cost countries?

Again, I hope it's a doubleheader and -- where we strive continuously for the improvements, but what that means is it's a balance, Adam. We picked off the low-hanging fruit for what we can move to our low-cost areas, but we're always evaluating product categories that we have in our existing facilities.

The bigger benefit becomes when we can pick up some acquisitions, again that are similar products to ours, and consolidate them in. And that's been really where we've seen, probably over the last couple of years, more of the benefit that's happened there.

We have beefed up the, Larry mentioned early, the R&D efforts to increase the manufacturing. So that's helping us in that area also. So we think that we have a program employees from increased manufacturing that's really going to drive it with our engineering efforts to continuously improve margins in Engine Management and also in Temperature Control.

And could you give us an update maybe on (inaudible) it's nothing huge right now, but just kind of your updated thoughts there?

Yes, sure. Thanks. We are very pleased with how it's going. It's a very rapidly-growing market. The forecast was 300% increase in five years to the market. We have a relatively small market share. So we're looking at nice increases. I think more important for the long run, we are a 25% partner in this business. We are developing very fine working relationships with the company and we are very pleased too. So we think this has a very nice future for us.

Thank you.

(Operator Instructions) [Robert Smith].

Good Morning. Hello. Operator, we're not getting anything.

Efraim Levy, S&P Capital IQ.

I am sorry. We did not hear that call. Is that all right?

Yes, Robert, if you're still in the queue or still in the call, can you please go ahead and re-queue your line please?

Okay, thank you. Sorry. Continue.

Okay. We'll go on to Efraim Levy. Go ahead and we'll wait for Robert to re-queue.

Okay. Thank you. Yesterday Polk reported its forecast for growth of the zero to five years in the 12-plus year old vehicles but a decline in 6 to 11-year-old vehicles. How does that play into your strategy and your ideal market mix?

I will take it. Well, again, they're both important. I would have to see if one balances out against the other. But I think the basic overall is that [the old] thing is growing and that the average car population continues to grow and you just heard that it sort of inching more towards 12. That may be where you got that. So they're both our markets, 6 to 11, above 11, that's our market and the total is growing and that's fine by us.

Okay.

The only other point I would comment on is that well, while they are measuring that 6 to 11 and if that declines slightly there is some -- the speculation will then move more towards economy lines because now the car is over 11 years. But it's a balance, it's a very broad category offering that we have.

Okay. And in terms of the acquisition pipeline, are you seeing many opportunities, what's the environment for what you're looking for?

Well, generally we are pleased with how the acquisition strategy is going. We try to do it carefully and picking companies that are essentially related but also give us new manufacturing possibilities, new market possibilities, but always staying relatively close to what we do. That has proved to be very successful. The last five we did, I am very pleased with all of them. So with that in mind, we continue to look. I think we have developed a very good expertise in integrating these things. We've been pretty good at that and our balance sheet is healthy. So, yes, we are looking, but we will always look carefully.

I mean, are you seeing -- the availability of opportunities, do you see a lot there or is it fewer now than you were before because you just had a bunch of acquisitions or is there enough there to choose from, it just takes time?

Efraim, it takes time. Obviously there is -- as you complete [and there is] some consolidation [there is few were] out there, but again we have a long list of suppliers and opportunities that we look at. The key is we want to stay within our two major product categories with the products we know and the customers we know and hopefully we are able to develop some leads if they come to fruition.

All right. Thank you.

You're welcome.

Robert Smith.

Erika, we can't hear from this (multiple speakers).

We can't hear it.

If someone can repeat it perhaps.

(Operator Instructions) Okay, Mr. Burke, at this time we have no further questions.

Okay. Thank you, Erika. I want to thank everyone for joining our call today. Good bye.