Standard Motor Products Inc (SMP) 2013 Q3 法說會逐字稿

Good day, everyone, and welcome to the Standard Motor Products Third Quarter Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Please note, this call may be recorded. I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Mr. Jim Burke. Please go ahead, sir.

Okay, thank you. Good morning, and welcome to Standard Motor Products' Third 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'll begin with a review of the financial highlights and then turn it over to Larry, followed by Q&A.

The key highlights in the quarter were overall sales reduction, strong gross margins, and very positive cash flows. Looking at our top line, consolidated net sales in Q3 '13 were $264.2 million, down $11.8 million, or 4.3%. For nine months they were $765 million, up $8.4 million, or 1.1%. By segment, Engine Management net sales in Q3 '13 were $177.9 million, up $2.1 million, or 1.2%. For the nine months they were $535.5 million, up $24.1 million, or 4.7%. Sequentially, Engine Management net sales in Q1 '13 were up 7.7% as we noted customers were broadening their inventory levels. Q2 net sales were up 5.4%, reflecting strong growth, and this most recent Q3 quarter net sales were up 1.2% as we were up against Q3 '12, which included pipeline orders. And year-to-date, overall we were up almost 5%.

As we have stated in each of the past quarters this year, we believe industry demographics remain positive for the foreseeable future and expect Engine Management sales to mirror industry trends in the low to mid single digits.

Temperature Control net sales in 2013 were impacted by a cool, wet spring, followed by a moderate to cool summer season compared to 2012, which was one of the hottest summers on record. Q2 '13 net sales were $84.8 million, down $10.4 million, or 10.9%. Nine months year-to-date net sales were $224.2 million, down $9.3 million, or 4%. However, adjusting for a CWI acquisition completed at the end of April 2012, the nine-month sales were off $26 million, or 11.1%. Larry will further touch on our Temperature Control segment.

The key takeaway is despite the reduction in our weather-dependent sales, we were able to deliver consolidated earnings improvement. Consolidated gross margin dollars in Q3 improved $2.3 million at 30.3%, up 2.1 points. Dollars year-to-date improved $22 million at 29.2%, up 2.5 points. The consolidated margin percentage point improvement also benefited from a higher mix of Engine Management sales due to the 2013 cool summer season.

Engine Management gross margin in Q3 improved $5.4 million at 31.8%, up 2.6 points, and year-to-date improved $22.2 million at 30.4%, up 2.9 points. Engine Management margin trend in the current year and over the last several years is reflective of our key strategic initiatives that Larry will review further.

Temperature Control gross margin in Q3 decreased $2.7 million at 24.2%, down 0.1 point. Year-to-date increase $200,000 at 23.1%, up 1 point. The Q3 gross margin percentage was essentially flat, and the decrease in dollars was volume related.

The CWI acquisition added incremental volume that improved year-to-date margins within our 23% to 24% target gross margins despite a weak summer season. Short term, the Temp gross margin may be under pressure in Q4 '13 and Q1 '14 due to reduced production levels as we scale down inventory.

Consolidated SG&A expenses in Q3 decreased $300,000, but increased as a percent of net sales to 19.2% versus 18.5% in Q3 '12. Year-to-date, SG&A expenses increased $8.5 million to 19.7% of net sales versus 18.8% last year.

Our sequential SG&A spend in 2013 has been fairly consistent with Q1 at $49.6 million, Q2 at $50.6 million, and, again, Q3 at $50.6 million. Consolidated operating profit before restructuring and integration expenses and other income net in Q3 was $29.5 million, up $2.6 million at 11.2% of net sales, up 1.5 points. And year-to-date was $72.9 million, up $13.5 million at 9.5% of net sales, up 1.7 points.

We are very pleased with the operational earnings improvement for both the quarter and the year-to-date results. Our restructuring and integration expenses in Q3 increased $1.3 million and $1.8 million year-to-date. In the quarter we implemented a voluntary separation program in our sales force incurring a $1.8 million charge that is expected to generate $1.5 million annual savings beginning in 2014.

The net effect of our operational results as reported on our non-GAAP reconciliation was diluted earnings per share in Q3 '13 of $0.79 versus $0.73 last year, and year-to-date of $1.91 versus $1.55 last year. This reflects an improvement of 8% in the quarter and 23% for the nine months year-to-date.

Looking at the balance sheet, accounts receivable increased $43.4 million from December '12, reflecting the seasonal nature of our business. Compared to September '12, AR is $19.4 million lower due to lower sales in the quarter. Inventory at September 30 was up $1.7 million from December '12 levels, but reflects a $26 million reduction in the quarter. That was built as a safeguard for our CWI integration.

Benefiting from changes in working capital, total debt decreased $36 million in Q3 from June 30 levels, and decreased $8 million from December '12 year-end. Our remaining debt outstanding is $32 million.

In summary, we are pleased with our operational performance in the quarter and year-to-date, highlighted by gross margin expansion and positive cash flows to reduce debt. Thank you. I will now turn the call over to Larry before we open for Q&A.

Good morning, everybody. Jim has reviewed the numbers and we can go into a bit more detail later on, if you like. But what I'd like to do is dig a little bit deeper into two of the elements of the quarter. One is the gross margin improvement and the other is Temperature Control sales. First, gross margin.

Our folks have worked very hard in this area over the last several years with a goal of being the low cost, high quality manufacturer in the industry. We've done this in several areas. First, we have had a major initiative to manufacture parts that we used to buy, and we've made the investments in R&D and in capital. Benefits in manufacturing are obviously reduced costs, which is what you see in the numbers, but also better control of quality and better control of supply, and we are continuing aggressively in this area.

Secondly, we've relocated manufacturing operations to low-cost areas. We've talked about that before. We now have over 1,000 jobs in Mexico and roughly 300 in Poland. This represents somewhat above 60% of our total manufacturing. Third, we've also had an effort to reduce purchasing costs, and helping along the way we have an office in Hong Kong staffed primarily by engineers, and this is helping us to both expedite the purchasing process and to ensure quality. And, fourth, we have integrated and streamlined our various acquisitions, and I'm going to come back to that in a bit. Okay. All of these have contributed to gross margin. It's what you've seen, and efforts in all these areas are continuing.

All right, now let's talk about Temp sales, the other big event. As we've said, Temperature is a very weather-related business. Sales can fluctuate plus or minus 20% depending on the temperature. 2012 was a very warm summer, and 2013 was a very cool summer, and that's what you've seen in the results. Now, our goal in this division, considering the variability based on weather, is we want to be able to do well in a cool summer and very well in a hot summer, and we think we're positioned to do this especially now that we have CompressorWorks fully integrated.

So, I want to talk about acquisitions in general and then we can get to CompessorWorks in particular. All right. We've evolved in acquisition strategy. We've made five acquisitions in the last two years. Quickly, one was BLD, which was a supplier of ours in Engine Management; one was Forecast Trading, which was the leading economy line supplier in Engine Management. Third, we made an investment in Orange Electric, who was our primary supplier for tire pressure monitoring sensors, TPMS, which we feel has a huge growth potential. Fourth, we acquired the OES business from our former European subsidiary. Again, that's an area we want to grow. And fifth is CompressorWorks. All are fully integrated, all are achieving the goals. And what they have in common, these are products we know and understand. These are markets we know and understand. We believe this acquisition strategy minimizes risk, maximizes savings, and we plan to continue.

Specifically, on CompressorWorks, I think our folks did an excellent job here. We relocated the CWI production to our plant in Reynosa, which effectively doubled their production of new compressors. We've combined distribution centers, we've merged product lines, all done on a very tight schedule because of the seasonality and to be ready for the season, and all went well. Now, the benefits have been masked, somewhat masked by a poor selling season, but we feel we're very well positioned for 2014.

So, that's our story. We like the way the Company is headed. Industry demographics remain favorable, and we are optimistic about the future. So, thank you, and with that we open for questions.

(Operator Instructions) And we'll go first to the site of John Lovallo of BofA Merrill Lynch.

Hey, guys. Thanks for taking the call. First question is on the voluntary separation program. Can you give us an idea of maybe how many employees that affected, and if there is the opportunity for more actions along these lines?

The plan in this area here, it's involving approximately 20 employees. But what we're doing in this area is we're upgrading the technical nature of our staff. So, some of these are senior people who are retiring, and then it is, we're replacing some of them with more technician-type, tech-type people.

And we have no further plans in that area in the short term, if you're asking that.

Sure, thank you. That's helpful. And then thinking about the 60% of you production in low-cost facilities at this point. Is there an opportunity to ship more to the low-cost facilities, or do you think that you've gone pretty much as far as you can go?

I think we've achieved what they like to call here the low-hanging fruit. We've move the bulk of the labor-intensive tasks and much of which remains are products that are highly automated, i.e., fuel injection and coil-on-plug, and things like that, which frankly doesn't make sense to move. So, I think most of it is behind us. We'll always be looking, but I think the bulk of it has been done.

Okay, that's helpful. If I could sneak one more in here. In May, I believe, you amended your credit facility. I'm just wondering if this has given you more flexibility in terms of acquisition repurchases, and if so, would you consider expanding the repurchase program kind of above and beyond what's needed to fund the comp plan?

We did amend the facility, as we previously -- I believe it was in May. We have the flexibility there for acquisitions, to be able to complete them, and we're active, always looking and trying to be opportunistic there. We have currently about $5 million outstanding on our share repurchase program, and again we address that with our board on a continuing basis. And once if we're not -- we have $32 million outstanding in debt, we would look to, again, the other uses of cash would be dividends and/or share buybacks.

Okay, thanks very much, guys.

And we'll go next to the site of Bret Jordan with BB&T Capital.

Good morning. This is actually David Kelley in for Bret. Just a couple quick questions. And first, if you're looking at the recent news in the industry, obviously, with Advance Auto Parts and the acquisition of GPI, I just wanted to get your thoughts on potential customer inventory consolidation or what your expectations are for the next six months or so, and the potential impacts on gross margin as well?

Are you talking about the industry or for us?

Both would be great.

I'll talk about the industry. Obviously, when a major acquisition like this, one of the ways they look to help pay for it is by reducing distribution centers. So, that is going to create some excess inventory in the system. So, I don't know how to quantify that at this point. But this has happened many times in the past and it takes a little while and the industry deals with it. So, I would imagine there will be some extra inventory floating around, which depresses production for manufacturers and may have some price effect in the short term. But that's a short-term event. I forgot the rest of your question, frankly.

Great, thank you. Just kind of piggybacking off of that. So, are your expectations, will there be some give-and-take on price here that could impact gross margins over the next six months given the consolidation of three of these larger customers?

Again, you're asking for the industry? Again, I can only speak in general terms, but, again, highly competitive industry. These were both very large accounts. There may be some, but I don't think it would be a great amount.

All right, great. Very helpful, thank you.

That is purely my personal speculation.

All right, great. Thank you. A quick follow-up on SG&A, I think, Jim, you mentioned that sequentially it's been very consistent throughout, you know, year-to-date in 2013. Any expectations for the fourth quarter, just for modeling purposes, given seasonally it's your least strong sales quarter historically in the fourth quarter?

Right. I think the key is that it's consistent and I would advise that you look at the absolute dollars and look at our trend over the last year. Fourth quarter basically comes down a bit because most of our -- a lot of our costs in SG&A are semi-fixed, that's in there. So, the key would be an [error] if you attempted to use it as a percent of sales. So, look at the trend and look at the spend over the last, over 2012 and over 2013.

All right, great. Very helpful, thank you.

And we'll go next to the site of Walter Schenker from MAZ Partners.

Hi, Larry, Jim. A comment which is obviously tongue-in-cheek and then a couple of questions, which is the music while we wait for your call on the day the stock effectively hits 40 should be more upbeat. Maybe "Happy Days are Here Again," or something like that. Two things. First, in regard to inventories the fourth quarter on Temp, you've indicated that the next couple of quarters, obviously, given the sales pattern, you're a little heavy on inventory and will cut back on production. Do you have any feel, since you can look through some of your customers, was it already starting to happen as to what type of return patterns they may have in the fourth quarter and that they may be somewhat heavy in inventory as well?

I think they've done a good job of watching their own inventories. So, inventory we're talking about is obviously our own. There may be some. Obviously, everybody's sales were less than they would have hoped, but, again, we have pretty good rules here, but more importantly, I think our customers have gotten very good at managing this. So, there may be some, but I don't think it's going to be gigantic.

Okay. And then a question/lecture, I guess, which I've been known to do. The dividend is still $0.11. It's been years now of talking about a dividend payout target. And not meeting that target and making very minimal progress toward meeting that target, I would just say that for the credibility of that actually being a publicly stated target, the dividend either should be moved significantly or maybe you should withdraw it.

(Inaudible) the dividend, you mean for the target right?

The payout ratio, I'm sorry.

Fair enough, Walter. We continually review this with our board and we see opportunities on this. But, again, also as we look for the dividend to be steady increases over the long haul and movement towards that one-third payout ratio. And I'm sure you won't hold us for improving the earnings significantly in 2013.

No, no, I'm not, but your payout isn't a third of last year's earnings, forgetting about the increase this year. So, we're running further and further behind. But that's my point. I'll see you guys next week. Thank you.

Point delivered. We'll see you next week, okay.

And we'll go next to the site of Robert Smith. Please go ahead.

Good morning. Congratulations. Yeah, also on the price of the stock, wow. So, I kind of go with what Walt just said about the dividend. I mean, I'd like to see some movement in there and you might at these levels kind of combine it maybe with some kind of a stock splitter or a stock dividend. Anyway, it's a thought. But the other side of the coin is you're buying back stock, so I don't know how you might feel about that. But nevertheless, I was wondering if you could give me a reading on the sensor business and how that's going?

Referring to the time sensor, I assume.

Yeah.

Because we have a lot of sensors, but I'm guessing the one we've been talking about. We remain very optimistic about that. Just to remind everyone, this is, it's called Tire Pressure Monitoring Systems. They have been mandated on all US cars for the last five or six years. It is reputed to be a major growth event, because they actually do fail, a 100% failure rate because the battery wears out. There's four on every car, so it's a good business, and it's a very competitive business now. There are many people in it, but we made an investment in our vendor, a company called Orange Electric, comes from Taiwan, and we are very pleased with how it's going so far.

Can you share any numbers of growth rates, I mean, that they're experiencing?

No, we don't like to get into that level of detail, but it is growing. And, again, the forecast for the industry is 300% growth in five years.

Yes, I also want to congratulate you on moving down the debt level. I guess during the next financial crisis you won't have to say sorry or anything like that. But, anyway, along those lines, what might be an optimum debt-equity ratio that you're looking for going forward?

Again, it will trigger upon what our acquisition opportunities are. So, again, debt-to-equity at the point now where our equity is one-to-one, it would be really looking at what a ceiling would be in there, looking at a multiple of EBITDA. I would say as a cap that we would target it to would be 2.5. Obviously, that gives us a significant amount of headroom. So, the key is being opportunistic on acquisitions.

Sounds intelligent, sure. Are there any particular changes in the competitive environment that you might want to share with us?

No, I can't think of any offhand. Again, they referred to the major customer move of Advance and Carquest, but, no, I think at this point the manufacturing base is quite stable.

Thanks so much. Good luck.

And we'll go next to the site of Patrick Archambault from Goldman Sachs. Please go ahead.

Thank you. Good morning. A couple here for me. Just in terms of the M&A environment, you guys have obviously accomplished a lot, successfully integrating, I think, five acquisitions recently. How do you see the M&A landscape going forward? Is there still a large number of attractive targets that seem like they come in reasonable price ranges to sort of sustain the level of activity that you've done, or how would you describe that landscape?

Patrick, the five that we've done was really a -- and a couple of them were a little sizable and the others were small, and that was a significant amount for us over that two-year period. We're opportunistic. I would say overall that there is not a complete pipeline of available acquisitions that you can anticipate how many we would be able to close, but we're always looking, we're always talking. And our key focus is really looking at opportunities within our vendor base, and we want to look to bring in-house manufacturing. So, that's our strategy and we look to hopefully close some.

Thanks, that's helpful. And my other one is just on the Temperature Control, the inventory reductions affecting 4Q and 1Q, you said would probably pressure gross margins somewhat. Can you just help us try and get an order of magnitude of what the impact might be of that?

It's a good question, and we don't put out the guidance that's on there, but if you look back over the years, because the impact of how much it's going to be is really the -- in a couple of points. We're in the 23% to 24% range and probably you look back where we were a couple of years back, we may have hit into the 19%, 20% range. But I don't envision that impact. So, a couple of points is the area. Again, it's lower volume, also, just so the absolute dollar impact is not that significantly, either, during that period.

Understood. Okay, great. Thank you very much, guys.

(Operator Instructions) We'll go next to the site of Efraim Levy from S&P IQ. Please go ahead.

Hi. Patrick took a bunch of my questions all at once, but as far as the Temperature operating margins for the quarter, so if you look at them, they have been flat from year-to-year, what do you think they would have gone to? To put it differently, what do you look at the normal contribution margins for Temperature?

Again, that's a good question, Efraim, but we don't put the guidance out. I think the key that we talk in our -- if you look at gross margin, how I like to look at it there, we're within our range of 23% to 24%, and we think we have opportunities, hopefully, once we get into a full season, what we're looking forward to in 2014 with the integration of CWI. As we point out, the SG&A spend is fairly consistent. There will be an increase. You can look, we disclose by segment the dollar numbers, and that incremental change will move up and down, so you can take those two numbers to get the operating profit. Currently in the quarter we were at operating profit and temperature control for 8.8%.

But as far as the underlying, you think that the operating margins would be improving in that segment, if they were normalized on sales?

Yes, because I gain more leverage on the SG&A. I'm still holding to the 23%, 24% gross margin, but obviously the absolute dollars that we would generate would be significantly more on a normalized, hopefully normalized season. So, we would still be in the 23%, 24% range on a full year basis for gross margin, leverage gained on the SG&A, and incremental dollars.

Okay, thanks a lot.

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

Okay. With that, then, I want to thank everybody for joining our call today. Thank you.

Thank you for your participation in today's conference. This does conclude your conference. Please feel free to disconnect at any time.