Standard Motor Products Inc (SMP) 2013 Q4 法說會逐字稿

Good day, everyone, and welcome to the Standard Motor Products conference call. I would like to now turn the conference over to Mr. Jim Burke. Please go ahead.

Thank you, John. Good morning. Welcome to Standard Motor Products' fourth-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 to report our full-year 2013 results. Key highlights include record sales and profits, benefits from integration of acquisitions, dividend increase for 2014 that was also previously announced, and a new share repurchase authorization.

Looking at the P&L, consolidated net sales in Q4 2013 were $218.7 million; up $26.4 million or 13.7%. For the full year, net sales were $983.7 million; up $34.8 million or 3.7%. We always caution against reacting to a single quarter, positive or negative, and believe the annual results are a better indicator of overall performance.

Let's now review revenues by segment. Engine management net sales in Q4 2013 were $175.7 million; up $22.1 million or 14.4%. Full-year sales were $711.2 million; up $46.1 million or 6.9%. The fourth-quarter sales were very strong, reflective of certain customers broadening their product lines for commercial business. Overall, we believe aftermarket demographics remain positive, and look for low- to mid-single-digit gains for the full-year 2014.

Temp control net sales in Q4 2013 were $38.3 million; up $3.1 million or 8.7%. For the full year, net sales were $262.5 million; down $6.3 million, and down 2.3%.

Excluding the benefit of CWI sales from January to April 2013 of $16.6 million, which were not present in the same period 2012, our temp control sales were down $22.9 million or 8.5%. This is reflective of the weak Summer season in 2013 from the cool and wet Spring followed by a very mild Summer. In addition, 2013 was up against one of the hottest Summers on record in 2012. We hopefully return to a more normalized Summer for the 2014 season.

Consolidated gross margin dollars in Q4 improved $8.8 million at 30.5%; up 0.4 points. Dollars year to date improved $30.8 million at 29.5%; up 2.1 points.

By segment, engine management gross margin in Q4 improved $8.3 million at 31.6%; up 0.9 points. And for the full year, improved $30.5 million at 30.7%; up 2.5 points. Engine management margin improvement reflects our key strategic initiatives that Larry will discuss further, and the benefit of overhead absorption from higher production levels to meet increased sales levels.

Temp control gross margin in Q4 decreased $653,000 at 16.5%; down 3.3 points. For the full year, gross margin decreased $433,000 at 22.1%; up 0.3 points. As we pointed out during our last earnings call, we stated that margins would be under pressure in Q4 2013 and Q1 2014 as we reduce production levels. We do expect sequential margin improvements from temp control throughout 2014.

Consolidated SG&A expenses in Q4 increased $5.3 million to 23.1% of net sales versus 23.5% in Q4 2012. For the full year, SG&A expenses increased $13.8 million to 20.5% of net sales versus 19.8% last year. The increased spending includes incremental costs from CWI and SMP Europe OE acquisitions. Our SG&A spend level has been fairly consistent across 2013 at roughly $50 million per quarter, with a total spend of $201.3 million for the year.

Consolidated operating profit before restructuring and integration expenses and other income net in Q4 was $16.3 million, up $3.5 million at 7.5% of net sales, which was up 0.8 points. For the full year, was $89.2 million, up $17 million at 9.1% of net sales; up 1.5 points. We are very pleased with the 150-basis-point improvement in consolidated operating profit, despite the weak temp control season we experienced. We look for temp control segment to recover in 2014, adding to further operating margin dollar improvements next year.

Our restructuring and integration expenses in Q4 increased $168,000, and were $3.4 million for the full year. This spending reflects integration costs related to our acquisitions, and a voluntary employee separation program in 2013. The net effect of our operational results, as reported in our non-GAAP reconciliation, was diluted earnings per share in Q4 2013 of $0.42 versus $0.28 in Q4 2012, and full-year 2013 of $2.32 versus $1.83 last year. Looking at the full year, operational diluted earnings per share improved roughly 27%.

Turning to the balance sheet and working capital, accounts receivable increased $26.6 million from December 12, which reflects the fourth-quarter sales increase of $26.4 million. Inventory was essentially flat against December-2012 levels, up only $2 million. Accounts payable also increased $9.2 million, reflecting increased production volumes to match the strong Q4 sales. Total debt decreased $19.2 million in 2013, with our year-end debt balance down to $21.5 million.

In addition to our debt reduction, other uses of cash in 2013 included dividends of $10.1 million; an increase of $1.9 million. On February 3, 2014, we announced a dividend increase of 18% from $0.11 to $0.13 per quarter, payable March 3, a week from today. We also repurchased $6.9 million of our common stock in 2013, reflecting a $1.9-million increase over 2012. Looking forward, our Board of Directors authorized a new repurchase program for $10 million.

In summary, we are very pleased with our operational performance for the quarter and for the full year. Thank you for your attention. I will now turn the call over to Larry before we open for Q&A.

Good morning, everybody. As we said in the release, and as Jim mentioned, we are very pleased with our 2013 results. Despite a drop in temp sales, brought about by the cold and wet Summer, we set records for sales and profit. The fourth quarter was especially strong, with engine management up 14%, and again, as Jim said, this was influenced, to some extent, by some large customer pipeline orders as they were broadening their inventory to go after more commercial business.

Temp was up 8%. Obviously, the fourth quarter is a very low quarter for temp, so total dollars didn't affect our numbers very much, but it did demonstrate that our customer base for this product line remains very strong and healthy.

The biggest area of improvement was in gross margin. It's up over 2 points for the year. As we have said, this reflects, and is the result of, our people's efforts over the last several years in many areas.

Our manufacturing products that we used to purchase. Increasing production in low-cost countries; we now have over 1,000 people in Mexico and about 300 in Poland, representing about 60% of our total manufacturing hours. Continuing improvement in our recent acquisitions, as they are now fully integrated. And savings on purchasing supported by our office in Hong Kong that we continue to invest in and grow.

We continue to push these initiatives. For example, we continue to expand our engineering group in all locations. We now have over 120 professional engineers.

Our goal is to manufacture as much as we possibly can. There are many benefits to this: obviously, lower cost; we have better control over quality; we have better control over the supply chain. And we believe that our customers appreciate the fact that we are a basic manufacturer. This helps differentiate us from some low-cost competitors who buy almost everything from third parties.

If we turn to acquisitions, we were pleased to announce in January that we had acquired the remanufacturing assets of Pensacola Fuel Injection. They had been our primary vendor for rebuilt diesel fuel injectors and other related diesel products. We will now be a basic manufacturer in this growing and increasingly important product line, with all the benefits of being a basic manufacturer that I just mentioned.

We've begun relocating the production to our plant in Grapevine, Texas, and the move will be completed by the end of the second quarter. We like these type of acquisitions. They are a basic part of our strategy for going forward. If you include Pensacola, we have now made six in slightly less than three years. The first five are fully integrated and performing well, and Pensacola will be there soon.

These acquisitions have helped us to become more basic manufacturers. They have broadened our customer base. They have helped us enter some new and related markets. We believe this is a good strategy to follow, and an excellent template. We continue to seek out acquisitions of this type.

That's a brief summary of 2013. We're pleased with the results. The industry demographics remain positive. And we look forward to 2014.

With that, we are happy to open for questions. Thank you.

(Operator Instructions). John Lovallo, Merrill Lynch.

In terms of Pensacola, is it fair to assume that the revenue contribution will probably be relatively small here and this is more of a margin improvement opportunity?

Exactly, John. They're our primary supplier in that line so, any growth in sales will be from the product category growing as opposed to acquiring any additional sales.

Okay, that's helpful. If we think about the Engine segment in the quarter, the strength, you guys did point out that there was some product line broadening by some of the customers. But was there any weather impact that benefited you guys?

I'd say a little, but not much. You are reading about the cold weather is good for the industry and it is, but it varies by product. Obviously, certain products have a much more cold weather related than others. A big example is windshield wipers, batteries and so on.

The majority of our products in Engine Management are not affected. There are a few that are and they did show a nice increase, but for the most part, our products, which are electronic and sensors, are not that affected by the weather. Our weather is summer. We root for hot summer.

Great. I know you guys don't disclose multiples for acquisitions, but can you just generally talk about where acquisition multiples are today versus maybe in the past, maybe a year ago?

John, I don't think they've moved that much that's in there. The ones that we're doing, again, I think overall, the industry sees anywhere from five to seven. Maybe the distributor is higher numbers. But ours are primarily bolt on. But they don't move that much. Again, they could be strategic if there's a key product category or something that we're doing and they are small. Absolute dollar impact is negligible to us.

Great. Thanks very much guys.

Patrick Archambault, Goldman Sachs.

In Temperature Control, you gave a good read on the likelihood that's going to improve. How should we think about the trajectory of Engine Management? It seems like you're pretty much at historical highs here in terms of profitability. What's the ability to continue to see that go upwards or sustain that?

Right. Okay, again from the top line, the revenue line, we think all the demographics are favorable. We said, excluding any individual quarters, low to mid-single-digits on the revenue line. To support that, we continue with cost initiatives that are in place there. We continue to try to expand our manufacturing. We're always evaluating product categories for low-cost manufacturing.

We've moved, as they say, the low hanging fruit, we picked up the bulk of that, but we're always evaluating other smaller product categories as they mature more. If we're able to do acquisitions, that offers us another little bump, because many of those products can fit in there. Long story short, we look for continued improvement in these areas, including Engine Management.

Okay, that's helpful. Building on the acquisition question, certainly, you guys have done a lot in a very short period of time. When you look at your pipeline of potential targets, is there enough to suggest that you can sustain this pace, or is this one of those situations where a lot of stuff has been consummated in a shorter period of time and you're going to continue to look do M&A, but it might be at a slower pace?

Yes, our balance sheet is very healthy at the moment now, and we've been doing very well with integrating these and look for these opportunities. We continue to work on them. We did six, as Larry pointed out.

I'd love to find six more that's on there, we're always working. We think there's opportunities, but I wouldn't say that I'm going to be able to do six per every two years that are in there, but we're working on them. Again, our supplier base becomes a key category there.

Okay, terrific. Thanks a lot, guys.

Brian Sponheimer, Gabelli and Company.

Just wanted to touch base on the buyback; as you said, the balance sheet's in great shape and you've improved the operations. Your EBITDA is going to be over $100 million in 2014. Why just the $10 million? It looks like you're in the position to do something more meaningful?

One of the benefits is, once we exhaust the $10 million, our debt levels, as we pointed out, down at $20 million. we'll address it. If we don't have the acquisition opportunities, we'll address it, and we can always evaluate the share buyback program and dividends as we move forward for our use of cash. Those are the key items. There are really four that's in there: the dividends, the share buyback, pay down debt, and acquisitions.

In an ideal world, where would you want the leverage and the balance sheet to be, Jim?

Right now, we have a very good luxury at, as you said $100 million in EBITDA, and even if we had to stretch it 2.5 times, it offers us tremendous amount of gunpowder that's in there. But we continue to do the bolt on acquisitions, pay for them almost in an annual basis and return cash to the shareholders.

Just from an operational standpoint about the longer-term impacts of the winter, cars right now, whether you're getting the benefit now or not, they're being stressed by the cold in a way that they haven't in the winter in a while. Would you expect any benefit, just from the added stress of this winter once it does turn hot again, or should we expect that summer needs to be hot for you guys to really get a --

As I said, you can't give one answer. It varies by product. If we were in the tailpipe business, it's great because salt chews up the tailpipes. The majority of our business is not directly affected by cold, it is by hot, later, different products.

But the industry is good and when the car gets hauled in for repair, because it didn't start or whatever happened, maybe they'll catch a few other things. But, again, we're not looking for a giant bump in our Engine Management line just because of the cold. Those things are short-term anyway.

Yes, sir.

Bret Jordan, BB&T.

Did you talk about what the inventory in the channels look like in Temperature Control coming into 2014?

Yes, again, it was a weak season, really from the spring. We think, overall, as we look at our big customers that are there, that the Tempo Control inventories are in reasonable shape. I wouldn't isolate it radically different than prior years.

Okay. On Engine Management, this inventory build up or increased product exposure on some of the commercial business, is that a front end load? Are you building inventory that now needs to turn? Or can we expect some continued growth on Engine Management from some of this new product line you're seeing in the commercial customers?

Again, they're broadening the product line because they have made a concerted effort to go after the commercial business. I'm assuming they're going to gain some of that and therefore, this product will turn.

All right. A question on TechSmart and where that is as far as strategic expansion? Some of those are highly engineered products, maybe as a percentage of sales or just a little color on that line?

We're starting small with it, but it has a very nice potential and we continue to invest in it. We invest in internal people to find the products, to source the products. We invest in marketing to get our name out there and we think it has a nice future.

Okay, great. As a relates to intellectual property, it seems like some of the stuff we are more recently -- some of the OE folks trying to protect some of their R&D investments. Are you seeing any increasing pressure on some of your -- maybe it's direct injection or any of the technologies that you've got in Engine Management that are drawing more attention from OE intellectual property rights folks?

No, we don't see any of that. In fact, I guess you're aware, our industry really won a nice legal battle and political battle where we have settled, I'm not the expert on it, but our industry associations have negotiated an agreement with the OEs. I think this is very helpful. It's good for them, it's good for us. We think we will all, especially our independent installers, have access to this information.

Okay, great. Thank you.

(Operator Instructions) Robert Smith, Center for Performance Investing.

Congratulations on a strong year.

Thank you.

The dividend, have you, at all, changed your payout targets? Because even with the increase and you must have had a pretty good handle on the year, it's really lagging the aforementioned target, as far as I understood it.

Yes. We maintain that goal. It is a long-term goal of one-third payout. However, we decided, after talking to many people, that the best strategy for us and for our investors is continuous small incremental increases. That is the strategy we are following at this moment. We're happy with the strategy.

Okay. Anything you can tell me about the sensors business? The Orange and how well that's doing, and any plans to broaden that?

Again, it is growing. It's a nice business. It is in its relatively early stages. As the law requiring this sensors is only about four years old, five years old, and so there's a lot of growth in this business. It is a wear part, it does wear out. Yes, we're relatively early stages now, but we think it has a very nice future.

Can it be broadened into other sensors?

We already do sensors. Sensors is our business. We continually look for sensors. It's become, perhaps, our largest or second-largest product area. Yes, more and more sensors on cars and more and more that's going to be added to the line.

Great. I don't want to dwell on the Pensacola, but I imagine that the acquisitions, essentially, are opportunistic or strategic. I'm wondering, when we discussed the number that might be -- appear the future, you said, can you give me some idea getting my arms around how many different possibilities exist? Are there many?

We look at it all the time. We have a list and we look at it. We are prudent. We're not going to overpay. We're not going to do something that we have no understanding of. But within that group, there are prospects out there.

Okay. Congratulations, again, on reshaping the balance sheet. Wonderful job. Good luck.

It appears we have no further questions at this time.

Okay, very good. I'd like to thank everybody for joining our call today. Goodbye.

This concludes today's program and you may disconnect at any time.