Standard Motor Products Inc (SMP) 2014 Q2 法說會逐字稿

Good day, everyone. Welcome to today's program. (Operator Instructions). Please note, this call may be recorded. (Operator Instructions). It is now my pleasure to turn the conference over to Mr. Jim Burke. Please go ahead.

Okay, thank you. Good morning, welcome to Standard Motor Products' second-quarter 2014 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 pleased to report continued operating income improvements in the quarter and year to date, excluding a one-time litigation charge and other non-operational gains and losses. Non-GAAP operating income compared to prior year increased 4.9% in Q2, and 12.5% for the first half 2014.

Looking at the P&L, consolidated net sales in Q2 2014 were $272.5 million, up $2.4 million or 0.9%. And year to date were $505.3 million, up $4.5 million, also 0.9%. By segment, engine management net sales in Q2 2014 were $184.2 million, up $2.1 million or 1.2%.

For six months, were $363.5 million, up $5.9 million or 1.7%. The engine management sales increase was at the low end of our expected range of low- to mid-single digit growth. Larry will further discuss sales performance shortly.

Temperature control net sales in Q2 2014 were $85.7 million, down $1 million or 1.2%. Excluding incremental sales of $2.6 million from our Annex Manufacturing acquisition at the end of April, Q2 2014 sales were down $3.6 million or 4.2%.

For the six months, net sales were $137.1 million, down $2.2 million or 1.6%. And adjusting again for the $2.6 million Annex sales year to date, net sales were down $4.8 million, or 3.5%.

Temperature control sales are highly dependent on the weather. During our Q1 2014 earnings call on May 1st we noted that our cautiousness due to the cold temperatures around the country through April. Unfortunately, that cool trend has continued through the second quarter, including very mild temperatures in July.

Consolidated gross margin dollars in Q2 were down $400,000 at 28.4%, down 0.4 points. However, dollars for six months were up $1.7 million at 28.8%, up 0.1 points. By segment, engine management gross margin in Q2 improved $1.7 million at 30.4%, up 0.5 points. And for six months improved $3.2 million at 30.1%, up 0.4 points.

Overall, we are very pleased with the continued efforts to improve gross margins by the engine management team. We have made significant strides achieving 30% plus margins and continue to work on initiatives to improve, though at a more moderate pace, as the low-hanging fruit has been harvested.

Temperature control gross margin in Q2 declined $2 million at 21.4%, down 2.1 points. And for six months, declined $1.1 million at 22%, down 0.5 points. As we pointed out during our Q1 earnings call, we were scaling back production and gross margins would be pressured in the coming quarters due to unabsorbed overhead.

The temperature control team has reduced expenditures based on lower production levels, and we look for margins to improve from the 21.4% level in Q2 for the second half of the year.

Consolidated SG&A expenses in Q2 decreased $1.7 million to 17.9% of net sales, versus 18.7% last year. Year to date SG&A decreased $3.8 million to 19.1% of net sales, versus 20% last year. We are pleased with the expense controls in place.

Overall, consolidated operating income before the one-time litigation charge, restructuring and integration expenses, and other income net in Q2 was $28.6 million, up $1.3 million at 10.1% of net sales, up 0.4 points. And for six months, was $48.9 million, up $5.4 million at 9.7% of net sales, up a full point.

The $10.6 million litigation charge, $6.4 million net of taxes as disclosed in our press release, is a one-time non-recurring charge resulting from a tentative settlement of a legal proceeding with a third party.

The legal proceeding arose from a former supplier's default of their commercial loan and our subsequent purchases of products from a third party that was alleged to be a controlled company of the original supplier.

SMP denied any wrong-doing in this matter but felt it was prudent to reach a settlement and put this matter behind us. Excluding this litigation charge, our non-GAAP diluted earnings per share in Q2 2014 were $0.76, versus $0.70 last year, an increase of 8.6%. And for the six months, diluted earnings per share were up 16.1% to $1.30, versus $1.12 last year.

Looking at the balance sheet, accounts receivable was up $19.1 million against December 2013 levels, but down $7.5 million against June 2013 levels. Inventory increased $23 million against December 2013, but again, down $4.4 million against the June 2013 levels.

Both A.R. and inventory increased mid-year based on our seasonal demand to temperature control business. Partially offsetting these increases was accounts payable, which increased $18.6 million since December, and was flat with June 2013 levels.

Total debt was $59.1 million at June 2014, compared to $68.5 million at June 2013, reflecting a $9.4 million debt reduction. This reduction was accomplished inclusive of $37.7 million in spending for three acquisitions in the first half of 2014.

Our cash flow statement reflects $17.6 million positive cash flow from operations for the six months, compared to $12.4 million cash used in operations during the first half 2013. The rate of increase in accounts receivable and inventory were substantially less in the first half of 2014 versus 2013.

Our uses for cash in 2014 to date were to fund $37.7 million in acquisitions previously discussed; $6.4 million in capital expenditures, $6 million in dividends; and $5.9 million in share repurchase program. We have $4.1 million available for future share repurchases against an earlier Board-authorized $10 million program.

In summary, we are pleased with our operational performance and operating income improvements, despite the soft sales for the six months. Thank you. I will now turn the call over to Larry before we open for Q&A.

Good morning. Jim has reviewed the basic numbers. I would like to discuss a few of the highlights and then we'll open for questions.

As Jim said, from an operational point of view we're quite pleased with the second quarter and for the first six months. We continue to show improvement in all areas of operations, manufacturing products we used to buy, reducing purchase costs, achieving efficiencies and cost savings in SG&A, and integrating our most recent acquisitions. The results have been a solid increase in earnings per share, up 8.6% for the quarter and about 16% for six months.

The one disappointing area has been sales, essentially flat for the period. However, as we advised you, we received reports from our customers on their sales of our products. And these are showing increases in both lines, in temp control and engine management, in the low- to mid-single digit range.

Now, typically this would translate into our sales growth fairly quickly. But this year, for reasons I'll explain in a second, we are forecasting relatively flat sales for the balance of the year. Let me go over each of the divisions.

In engine management, if you recall, we had a very strong fourth quarter in 2013. We were up 14%, which is a very, very high number for us. This was aided by certain pipeline orders that our customers put in. It also included some heavy orders on some winter-related items, as it was a very harsh winter.

This has led to two effects. One, we're going to have a tough comparison in the fourth quarter when we go this year against last year. And we believe there is still some inventory overhang out there from that very strong fourth quarter. Well, that's engine management.

In temp, as Jim said, this is our second cool summer in a row. Those of you in the New York area, it's in the low 70s here today and here we are at the very end of July. Overall, it has been a slightly better season than 2013, but still well below the 2012, which was a very hot summer.

So our customers, as we've said, are showing some moderate increases in temp. But we believe they are still working down inventories that they had left over from the poor 2013 season, and that reflects the slight drop in sales this year.

Okay, to conclude on sales, we're forecasting relatively flat sales for the balance of the year. But a return to our historical pattern of low- to mid-single digits increases beginning in 2015.

All right, let's move to another important area, which is acquisitions. We've made three since the beginning of this year. All of them are going well. I'll spend a minute on each.

The first was Pensacola Fuel Injection, which is a rebuilder of diesel fuel injectors from Pensacola; a rapidly growing business. This is a step in vertical integration, as we used to buy everything from them.

We are now -- just completed the relocation of this operation to our factory in Grapevine, Texas. We anticipate significant improvements in cost, in delivery, and in quality. And from all we hear, this business has an excellent potential.

The second acquisitions is Annex Manufacturing, an importer and distributor of various temperature control products. As with Pensacola, we purchased product from them, so we'll be achieving some cost savings here.

In addition, they had sales to outside customers in the $10 million to $12 million range. We've maintained 100% of this business, plus we see some potential for new business. By the end of the year, this will be relocated to our Lewisville, Texas, facility, with anticipated savings in both people and in expenses. It's going well.

The third is a 50/50 joint venture with Gwo Yng, the leading manufacturer of various temperature control lines. The best way to think of it is basically everything in the temp line with the exclusion of compressors.

There are several benefits we anticipate. One, this is another example of vertical integration, as we were a large customer of theirs. Therefore we will be seeing cost savings in product.

Strategically, with compressors now in Mexico and much of the rest of the line as a result of this acquisition or joint venture, in China we believe we are now the low-cost, high-quality manufacturer in the temperature control business, which is a very strong competitive position. Further, third, we hope to use Gwo Yng as a base to begin penetrating the rapidly growing Chinese temp control market. So, all good things.

So let's summarize now and then we'll open for questions. We are optimistic going forward. Number one, our customer base is strong. Our customers continue to generate sales increases in both our product lines. We continue to focus on improvements and cost reductions in all areas of the operation.

Our acquisitions are performing well and are contributing to our bottom line. And our cash flow is strong. As a result, we look forward to the balance of the year. And now we'll open for questions.

Certainly. (Operator Instructions). John Lovallo.

First question is, one of your competitors had cited some increased pricing pressure from competitors on certain product lines. So I'm just curious if you guys are seeing any of that and if there's been any change in the O.E. pricing dynamic as well.

As we all know, we in a pretty competitive business. But thus far, we have been able to achieve price increases roughly in line with inflation. And we expect to continue doing that.

Okay, that's helpful. And then in terms of the temperature control business, realizing it's been relatively mild weather throughout much of the country, it has also been pretty dry weather. And I thought that there might have been some of an offset given that. Is this really just more driven by heat as opposed to dryness?

Yes. It's nice. Rain doesn't really affect it. Humidity affects it, by the way. But it's primarily heat and humidity. That's the business. And just look outside the window today.

Yes. (multiple speakers)

Beautiful day but not so good for our business.

Got you. And then finally, in terms of the acquisition landscape, any high level comments on what you're seeing out there?

Well, we continue to look. We think we have a pretty good model. Plus our balance sheet is strong. We look in two main areas. I think vertical integration. And I think you see the three we did this year are all basically vertical integration, which means not much sales to show for it, but nice savings.

And we also look for bolt-on acquisitions, which would be related lines, as we've done in the past. These are businesses we know and markets we know. And we believe it minimizes risk. But I have nothing to report right now. But we are continuing to look.

Great. Thanks very much, guys.

Okay.

Yes.

Brian Sponheimer.

Jim, as you're looking at this balance sheet and kind of adding onto what Larry just said, you've got $52 million in net debt or so. You're going to have $105 million to $110 million in EBITDA this year. What's the right amount of leverage that you'd like to see on the balance sheet, weighing acquisitions, returning cash to shareholders, dividend, et cetera?

Well, you bring up a good point. If we have the $100 million plus of EBITDA that we're generating, all of the key uses of cash. So we have opportunities where we've had a steady stream of increasing the dividends. We hope that would continue. We also look for the share repurchase program.

Again, on the question related to leverage, because we have such an improved EBITDA level, I think even if we had to scale up at anything larger, cumulative acquisitions to 2.5X still gives us plenty of gun powder.

So again, we will have -- I don't expect cash to build up. We'll look for debt reductions, capital expenditures. As we see opportunities, we'll be funding more in the second half of the year. I think we'll be higher than the first half for spending. And we have opportunities, again, for dividends, acquisitions, and share repurchase.

Okay. And just looking at the landscape, any change from some of your customers with Advance and CarQuest coming together? Any changes in terms or pricing that you need to negotiate?

No, that has not created any change. Again, we were highly concentrated before and we're highly concentrated now. I don't -- we have not seen any change, really, in the landscape.

All right, thank you. Hope for a hot August for you.

There you go.

All right, thanks, Brian.

Bret Jordan.

Yes, sort of a follow-up to that last question. If you haven't seen any change in pricing terms yet, have you seen any change in order patterns? Is there any inventory consolidation that may be slowing short-term orders? And I guess do you expect any change in pricing looking out in the second half?

Well, I think the pricing we discussed, we don't see any change there. Yes, I believe -- and that is another factor. Every time there's a big acquisition like this, and this is a big one and you know about it. There's some other little ones that are going on that are sort of under the radar.

Whenever this occurs, there's going to be some consolidation. People will look for efficiencies. They'll say: We don't need three distribution centers, we only need two, et cetera. That's going on and it's going on I'd say the last six, 12 months at a fairly rapid pace. More rapid than before.

And yes, this does lead to inventory reduction. And I think that is another area where our customers are showing sales increases and we're not. And I think that's another reason, as this inventory needs to be absorbed.

Now, this is a one-time event and again, I think it leaves the industry in a stronger and healthier position for the future. But I think it has had some effect. It's very difficult to quantify but some short-term effect on our own sales.

Okay. And then a question on engine management. You mentioned the strong fourth quarter last year maybe created some overhang. Specifically, what areas of overhang are you seeing? I guess, what product lines, just so we can sort of monitor the channel to see when those may clear.

It's -- well, I can't pinpoint it to a product line. It's general.

Okay.

I mean (multiple speakers) --

And one last --

-- some product lines that are growing and some that are shrinking. But there's nothing specific.

Okay. And again, the last question on channel inventory. We've had two tough years for A.C. and there was not much of a second half order cycle for the retailers last year.

What's your feeling how close we are to bottom in channel inventory at the retailers in A.C.? You'd mentioned that their sales are up but they're not ordering product. At what point do they not take inventory any lower?

Well, as far as this year goes, in about two or three weeks from now the ordering is going to really stop. Because nobody's going to start ordering air conditioning parts in September unless you're in Texas or Florida or something.

So for most of the country, the buying season is effectively over. Will they finish up the year? I believe just based on what their sales are and what their purchases are they will finish up this -- 2014 in better inventory shape than 2013. And that's why we're predicting a return to sales increases next year.

Okay. Great, thank you.

Thank you, Bret.

Robert Smith.

Could you give us some more color on the Chinese joint venture and what the opportunity is in China?

You mean about sales in China?

Yes. No, I mean, the 50/50 joint venture.

Yes, I understand what you mean. Well, the 50/50 joint venture we worked together. We are their largest customer and were before. And so we worked with them to make them hopefully an even better supplier. And as a result of that we achieved some nice cost reductions on our product. And that's one area.

And the second, what I refer to is it's very, very early and way too soon to really say anything. But they are a well-regarded operation. There is a market out there in China. And we're going to start to look and see what we can do to sell some stuff in China.

There's no after-market as we see it here. It's too soon for that. But there is some what we call O.E.S. business, selling to other -- selling to dealerships, et cetera, et cetera. But way too soon to speculate on what that would be.

Okay. And with respect to the balance sheet and the dividend, there's sort of a club in the investment community of companies that have raised dividends for ten straight years.

I mean, considering the payout ratio, it's well under your target. Perhaps you might consider beginning a program of something like that to join this club where you could kick up the dividend a cent a quarter for any number of years. I'm sure you could handle and put it under your belt. It might be an interesting way to bring more attention to the Company in the investment community. Thanks and good luck.

Thank you for that comment. Thank you.

Seth Basham.

So my first question is around engine management. You guys talked about some potentially carry-over inventory there. But if you think about the harsh winter we had last year, have you seen any evidence that we're still seeing knock on sales as a result of that harsh winter and people still doing repairs as a result of their cars being beat up through that period?

That might be true for some other product lines, not ours. And that's probably coming to an end. But those other companies better tell you about that. For example, with all the salt on the roads, it chews up a lot of engine parts. So that has had a beneficial effect for other product lines but not ours.

Got it.

So I can't really comment on that.

Okay. And then secondly, going back to the questions around Advance and CarQuest getting together. Do you expect to pick up or lose any volume as a result of that merger?

They're both going to be customers of ours. We do business with both of them. And we have nothing to report.

Okay. Thank you.

Thank you.

David Tamberrino.

I jumped on a little late, so I'm not sure if you covered this already. But I just wanted to get a little sense of the timing of the one-time costs that you'll see for the year for the integrations of the acquisitions that you're working on.

I understand you expect them to be accretive to earnings exclusive of them. But just kind of get an understanding of the timing of maybe some of the one-time costs as they roll off of 2014 as we go into 2015.

Our costs in that area, as we're continuously moving facilities and operations towards -- to our low-cost areas there. But these ones -- Annex is located in Texas currently and we're moving it, consolidating it into Texas. The other one that we're completing now, Pensacola's going from Florida. It's a small operation.

So overall our restructuring costs have been in that approximately $2 million or a less, $1.5 million, $2 million range. And it'll be -- won't be significant for any particular quarter. But that -- we kind of have a run rate at that with moving of product lines around to our off-shore facilities.

Okay. And when do you expect to have those two fully integrated?

By the end of 2014.

Okay. And then as I look at your SG&A expense, you guys have done a pretty good job of reducing that and gaining some leverage year-over-year. Is this the current level you expect to be at, the $49 million for the rest of the year? And then on top of that, going into 2015, how much more leverage do you think you can get from there?

Okay. Again, we're very pleased. I guess last year we were running at the $50 million range. And we've achieved down to $40 million, $48 million, $49 million. I think it'll be consistent.

Again, some of it is sales-driven, so we've had some savings there a little bit. But we're holding the cost. I think the leverage that we gain is when we get the sales back. So you can imagine we're holding very tight controls on all of the spending that's in that area.

We have experienced favorable medical costs year-over-year, which is assisting us there. But I don't see any significant increases going forward. The leverage will be as top line sales grows and we reduce as a percent of sales.

Great. Thank you for your time.

Okay. Thank you, David.

(Operator Instructions). It appears we have no further questions.

Okay. I want to thank everyone for joining our conference call today. Goodbye.

This concludes your teleconference. Thank you for your participation. You may now disconnect.