Standard Motor Products Inc (SMP) 2017 Q1 法說會逐字稿

Good day, everyone, and welcome to today's Standard Motor Products First Quarter Earnings Release Conference Call.

(Operator Instructions) Please note, this call may be recorded, and I'll be standing by should you need any assistance.

It is now my pleasure to turn today's program over to Mr. Larry Sills, Executive Chairman of Standard Motor Products.

Please go ahead, sir.

Good morning, everyone.

We welcome you to our First Quarter Conference Call, and we thank you for taking the time to attend.

Here from the company is Eric Sills, President and CEO; Jim Burke, Executive Vice President and Chief Financial Officer; and myself, Larry Sills, Executive Chairman.

Our agenda for the morning will be: first, Jim will review the numbers of the quarter; second, Eric will review the progress of some of our latest initiatives; and then we'll open for questions.

So let's start with Jim.

Okay.

Thank you, Larry.

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.

Looking at the P&L.

Consolidated net sales in Q1 '17 were $282.4 million, up $43.5 million or 18.2%.

This significant increase is primarily related to 2 factors: first, $23.4 million wire sales from our general cable acquisition, completed at the end of May 2016.

Excluding the GC volume, our consolidated net sales increased 8.4%.

The second significant increase was from stronger preseason Temp Control orders, following the warm 2016 season.

By segment, Engine Management net sales in Q1 '17 were $211.3 million, up $30.6 million or 17%.

Excluding the GC wire acquisition incremental sales, Engine Management sales were up $7.2 million or 4%.

This increase reflects higher pipeline orders from certain customers as they are increasing their inventory coverage.

Temp Control net sales in Q1 '17 were $70.3 million, up $13.5 million or 23.8%.

This significant percentage increase reflects the higher preseason orders in anticipation of another warm season as experienced in 2016.

Consolidated gross margin dollars in Q1 were up $11.1 million at 29.8%, down 0.8 points.

Looking at the margins by segment, Engine Management gross margin was 30.3%, down 1.4 points versus Q1 '16.

Margins were off slightly related to lower margins in our GC wire acquisition sales not present last year.

We expect the GC margins to improve significantly once we have combined the acquired operations in Nogales, Mexico, into our existing Reynosa, Mexico, operation.

In addition, we are incurring additional costs during our multiple transition moves.

Temp Control gross margin was 25.2%, up 0.4 points versus Q1 '16.

Margins benefited from higher production levels and our continued efforts and focus on reducing costs.

Total SG&A expenses were $57.4 million in Q1 at 20.3% of net sales versus 22.2% last year.

The GC wire acquisition was beneficial, gaining leverage on our SG&A spend as we have integrated our wire sales, marketing and distribution functions during 2016.

The SG&A percentage also benefited from the higher Temp Control preseason orders shipped.

Consolidated operating income before restructuring and integration expenses and other income net in Q1 '17 was $26.8 million, 9.5% of net sales versus $20 million, 8.4% of net sales last year, reflecting a 1.1 point improvement.

Operating income dollars were up in both segments, and our restructuring initiatives underway should improve this performance further.

The net effect of our operational results as reported on our non-GAAP reconciliation was Q1 '17 diluted earnings per share of $0.74 versus $0.55 last year, which is almost a 35% increase.

Looking at the balance sheet.

Our working capital needs increased as we entered the spring and summer seasons.

AR increased $45.5 million since December '16, primarily with the strong Temp Control preseason orders.

Inventories increased $19.3 million since December as we build inventories for the summer season and also bridge inventory builds, with our multiple facility moves underway.

Accounts payable increased $18.1 million, partially offsetting the rise in receivables and inventories.

Total debt increased $27.2 million to fund our working capital needs.

These working capital increases are expected as we enter Q1 and Q2.

And then we begin to monetize these investments through Q3 and Q4.

Our cash flow statement reflects a $27 million use of cash in Q1 '17 versus only $1 million use last year.

This increase reflects the higher working capital needs, slightly offset by higher net earnings.

Capital expenditures were $3.2 million, slightly below the $4 million level in Q1 '16.

We anticipate this spend level to increase over the balance of the year to the $25 million-plus range for the full year compared to $21 million in 2016.

This reflects our continued focus to reinvest in our businesses.

In February 2017, we announced a $20 million Board of Directors authorized repurchase program for our common stock.

In Q1 '17, we repurchased 32,367 shares at a cost of $1.6 million or $48.18 a share.

In Q2 '17, through the end of April, we repurchased another 30,543 shares at a cost of roughly $1.5 million or $48.09 a share, leaving us a remaining $17 million authorization for future repurchases.

In summary, we are pleased with the results in the quarter and future initiatives to strengthen our business for the long-term.

Thank you for your attention, and I will turn the call over to Eric.

Thanks, Jim, and good morning, everybody.

Jim has covered the numbers, and as you've heard, we're quite pleased.

Sales were obviously quite strong.

However, it is important to note that in both of our divisions, a portion of the sales was geared towards customer pipelines rather than strong demand through the channel.

As you've seen from first quarter earnings calls from our large publicly traded customers, Q1 was a bit of a challenge overall, and we did see that to varying degrees with how they did with our product lines as well.

I'll talk about the 2 divisions separately.

In Engine Management, our customers' POS was slightly down.

Meanwhile, their purchases from us were up fairly substantially.

If you exclude the acquired General Cable business, our Engine Management sales out were about 4% up.

Few of our customers determined the need to expand their assortment and deployed broader inventories throughout their system.

They, therefore, placed heavier-than-normal line update orders as they reset their planograms.

As you know, a key to growth in the DIFM business is to have broad coverage and rapid delivery.

So working with our category management team, they identified coverage gaps and sought to fill those gaps.

In Temp Control, our customers did post slight increases in POS, but the dollars are small as Q1 is always a light quarter.

As a weather-related business, our first quarter is almost entirely about preseason orders as our customers get ready for the summer.

We see this every year, but this year, the preseason orders have come in heavier, which reflects the impact of last year's hot summer, where they ended the season a bit lighter on inventory than usual.

So we, therefore, believe that the customer actions within both divisions do bode well for the future as we believe that these strategic purchasing decisions will help them secure sales going forward.

But as we always reiterate, one should look at our performance year-over-year, as quarterly activities can cause some temporary peaks and valleys.

So I won't spend any more time on the numbers.

I thought I'd spend a few minutes talking about recent initiatives, and then we'll open it up for Q&A.

First, an update on General Cable.

We're nearing the anniversary of this acquisition, and other than planned integration and efficiencies, it's performing quite well.

Sales have been solid, and we've retained all the accounts.

We've greatly improved our shipping performance, our fill rates across the board to all of these accounts, and the acquired plant in Nogales is doing really quite well.

The integration is proceeding on plan as announced, the distribution all moved last year, and we have now moved the manufacturing for several accounts without any hiccups.

We're on target with the build-out of an additional 75,000 square feet in our Reynosa wire plant to accommodate the balance of the production lines, which will all be moved by the end of the first quarter of next year.

So overall, within wire and cable, 2017 will remain a transition year, with lots of moving pieces.

And while we fully expect to achieve all of the planned synergies, we won't be all the way there with our profit improvement until next year.

We've also been quite active with other plant moves.

We're making strides in winding down our Grapevine, Texas, plant, a project we've been working on since early of last year.

To remind you, there were 2 elements in Grapevine, where we did all of our diesel products as well as a bunch of our Temperature Control.

All of the diesel lines have now moved to our injector plant in Greenville, South Carolina, and are performing really quite well.

Greenville is our center of excellence for fuel delivery products, and we're excited to see what they're going to be able to do with this line.

The Temp Control products are all slated to move to Reynosa.

We've expanded into an additional building there, which is now fully up and running.

We've moved several of the lines already and have a handful of lines left to go.

We're on target to be out of Grapevine by the end of the year, and we're actively marketing the building and the [product].

We are very pleased to note that many of the Grapevine employees have elected to take other jobs with us, mostly at our Louisville location close by, but also in South Carolina, and we're very excited that they've chosen to stay with us.

As discussed on our last earnings call, we are now also in the process of closing our electronics plant in Orlando and relocating it to Independence, Kansas.

To remind you of the rationale, Orlando is an excellent high-tech plant, but quite small, less than 50 people and only about 50,000 square feet.

And meanwhile, Independence is quite large and diverse and manufactures many other similar electronic products, and they can easily absorb all the Orlando production and allow us to be a much more effective manufacturer seeking synergies between the 2 operations.

This will be a multi-phased move, which will take us into the middle of next year to complete.

The first phase will soon be underway, and everything is on schedule.

So for all of our employees in both Grapevine and Orlando, we really would like to thank you publicly.

You've been terrific throughout this entire process.

It's been a difficult time, but you've continued to operate your plans with pride, performed at a high level and are helping to make this successful.

So you do truly have our sincere gratitude.

So in closing, we are very pleased with the quarter.

We have a great team here at Standard, and with their talents, I and the rest of the senior management team here at Standard, we're very excited about our future.

So with that, I will turn it back over to the moderator, and we will open it up for questions.

(Operator Instructions) And we'll take our first question from Scott Stember with CL King.

Can you maybe just talk about sell-in?

Eric, you talked about how your customers are talking about how things were a little sluggish in the quarter.

Maybe just talk a little bit more about what they're saying, what they're hearing, whether it's weather related or just timing or tough comparisons with a year ago.

And maybe just talk about -- maybe just reaffirm your expectations for the segment if you could.

The quarter -- different customers had slightly different experiences in the quarter with the 2 different product lines.

And -- but I don't think it's anything that has any longer-term impacts.

Overall, we see our Engine Management business is going to increase barring any major gains or losses of business.

It's going to roll with the trends of the overall market, up a couple of percentage points year-over-year.

Temp Control is entirely based on the summer.

And so here we are in early May.

We'll see what the next few months bring.

But we don't get too hung up in what happened in a particular quarter.

And we'll just see what happens as the year progresses.

Got it.

And on the margin side, a couple of items.

You talked about General Cable mixing in and some of the redundancies with the facility moves.

Can you maybe just -- it sounds as if the lion's share of the contraction came from the latter.

Can you maybe just confirm that, maybe just talk about that a little bit?

Yes, Scott.

This is Jim Burke.

So again, part of the -- on the General Cable, the volume there -- when we took it over, the margins were lower and fully anticipated to bring them up once we consolidated the businesses.

They have a higher mix of OE/OES business that's in there, which margins will be different than our aftermarket, but then we have lower SG&A.

We are incurring incremental costs as you start up in a new area and wind down in the other.

And really, there's a lot of moving parts.

The key is we expect these margins to improve to the Engine Management levels, and you'll see further improvements once we complete all the moves by the end of Q1 '18.

Got it.

And maybe on the SG&A line.

You definitely had some nice advances in leverage.

Some of the things you talked about with General Cable and some of the consolidations there.

But maybe just give us a framework of where you see in absolute dollar terms the line item going, I guess, for the balance of the year on a quarterly basis?

Yes.

We came in at $57 million for the quarter.

And Q2 and Q3, because of our sales volumes will pick up, that's in there.

So again, that's probably the low end of the number that we would be in.

And again, I've talked consistently that we're more in absolute dollars than as a percent when you're looking at our spend.

So from the $57 million, we would size up, obviously, in Q2 and Q3.

And then Q4, it really depends how much volume, but we're probably in that same range again there.

So I would say the low point per quarter is $57 million.

We size up a little bit in Q2 and 3.

Got it.

And one just last question maybe on new products.

I know that you guys have a lot of things in the pipeline and you've talked about numerous times.

Maybe just talk about whether it's diesel injectors or some of the new technologies in cars today that are leading to increased uses of your parts.

Maybe just give us an idea of how that's going.

Sure, absolutely, Scott.

Well, yes, we do always have several new product lines that we are adding and growing with.

It's important to note that a lot of times, any sales growth that we see on newer categories is really replacing older technology as it's falling off the backside of its life cycle.

But we do have several going on right now.

One that we've been talking about a bunch recently is diesel where, if you go back a couple of years, 2015, we really used that to get our house in order; 2016, we started to see the fruits of that; and here, first quarter of 2017, we're continuing to see sales in our overall diesel offering up in north of 20% growth year-over-year.

So diesel is a really exciting category for us, and we see a lot of upside there, continuing to see growth in our TechSmart offering.

One new thing that maybe I'll highlight just briefly is, we developed several years ago a compressed natural gas injector for heavy-duty markets, and really, it was -- we had the product, and we're waiting for the market to develop.

Here in early 2017, we are starting to see a nice uptick as the China market starts to adopt the technology a little bit better.

Yes, it's a small piece of what we do, but just another example of where we're always looking for complementary product categories.

(Operator Instructions) We'll take our next question from Bret Jordan with Jefferies.

On the POS topic, I guess, if you look at maybe cadence or trajectory of the sell-through as the quarter progressed and maybe anything that you've sort of seen anecdotally in April, just that from an industry demand standpoint, obviously, that's been talked a lot about the weak first quarter for your customers.

Within -- I don't have the month-over-month numbers.

But within the quarter, like I said, Engine Management was slightly soft, Temperature Control was okay.

It's really a little too early to tell what's happening in this quarter, especially Engine Management, not particularly a weather-related product line.

And Temperature Control, as we've said numerous times, we really have to wait and see what happens going forward.

Okay.

And then I guess from a Temperature Control channel inventory standpoint, obviously, a lot of early seasonal orders.

If you looked at the inventory with your customers year-over-year, did they start out particularly light?

Or are they holding more inventory now versus where they were a year ago?

I believe that they started out this year a bit lighter than they started out last year, which is reflecting the fact that not only was last summer hot, but it stayed hot long.

So what typically happens is, towards the end of a season, they will stop reordering from us and sell [them] from their own shelves.

And that is what we saw happen in 2016.

So I believe that what we saw this year is, they started out lighter than they started '16, and now they are probably equally positioned for the season as they were last year.

Okay.

And then one last question on margins.

You talked about the Engine Management, the wire margin improving significantly.

Is there sort of gradual improvement or more of like a step function where we get to '18, you shut the plant and then we really pick up the margin.

Should we expect that margin to uptick gradually over the next 12 months?

Or is it mostly -- is it sort of going to be an abrupt uptick?

Yes.

Again, Jim Burke.

It'll be more gradual that's in there.

We'll see some improvements coming over the second half of the year that we would see there and then the balance.

It won't be a full step item that's in there, Bret.

And we have no further questions at this time.

Okay.

Well, thank you all.

Thank you all for attending.

Just to summarize what you've been hearing, we're pleased with the first quarter, the year was off to a good start, but then again, it is only the first quarter.

However, as you've heard, we have many initiatives in place, and we have an excellent group of people to carry them out.

As a result, we look forward to the balance of the year.

So thank you all for attending.

All right.

Goodbye.

Thank you.

This does conclude today's call.

You may disconnect at any time, and have a wonderful day.