Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Lawrence I. SillsChief Executive Officer

James J. Burke – Chief Financial Officer

Analysts

John Lovallo – Bank of America Merrill Lynch

Aditya Oberoi – Goldman Sachs

Bret Jordan – BB&T Capital Markets

Brian Sponheimer – Gabelli & Company, Inc.

Walter Schenker – MAZ Partners

Efraim P. Levy – Standard & Poor’s Investment Advisory Services LLC

Adam Brooks – Sidoti & Company

Standard Motor Products, Inc. (SMP) Q1 2013 Earnings Conference Call May 3, 2013 11:00 AM ET

Operator

Welcome to the First Quarter Earnings Release Conference Call presented by Standard Motor Products on Friday, May 3, 2013. At any time during the program, you may pause, fast forward or backup the program with the single piece stroke. (Operator Instructions) Everyone and welcome to today’s program. At this time, all participating are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. (Operator Instructions) Please note this call is being recorded. I will be standing by, if you should need any assistance.

And it’s now my pleasure to turn the conference over to Mr. Jim Burke. Please go ahead, sir.

James J. Burke

Okay, thank you, Tony. Good morning and welcome to Standard Motor Products first 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 with our first quarter performance to kick off 2013. Highlights in the quarter were revenue growth, gross margin expansion, significant operating EPS improvement, previously announced dividend increase, paid March 1 and a share repurchase program.

Looking at our top line, consolidated net sales in Q1 ‘13 were $230.7 million, up $19 million or 9%. By segment, interim management net sales were $175.5 million, up $12.5 million or 7.7%. In Q1, some customers broadened their inventory coverage, leading to the 7.7% increase. We would anticipate this trend to be more in the low-to-mid single digits going forward in line with our customers’ estimates.

Temperature Control net sales were $52.7 million, up $7.4 million or 16.4%. Recall, we acquired CompressorWorks at the end of April 2012. Incremental CompressorWorks net sales were approximately $11.7 million in Q1 ’13. Our customers have already begun blending our CWI and Four Season brands, so after April, we will report combined Temperature Control sales for comparison purposes.

To date, the spring has been very cool and we await warmer temps to determine the impact on our 2013 season. Consolidated gross margin dollars in Q1 improved $11.3 million at 28.5%, up 2.7 points. Engine Management gross margin improved $8.7 million to 29.5%, up 3.1 points. The significant improvement builds off our base from 2012 when we finish the year at 28.2%.

In Q1, we experienced very good production absorption on higher volumes and favorable sales mix. We strive to improve margins year-over-year and target 28% plus margins for 2013, Temperature Control gross margin improved $2.4 million to 20.8%, up 1.9 points.

Temp margins tend to be a low point in Q1 and improve as production volumes expanded to Q2. Over the last six months, we concentrated on integrating our CWI into our compressor manufacturing plant in Mexico and distribution into our Louisville, Texas, operations.

We are very proud of the entire team completing this integration in time for the 2013 season. We anticipate savings over 2012 with margin improvements, and we continue to target 23% to 24% gross margins in Temperature Control. Consolidated SG&A expenses in Q1 increased $4.8 million to 21.5% of net sales versus 21.1% last year.

This increase was primarily driven by incremental CWI expenses in Q1, not present last year, higher accounts receivable draft fees on higher sales volume, and increased intangibles amortization expense from our recent acquisitions. Consolidated operating profit before restructuring and integration expenses and other income net in Q1 was $16.2 million, up $6.5 million at 7% of net sales. This reflects a 2.4 point improvement in operating profit.

The net effect of our operating results is reported on our non-GAAP reconciliation was diluted earnings per share in Q1, 2013 of $0.42 versus $0.23 last year. This reflects leveraging a 9% sales increase into a better than 80% improvement in operating earnings per share.

Looking at the balance sheet, accounts receivable increased $29 million from December 2012. This increase is seasonal in nature, compared to our December quarter close, which is our low watermark.

Inventories increased $26 million from December ‘12. While a large portion of this increase is seasonal, preparing for our summer season, we were very cautious to ensure that we had sufficient inventory levels during the CWI integration. As I stated earlier, this integration is complete, and we will be able to reduce inventories over the balance of the year.

Total debt increased $35 million to support our accounts receivable and inventory build partially offset by accounts payable. And also two investments; our Orange TPMS investment of $6.3 million, and our SMP Europe OE product line acquisition for $6.5 million. Our cash flow statement reflects a $27 million cash use from operations from our accounts receivable and inventory build, versus a $9 million use in Q1 of 2012 last year. This investment in working capital will be reduced from these elevated levels by year-end. Under investing activities, as I mentioned earlier, our two acquisition investments totaling $12.8 million.

Lastly, in our financing activities, capital return to shareholders by way of first, a share repurchase program. We spent roughly $600,000 in Q1, 2013 for 21,600 shares at an average price of $27.89. And in April, an additional $550,000 for 19,700 shares at again an approximate price of $27.85. This reflects a 2013 spend to date of slightly less than $1.2 million with $5.7 million board authorization remaining open.

Our second component of shareholder returns reflects the quarterly dividend increase from $2.1 million to $2.5 million. This dividend payout was on March 1, as previously announced, reflecting a 22% increased from $0.09 to $0.11 per quarter. In our release, we also announced our Q2 dividend payout effective June 3, to stockholders of record on May 15.

In summary, the very pleasing results; a combination of revenue growth and operational execution. Thank you. and I will now turn call over to Larry before we open for Q&A.

Lawrence I. Sills

Good morning, everybody. There’s really not much to add to what Jim has said. He has reviewed the numbers, and if you read the quarterly release, there was some more detail in that. I’ll just summarize by saying we are quite pleased with how things are going. and I think what it shows is, that all the efforts of our people over the last several years have been bearing fruit.

When I look back, I think we’ve accomplished a good deal over this time. We’ve gained some additional business. We’ve worked very hard on cost reduction, which you see reflected in the gross margin improvement. We’ve increased our manufacturing, going from products from purchasing to manufacturing. We’ve increased production in the low cost areas of Mexico and Poland. And we have been working hard on reducing purchase costs. And then third, we have made five acquisitions over the last two years.

Just to summarize, BLD Manufacturing, Forecast Trading Company, CompressorWorks. Orange Electric, which was basically an investment, 25% equity investment that’s a TPMS manufacturer in Taiwan and then we acquired the OE business from our former subsidiary SMP Europe. So that’s five deals. All are fully integrated, all are working well, and all have been essentially financed out of operating cash flow. So you add these results to the fact that the industry is healthy and industry demographics are strong with the deal goal population keeps getting older, our customers are doing well and all this adds up to good results and so we’re pleased. But as I keep reminding our people, we cannot afford to be complacent. We have to keep pushing to get better and we’re going to keep doing that. So with that, let’s open for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll take our first question from John Lovallo calling from Bank of America Merrill Lynch. Please go ahead.

John Lovallo – Bank of America Merrill Lynch

Hey guys, thanks for taking the call.

Lawrence I. Sills

Good morning, John.

John Lovallo – Bank of America Merrill Lynch

Good morning. First question would be, aside from the typical seasonal patterns in the Temperature Control business and in the margins there, what kind of benefit do you think you’ll get from pressure works being fully integrated now through the remainder of the year?

James J. Burke

What do you mean by that?

Lawrence I. Sills

The operating results that are in there. Again, John I think, we’re going to get the favorable – we’ll get absorption from our fixed cost. The key is when we acquired this business, it was a separate business. They had a single location located in Texas. Eventually, we’ll be able to exit that facility. A number of the fixed cost will be removed. It’s the manufacturing, is in our Mexico operation. So basically, you can think of it as fixed cost getting removed both in manufacturing and again some savings in SG&A also.

John Lovallo – Bank of American Merrill Lynch

Great. That’s exactly what I was getting at, okay. And then the second question would be, with new vehicle sales increasing since 2010, I mean, the car park – the four to six-year-old car – the vehicle park should start to rebuild again. But do you think that this could lead to a shift away from the economy line of products and kind of into higher margin products over time?

James J. Burke

Again, it’s so difficult to be able to pin that down.

Lawrence I. Sills

I have a quote on that. Yes, that area is growing, but that’s balanced by the fact that the total average age is growing. More and more cars are older, more and more cars are passed 8,9,10 years. So I think, I don’t think you’re going to see a reverse of that trend. I think you’re going to keep seeing a move to lower price and but we can deal with that and we have dealt with it well by having cost reduction. So I don’t see it going backwards. But I don’t see it being a problem for us either.

John Lovallo – Bank of American Merrill Lynch

Great, thanks very much guys.

Lawrence I. Sills

Okay, thank you.

Operator

Thank you. Next we’ll move to Aditya Oberoi with Goldman Sachs. Please go ahead. Your line open.

Aditya Oberoi – Goldman Sachs

Great, thanks a lot. My first question is on the Temperature Control segment. Did you guys see any impact on your sales because of a much cooler March, so as to say?

Lawrence I. Sills

Well, we’re still pre-season. Anything that happens in the first three or four months is not nearly a reflection of activity at the customer level or the consumer level. What you have now is this as people just getting their inventories ready for the season. So you really can’t tell anything yet. We’ll start to see in the next – we’ll start to be able to tell what the year looks like in the next 30s or 60s to 90 days, that’s when it tells. But as we said it, we’re off to a pretty cold start. It was 30 degrees, 30 somewhat degrees in Dallas this week. So we’ll see.

Aditya Oberoi – Goldman Sachs

Got it. Like maybe the other way to ask is, have your distributors or the guys that who kind of stock up their inventory in March, have you seen any deferred purchases from them that might help in Q2 if the weather kind of warms up to normal temperatures?

James J. Burke

Yeah, I think they’ve been a bit cautious. I think they’ve been a bit cautious. They want to wait and see. So yes, it’s certainly haven’t overloaded. So we’ll have to wait and see.

Aditya Oberoi – Goldman Sachs

Got it. And my second question is on acquisitions. Obviously, you guys have been very successful in getting the right targets and very successful in integrating them as well. What is your acquisition strategy from here? Are you guys still open to looking at new targets, or and on similar lines, how is the acquisition environment looking like right now? Thank you.

Lawrence I. Sills

Okay. I’ll try the crack at that. We are continuing to look first of all; our balance sheet is healthy which is good. And I think we have shown that we have a pretty good track record here. But we’re going to maintain a disciplined approach. I think that’s why we’ve had a good track record. We’ll only make deals not for the sake of making deals, we’ll only make them when we see through synergies and real cost savings. Now, I mentioned five deals that we’ve made over the last two years. They were all successful and they were all successful, because of that, because they were true legitimate cost savings. So we will continue to have a disciplined look and that’s where we’re going to keep doing that, not going to go to Illinois. But we think we have a good model and we plan to continue with it.

James J. Burke

Okay?

Aditya Oberoi – Goldman Sachs

Got it. And one last one from me, can you guys update us on the percentage low cost footprint that you guys have now versus what your long-term target is? And maybe, I think you guys define it as percentage hours of production in low cost regions?

James J. Burke

Yeah. We are somewhat north of 50% in low cost areas, and as we have said in the past, we think we’ve gotten much of the low hanging fruit, but we have a few more to go yet. You want to add to that?

Lawrence I. Sills

Yeah. we’re above that 50%. But again, we are moving the opportunities where this past year, we jumped up a bit, was related to acquisitions. So a good example was, like CompressorWorks, another one was forecast trading, which was when we acquired that business, they were fully purchased product. those offer us opportunities. While there’s some products that we have in our existing U.S. based facilities that our candidates, it is on a lesser degree, but we still believe we can move the needle in small increments.

Aditya Oberoi – Goldman Sachs

Great, very helpful, guys. Thank you so much.

Operator

Thank you. Next, we’ll move to Bret Jordan with BB&T Capital Markets. Please go ahead. Your line is open.

Bret Jordan – BB&T Capital Markets

Hey, good morning. A couple of quick questions, and one, as you looked at the Engine Management business and some expanding inventory with a couple of major customers. is that market share gains? Are you becoming a category manager in lines that you worked previously or is that customers who are just building out their inventory coverage going into the spring season?

Lawrence I. Sills

Okay, good morning, Brett. Well, while we see and feel there are some small market share gains in there. It looks more to be where the larger some large accounts are expanding and broadening their coverage, adding additional SKUs that are in there. We always are updating certain product lines and categories with new features and that that they are adding on there. So they identify in this pipeline orders that our sizable orders that we put in there, but I think it’s a combination of both.

Bret Jordan – BB&T Capital Markets

Okay. And I guess to some extent and maybe this relates to directly the TechSmart business initiative that I think you guys are doing some more, maybe product R&D and new product launch. Is that what’s driving that or is that something completely different?

Lawrence I. Sills

Well, that’s sort of a separate business now and we really just getting started at it. So I don’t think there is really enough data have a noticeable impact on results.

Bret Jordan – BB&T Capital Markets

Okay.

Lawrence I. Sills

We like the business though, we’re getting started.

Bret Jordan – BB&T Capital Markets

Yeah, how is TechSmart looking, I guess, in the early phases?

Lawrence I. Sills

We are in an early stage. We have to educate – the big issue is to able to educate our customers that we have these products because it’s different than our normal business. But slowly but surely we think we are making progress in this area.

Bret Jordan – BB&T Capital Markets

Okay. And one last question, on Orange Electric, I guess, to some extent you talk about sales showing substantial increases. At some point do you want (inaudible) are you going to be quantifying sort of what the sales growth in Pressure Monitoring Systems and what the margins of categories are looking like?

Lawrence I. Sills

Well, again, this product category was almost new for the after market, mostly at this time it was in the OE channel and the tire channel sectors that we believe. So our incremental sales are growing significantly, but it’s again from a very low base. And we do not, on individual product categories, wish to disclose for competitive reasons, what our sales that are in the overall margins.

Bret Jordan – BB&T Capital Markets

Okay, great. I appreciate it.

Operator

Thank you. Next, we’ll move to Brian Sponheimer with Gabelli & Company. Please go ahead. Your line is open.

Brian Sponheimer – Gabelli & Company, Inc.

Hi, Jim. Hi, Larry, how are you?

Lawrence I. Sills

Good.

Brian Sponheimer – Gabelli & Company, Inc.

First of all, a great quarter, just spend a couple of minutes talking about Orange Electronic rather and what do you think you can do with that business and what are the goals that move up from the 25% stake to something larger over time?

Lawrence I. Sills

Again, this is our initial investment in there; we look to grow the market here in North America where we’re the primary distributor of the products. It’s growing for our industry, but the key is other parts of the world also were our partners now in Taiwan can look to grow that market potentially in the Asian market and or even for OE/OES. So we look for opportunities there. If there is an opportunity for us to size up our position, we will. But at this point, we’re just new with new partners and we’re satisfied to be able to participate in this growth area with them.

Brian Sponheimer – Gabelli & Company, Inc.

Okay, thank you.

Lawrence I. Sills

Thanks.

Operator

Thank you. (Operator Instructions) Meanwhile, we’ll move to Walter Schenker with MAZ Partners. Please go ahead. Your line is open.

Walter Schenker – MAZ Partners

Thank you. Two questions. First, a number of years ago, one of the trusts of enhancing the sourcing was to look to China, obviously you’ve done more with Poland and Mexico. Have you found that sourcing in China has lost some of its competitive advantage, it is the first question? And secondly, a number of your customers have discussed price competition and pricing pressure given your large share. I know you always do have competition. Can you give us some better feel for what you think is going to happen to your pricing that you sell out during the course of the year?

Lawrence I. Sills

Okay. Those are two different subjects.

Walter Schenker – MAZ Partners

Yes.

Lawrence I. Sills

It’s actually three different subjects. The Poland and Mexico is manufacturing. so that’s on the side. When we were talking about purchasing, our purchasing alerts from China, obviously the costs are going up. Their labor costs are going up. I just saw the other day, their fixed pay, reaching $4 an hour in the next couple of years, and that’s not much left in Mexico.

So the costs are going up. We still require from there, because they do have a good manufacturing base, and they have a lot of technical expertise. So I don’t think, we switch much away from China to other lower cost markets, like the Bangladesh or something like that.

Walter Schenker – MAZ Partners

Now, you want to turn to pricing?

James J. Burke

Let me just stay at what he said at, Walter, is that, when we add new products each year, our primary source initially is really a OE or so. China or Asia, low cost countries offer our significant advantages. We put a significant amount of effort into low cost sourcing and generate significant savings. So that’s still there, despite the inflation increases that we’re seeing in China.

Walter Schenker – MAZ Partners

Okay. thanks, Jim.

Lawrence I. Sills

Okay. As to pricing, I think we’ve maintained our philosophy, and we are in a competitive environment. We do have to watch stuff coming from all over the world. But judiciously, we’ve been able to have price increases roughly equal to inflation, and that’s what we’ve managed to do the last few years, and we expect to be able to continue that.

Walter Schenker – MAZ Partners

And as a comment, which will not get in and not a question, is your dividend policy still to pay out 30% of earnings?

Lawrence I. Sills

Yes. We just raised it, Walter.

Walter Schenker – MAZ Partners

I know.

Lawrence I. Sills

Give me a break. We just raised it. Yes, that remains our goal. We have a long-term of one third, and we watch the numbers all the time, and our Board watches all the time and seriously, we did just raise it, but we will continue to look. That remains our long-term goal. yeah, absolutely.

Walter Schenker – MAZ Partners

I know you raised it. It just seemed there might have been room under that guideline to even add more. Thank you.

Lawrence I. Sills

Noted…

Walter Schenker – MAZ Partners

Okay.

Operator

Thank you. Next, we’ll move to Efraim Levy with S&P Capital IQ. Please go ahead.

Efraim P. Levy – Standard & Poor’s Investment Advisory Services LLC

Good morning, gentlemen.

Lawrence I. Sills

Good morning.

James J. Burke

Good morning.

Efraim P. Levy – Standard & Poor’s Investment Advisory Services LLC

Questions on acquisitions. So with the five acquisitions that you made, has that changed your long-term organic sales growth rate? Has that changed any mix that will drive your earnings, your sales growth faster? And also while you’re being disciplined in acquisitions, what do you see in terms of like, do you see many opportunities? And what is the pricing market out there? Thank you.

Lawrence I. Sills

Well, the second part is what do we see out there? Why don’t you take that one?

James J. Burke

Well, I think let me start, I think the first question was around organic sales in our acquisition. So our top line, we’ve had obvious growth from the acquisitions that we’ve had in there. I think in the organic arena, we look and continue to target that we’d be in the low-to-mid single digits because demographics are favorable in they’re mirroring what our customers’ estimates are. So I think organic, again, there is a change in product mix that goes on there with all the ignition going down and newer sensors going up. We look for that 1% to 2% to 3% improvement organic sales, I’d say. Acquisitions, we were very fortunate with five in the last two years.

We continue to look and moderate probably the most area that we can identify would be suppliers to us that we can look for savings and that’s what we’re doing. They could be either domestic or they could be international from a standpoint that if they are international there maybe an opportunity for local market, but we consider really the source or majority in North America and hopefully as we’ve done with many of the others, have been able to integrate into our existing facilities where you really save all the fixed overhead.

Efraim P. Levy – Standard & Poor’s Investment Advisory Services LLC

Great. Thanks. That's very helpful.

Lawrence I. Sills

Thank you.

Operator

Thank you. And our next question will come from Adam Brooks with Sidoti & Company LLC. Please go ahead, your line is open.

Adam Brooks – Sidoti & Company

Good morning, guys. I just wanted to hop back to Engine Management margin. Just seeing all of the improvements you’ve had over the past year or so, could you maybe give us a sense of what inning you are in and maybe if your target has been reset as far as what you cannot hit on gross margin side?

Lawrence I. Sills

Well, nowadays there is no sealing to what we were doing – the recently put out the targets early was back when we were doing to go back as far as main acquisition and closing facilities and we had a lot of heavy lifting and moving going on and we want to put out a 27% and 28% where we felt we could get to. During that period of time, we also invested in engineering talent to bring more – develop strategic initiatives to bring more in-house manufacturing low cost sourcing, and they’ve paid off. So our investment and engineering has paid off. That’s why we’re north of 28% now. So I’m going on record. It’s not much of a stretch, but we’re 28% and north of that. We’ll see, the key, Adam, is going year-over-year looking for incremental improvements. so I can’t specify it’s going to be 30% or over 30%. But we finished 28.2% last year, and I expect to do better than for this year.

Adam Brooks – Sidoti & Company

Okay. And can you give us a sense at this point of what you do in-house as far as what percentage of revenue is tied to in-house production?

James J. Burke

The way we look at it, all the top movers on the volume that basically in our key product categories we manufacture. The key is we add about 3,000 parts per year to the line 99.9% of those we purchase. They have low margins. And then what do we do next? We look to bring them in for manufacturing over the next couple of years or low cost sourcing. So the good news, it’s always a continuous pipeline that offers us opportunity for savings in there. So when you think of our business, we’re as much a manufacturer, as a distributor and logistics company, and we look to continue to expand the manufacturing.

Adam Brooks – Sidoti & Company

Okay. and then just lastly on the Temperature Control side, as far as SG&A you mentioned some of the dryers was a bit higher. As you’ve now worked CompressorWorks in, is it reasonable to assume that starts to feed as far as a percentage of revenue over the next, call it, two to three years?

James J. Burke

CompressorWorks, well now Temperature Control, we’d call CompressorWorks was about a $60 million annual business. so again, Temperature Control, the mid-size is up for us. But we expect to be able within again, organic volume that it would be in the low single digits continuing with the demographics, and we think that will end along with our four seasons, it will be blended brands. We expect to maintain that volume and grow with the industry.

Adam Brooks – Sidoti & Company

All right, thank you very much.

Lawrence I. Sills

You’re welcome.

Operator

Thank you. And it appears we have no further questions at this time.

Lawrence I. Sills

Okay. I want to thank everyone for joining our call today. Thank you.

Operator

Thank you. This does conclude today’s conference. You may disconnect at anytime and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Standard Motor Products' CEO Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts