Remy International Inc (NASDAQ:REMY)
Q2 2014 Earnings Conference Call
July 31, 2014 9:00 AM ET
Monica Bolt - Vice President, Finance
Jay Pittas - President and Chief Executive Officer
Fred Knechtel - Chief Financial Officer
Jimmy Baker - B. Riley & Co
Ladies and gentlemen thank you for standing by. Welcome to the Remy International Second Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. Instructions will be given at that time (Operator Instructions) As a reminder, this conference is being recorded.
And I'd now like to turn the conference over to our host Vice President, Finance, Ms. Monica Bolt. Please go ahead.
Good morning, and thank you for participating on our second quarter 2014 earnings call. My name is Monica Bolt, Vice President of Finance. Joining us are President and Chief Executive Officer, Jay Pittas; and our Chief Financial Officer, Fred Knechtel.
Yesterday, we released our second quarter 2014 financial results. A copy of the release and financial statement are available on our Web site under the caption Investors at remyinc.com. Login instructions for the webcast were included with the invitation to today's call.
The Company's Safe Harbor statement is included in the earnings press release. Please consider my reference to this statement as notification of the applicability of the Safe Harbor provision to today's call.
Now, we'll hear from our President and Chief Executive Officer, Jay Pittas.
Thanks Monica. Good morning everyone, and thank you for joining us. The second quarter was a solid one for us with the business performing as expected with higher revenue in profit versus the second quarter of 2013. Favorable mix continued with strong commercial vehicle sale at high light-duty aftermarket demand. We reported net sales of $299 million, up 6% compared to $282 million last year. Aftermarket sales grew 12% versus last year and made up 51% of net sales in the quarter. Our light-duty aftermarket sales grew 16% while our heavy-duty aftermarket was up 5%. Heavy-duty OE sales were also strong up 12%. Sales outside North America were 35% of the total sales with China expanding 52% over last year.
Operating income excluding purchase accounting adjustments was $23 million compared to $20 million in 2013. In the second quarter, we continue to undertake initiatives to grow the top line and secure new business as well as take steps to maintain our competitive cost structure relative to our peers. Pressure from our customer to reduce is characteristic of the automotive supply industry. We anticipate the impact of our pricing to be in the range of 1% to 3% consistent with prior years. Despite this reduction, we maintained a gross margin percentage in Q2 of 2014 consistent with prior year.
Due to the competitive nature of the business, revised terms with customers may impact our ongoing profitability. We have taken and expect to continue to take steps to improve operating efficiencies and minimize or resist price reductions. As a result, we may choose to no longer continue programs of certain customers due to unacceptable competitive pricing or terms. While these decisions impact sales and profit in the short term, we believe this operating discipline will help to maximize the long-term sales and profit of the Company.
In the aftermarket, we were awarded 186 new aftermarket part numbers for Denso under our cross licensing agreement and release 53 new part numbers in the light-duty aftermarket continuing to show our commitment to be first to market. We expanded our market leading brushless product line to support upcoming emission requirements with the introduction and sale of the new 38SI alternator. We expect to see increased sales as we enter the alternator selling season.
Our refrigeration products continue to gain market shares as a result of our strong brand recognition while our sales team continues to focus on opportunities to expand our multiline business. In our original equipment business, we secured several significant global programs especially in our heavy-duty and off-roads segments. We were awarded a major new China program from Hyundai with start of production scheduled for late 2015 and we agreed to long-term contracts with Daimler Trucks Germany and several other customers in North America and Brazil.
Perkins, Peterborough, and Shibaura were awarded various programs starting in 2015. Our global OE backlog in the second quarter increased by $10 million, increasing our anticipated 2017 annual revenue to nearly $770 million. This represents a 37% increase in OE sales over 2013 results. As a reminder, we believe our backlog accurately reflects the churn of base business offset by new business. It is intended to represent the net revenue change between 2013 and 2017 of base and awarded business.
Finally, Hino Motors a Toyota Group company recently name Remy as one of the recipient of its prestigious excellence and quality award in recognition of our year long record of zero plant rejections. We continue to be proud of our customer recognition for our quality and one time delivery.
I'll now turn the call over to Fred to review our financial results.
For the second quarter, net sales were $299 million, up 6% when compared to $282 million last year. Aftermarket net sales were $153 million, up 12% as compared to $137 million last year.
North America light-duty aftermarket sales were up 16%, heavy-duty aftermarket was up 5% and Europe's aftermarket was up 3%, all reflecting additional demand in this important market segment.
Original equipment sales were $146 million, up about 1% compared to $145 million the prior year. Growth in heavy-duty OE Hyundai, PSA, and China sales offset the decrease from the roll off of GM programs. In the off-highway market combined sales to Cat and Cummins increased 3% versus 2013.
Global light vehicle production was up 2% in the quarter while Remy’s global light-duty unit volume was down 5%. Hyundai’s production was up 3% globally; however, our sales to Hyundai were up 13% as we continue to increase our share within Hyundai. General Motors production decreased 4% while Remy unit sales decreased 18% reflecting a reduction of GM platforms with Remy content.
Second quarter global commercial vehicle production was flat versus last year while Remy’s unit sales were up 3% for the quarter reflecting increased North American production at Navistar, Daimler in our off highway customers.
Operating income excluding purchase accounting adjustments was up 15% to $23 million compared to $20 million in 2013. Our reported net income for the quarter was $10 million compared to $11.5 million in the second quarter of 2013. This quarter was unfavorably impacted by mark-to-market of our interest swaps and increased effective tax rate due to the impact of foreign taxable income and purchase accounting.
Given our business dynamics we believe cash earnings per share is a strong indicator of our long-term performance. Cash EPS is calculated starting with adjusted EBITDA and subtracting the cash impacted taxes, interest, and capital expenditures. Cash EPS increased 5% from $0.61 in the second quarter of 2013 to $0.64 in this quarter. It is our intent to report to this metric going forward.
Adjusted EBITDA was $35 million compared to $33 million last year as a result of favorable volume mix and operational performance partially offset by pricing currency. Cash generated from operations was $5 million as compared to $6 million in 2013 as we built inventory to support cost to demand during the summer selling season and increased account receivable as a result of additional volume. Capital expenditures for the quarter were $5 million compared to $7.5 million last year.
Total cash-and-cash equivalents were $56 million as compared to $61 million at the end of the second quarter in 2013. We had $247 million of net debt outstanding, compared to $241 million last year.
Finally, Standard & Poor’s Ratings Services upgraded our corporate credit rating from B+ to BB- on improved financial metrics reflecting our leading position in North America as a supplier of starters and alternators.
I will now turn the call back over to Jay.
Thank you, Fred. Looking forward Remy is well positioned to build on its accomplishments. Long-term industry fundamentals remain favorable and support continues global growth in vehicle and components sales. Our customer product and regional diversification, OE and aftermarket mix combined with our strategic investments to capture growth in the rapidly expanding markets of the world provide a solid foundation for the future. By executing our plan, we will drive superior long-term value for our shareholders.
Operator, we’ll now take any questions.
(Operator Instructions) We have a question from the line of Jimmy Baker. Your line is open.
Jimmy Baker - B. Riley & Co
Can you speak about [indiscernible] discussions you’re having with your customers to cross-sell some of the USA multiline products and how those are progressing?
As you know Jimmy, first of all in Europe, we've been successful in selling multiline products for some time. So this isn’t a new exercise for us and in fact that’s been probably our healthiest growth segment for Europe. In North America, it’s going well. We've been slowly expanding both the brake caliper and axel business with several existing customer groups and expect a couple of new ones to come on board here within the third quarter as we expand our production capacity.
Jimmy Baker - B. Riley & Co
Okay and any of those discussions with some of the industries like -- major retail customers that, I mean if not, do you think that might be a 2015 phenomenon?
It’s a mix of both retail and WDs. I think it’s probably a little further along with the WDs, although one of the retailers looked very eager to start taking some supply from us.
Jimmy Baker - B. Riley & Co
Okay great and then I may have missed this, but did you breakout some of the key contributors to the uptick in SG&A in the quarter and maybe if you could just a little color on your outlook on how that spend will be trending sequentially in Q3 and Q4?
The SG&A was up year-over-year, a couple of drivers with the addition of the USA, we took on some additional SG&A spending. And then there were increased legal and professional fees associated with some strategic initiatives that we’re working on it. And there was a small portion that's just volume related with the higher volume year-over-year.
Jimmy Baker - B. Riley & Co
So this is effectively a fair run rate going forward or any of those USA expenses expected to come out as some synergies are struck or should we assume this is kind of the new run rate?
Yes, we’re taking a look at our SG&A and it’s been a focus for us looking forward, so all I can say at this point that we’ll continue to work on our SG&A cost and make sure that we're matching our spending with our volume.
Jimmy Baker - B. Riley & Co
Okay. And then Fred, maybe you can just speak to the receivables balance, DSO has been a bit higher than I think it’s typical for your company over the past couple of quarters now. Is there something about USA in there or customer mix that’s impacting this?
It’s mostly related to customer mix. The terms that we have with our Asian customers are considerably higher than here in the U.S. and we talked a little bit about our China sales being up 52% or so. That’s going to drive a higher DSO just based the mix basis. And then there were few things from collections, not [indiscernible] to do that, impacted U.S. DSO that we’ve collected in this month.
(Operator Instructions) And we have no additional questions, so please continue.
I thank everyone for joining us today and your support on Remy overall. And I look forward to sharing our results in our upcoming quarters. Thank you everybody for joining us.
And ladies and gentlemen, this will conclude our conference call for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.
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: firstname.lastname@example.org. Thank you!