Standard Motor Products, Inc. (SMP) Q2 2012 Earnings Report, Transcript and Summary

Good day, and welcome to the Standard Motor Products’ Second Quarter Earnings Release Conference Call. It is now my pleasure to turn the conference over to Mr. Jim Burke. Please go ahead.

Okay, thank you. Good morning and as Clint mentioned, it’s our second quarter 2012 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 begin with a review of the financial highlights, and then turn it over to Larry followed by Q&A. Overall, we are very pleased with our Q2 results. Three key highlights from Q2 2012, revenues up 10.2%, the benefit of recent acquisitions; operating, earnings per share up 20.4% from $0.49 to $0.59, and debt reduction of $25 million from operations. However, total debt increased as we made 2 investments in quarter 2, $5 million share repurchase program and $38.6 million acquisition of CompressorWorks. Larry will go into more detail on our recent acquisitions after I review the financial highlights. Our consolidated net sales in Q2 ‘12 with acquisitions were $268.9 million, up $24.9 million or 10.2%, without acquisitions, $245.1 million, up $1.1 million or 0.4%. By segment, Engine Management net sales in Q2 2012 with acquisitions were $172.6 million, up $12.7 million or 8%, without acquisitions $162.5 million, up…

Good morning. Jim has covered the results very well. there is not that much to add. I will just review a few of the highlights, and then we’ll open for questions. We are obviously pleased with the second quarter, sales and profit were both well ahead of the second quarter of 2011. Acquisition certainly played a major role and I’ll review them shortly. Excluding the acquisitions, our sales were marginally ahead in the second quarter, and slightly down for the 6 months. But as we have stated before, for the purposes of sales comparison, we were up against 2 major events in 2011. Our first and extremely strong first quarter of that year, we were up 23%, mostly the result of one-time pipeline orders. And second was the loss of certain Temperature Control product groups from a major account. Now both of these events are behind us. We have made up the bulk of the sales shortfall and the comparison should be looking better as we proceed in the months ahead. Okay. Let’s talk about the acquisitions for a second. As Jim said, we have now made 3 acquisitions over the last 14 months: BLD, Forecast Trading, and CompressorWorks. All 3 are performing very well. We have maintained all the major accounts. Sales are achieving expectations. The integration is proceeding on schedule. We’re starting to see some of the savings in product cost and in expense reduction. We’ll see some of it this year, but we anticipate the most of the benefits in 2013 and all 3 have been profitable in year 1. Perhaps even more important, each of them are helping us to achieve strategic goals. BLD has helped us to become more basic in some very important Engine Management product groups. Forecast Trading, the industry leader in the economy line, Engine Management and as the vehicle population is grow -- ages rather, economy lines become more important. And our CompressorWorks is the industry leader in manufacturing new compressors, which is the fastest-growing part of the Temp business. So as we say, all 3 are not only doing well, but they’re helping us to achieve strategic goals. Financially, thanks to our healthy operating cash flow. We have absorbed all this acquisition cost, and we anticipate ending the year with better than a 1:1 debt-to-EBITDA ratio. So to summarize, we’re pleased with the first half of the year. We are optimistic looking ahead. July as you would imagine was a very strong month for Temperature Control. In addition, the vehicle population continues to age. Our customers doing well and we look forward to the balance of the year. And now we look forward to your questions. So with that, we will open it to questions. Thank you. Clint?

Yes, sir.

Yes. Okay, we’re ready for Q&A.

[Operator Instructions] First, we’ll go to the side of Brian Sponheimer with Gabelli & Company.

You’ve noticed some pickup in activity over the last 6 weeks, because of the hot summer. Comparing this year to maybe a year-ago or some other hot summers that we’ve had, where is the industry as it relates to inventory overhang and to what degree can the summer be better than others you’re seeing?

You’ve asked 2 questions. One of them, you’re asking is the, are our customers inventories in good shape. I think if you’re asking that, and yes to the best of our knowledge they are. The second question, are we seeing better than prior years for the weather? Is that what you’re asking?

Yes, just degree of whether this year, how this year stacks up to maybe some other that you’re seeing?

It’s pretty good. It’s pretty good.

And Jim, what prompt that the share repurchased activity relative to what you’ve done that before?

This is our second year for the share repurchase program. We had $5 million last year, another $5 million this year, and is our intent to have, this is an ongoing program to match any equity programs, equity compensation programs that we have in place.

Right, so this is just offsetting option dilution for the most part?

We’ve basically option dilution, but options were out of for the last number of years. But we have a very few left, but restricted stock program that we replaced options with.

Okay. Can you talk a little bit about the pricing environment that you’re seeing?

Okay. Well, we are in a highly competitive pricing environment, because we have to compete increasingly with products coming in from China and the Far East. We analyze all this very carefully. Some of the prices go up, some of them go down. On balance, we have been able to achieve net increases somewhat better or equal or better to than inflation that’s been our pattern for the last few years and that is our pattern for the year 2012.

We’ll go next to the side of Bret Jordan with BB&T Capital Markets.

Couple of quick questions, and I want to talk on the savings from the acquisitions as we progress through ‘12 and into ‘13. If there was a little over $5 million of incremental SG&A from the acquisitions between the SG&A and potential cost savings on the production side. What do you think the magnitude of pickup you could see next year from that could be?

We haven’t disclosed what would be the specific from the individual acquisitions. The timing on and we intend to integrate our product offerings and where we can gain leverage on the SG&A expenses. So I think really what we would look towards is, we’ll say Engine Management will be focused on getting between 27% and 28% gross margins. and we believe in the second half, Temp margins will improve and we’ll work on getting those to the mid-20s to improve the gross margin versus the 21% or so that we’re sitting at now.

Okay. and then a question on organic growth in the quarter, I guess we did have the large customer that was not in the mix, but the core demand was strong enough to come in flat at Temperature Control. And that was refreshed me about a $20 million annual volume with that customer? And I guessed if we looked at it, how it rolled quarterly? I’m just trying to get a feeling for what the Temperature Control growth was in the quarter? What sort of magnitude strength to offset the lost customer?

Right. we said previously that it was in the $20 million. It’s somewhat difficult because still customer buys from us. Best estimate now I would say is that the season, it’s improving to $20 million to $25 million. I’ll expand it a little bit with the bulk of it being behind us now, because most of that they buy in the first half of the year. There’ll be a little bit more in the third quarter, and then that should be in sort of season really it’s negligible certain amount in the fourth quarter?

Okay. And I guess one last question on use of cash by year-end, you’re down to 1:1. Where do you see using cash going forward? is that you’re able to do a bigger buyback dividend or just continued acquisition?

Right. The 3 items that we look out, and we address the dividends would be a key item that we look at; we’ll review that at the end of the year. So dividends want the share repurchase program, I envision to keep that roughly in the same dollar amount, maybe it depends on its own number of shares that may increase slightly as we move forward. And then hopefully if there’s, we continue to look and if there’s opportunities with acquisitions.

We'll go next to the side of Greg Garner with Singular Research.

A question on the CompressorWorks, did I hear that right, there was $13.3 million contribution from CompressorWorks in the quarter?

It was the bulk of our sales increase there. Hold on one second. Let me think that number was…

Yes.

Okay. And is it safe to assume that the margin compression in Temperature Control was all to do with the inventory right up with the acquisition for CompressorWorks?

No. I would say it was split. There were 2 items. One, it’s the impact of the write-up and amortization of those costs, which will -- the bulk of it was in May and June a little bit more in July. The other part relates to the production levels and our cost of production. so with the loss of that customers’ volume, we were in a inventory reduction mode at the beginning of the year, so we’re cut in production, hence our costs per unit would be higher, and that’s what sit in the P&L now. The good news is with the warm summer season, our production levels are up significantly from where they were in the first half and that’s why I feel comfortable stating that our margins will be better in the second half for Temperature Control.

Okay. And when you say they can be better in the second half. Does that mean sequential basis or are you comparing to last year’s quarters?

Sequential basis.

Okay. And CompressorWorks, is the production going to move to Mexico there or some reason I'm thinking that this is a little bit different that that might not occur?

Yes, that is going to go to Mexico. That has been announced. We will start moving after the season, and it’s a pretty straightforward move, so we’re confident. We’ll be in good shape really for the next season. and with this again, we are very confident of our ability to compete on costs with China.

Okay. And so that would be the primary driver for the margin improvement from CompressorWorks next year?

Yes. As we integrate the product costs, and look for savings there, yes. Both in manufacture and in purchase costs, this will gain the leverage there also.

Okay. And the inventory write-up would be totally completed by end of July?

Yes.

[Operator Instructions] We’ll go next to the side of Adam Brooks with Sidoti & Company, LLC.

Just a few quick questions here on Engine Management side. I’m guessing about 60 basis points to 80-basis points of growth is due to the change in higher expense in that one item. The rest given flat organic sales, anything baked to point out towards that big improvement?

These are efforts that have been -- it’s pipeline working on engineering projects to bring in-house the manufacturer and low-cost sourcing from overseas. So these are really ongoing cost reduction programs that we’ve been working on. But it’s a combination of everything that we have there including pricing.

And can you give us a sense maybe the magnitude of the cost difference, once you would move CompressorWorks down to Mexico or is that something you don’t want to divulge?

Yes, we wouldn’t disclose that type of information. Again, I think what we’re look to see is the -- you’ll see the margin improvement in Temperature Control as we go into 2013 and gain the savings there.

We’ll go next to the side of Walter Schenker with MAZ Partners.

Two questions, one of which is could you restate your dividend policy and what the objectives there are. And secondly in regard to the industry trends by your customers to extend the dating of virtually everything I guess, what if anything can you do to what set that or what can you do in pricing to sort of try and adjust your pricing a little for the quest of having to extend receivables more than they might have been in number of years ago?

Okay, Walter, I’ll answer the first and Mr. Burke will answer the second. The first is the dividend policy, as you see we just announced the current quarter at $0.09 of share. As we have stated, our long-term goal is to achieve 1/3 of earnings per share. We are obviously running somewhat below that number. Our Board will evaluate this and constantly evaluating it, and we intend to work in that direction. For the second one, I’ll give that to Mr. Burke. Walter, we look at the customer terms everything that you read, everybody is asking for extended terms and improve their payables to inventory ratio. So that pressure as given, it’s no different than anything else with pricing. It’s a competitive environment. What we do, there’s a balanced that has to be add for both the buyer and the seller. We negotiate work on those items and again any increases from customer extension of terms or factoring that’s no different than any other commodity cost or increase that we would have in there or we would look to negotiate any of our costs to be transferred over to as our cost increased to the buyer.

Okay. And then just one last question, it’s for register. Long-term question, we’ve been trying to address this for long time. Even though you’re manufacturer, your inventory turn is about 3x give or take closest round number. Is there anything that you can do to enhance that over time, or is it just the nature of the large number of SKUs you guys have to work with?

Yes, Walter we are working aggressively to improve that number. We’ve actually asked for some outside consulting help to give us some advice on techniques that we could be doing better on. I think one of the biggest ways we can accomplish this, and also become a better supplier is to enhance our collaboration with major accounts. Some of our accounts are very willing work with us in this area. this can help us both improve shipping level and reduce inventory. And yes, we’re not satisfied with the current number, and we are working very hard to improve it.

[Operator Instructions] We’ll go next to the side of Aditya Oberoi with Goldman Sachs.

My first question was on working capital. Can you talk about a little bit, how it’s going to pan out in the back half? is there going to be any other impact from acquisitions or is it going to be the regular seasonality there?

It may have broke-up on the beginning; there I’ll repeat was it -- my forecasts or any significant items in working capital for the second half of the year. Right. At this point, while we continue to look at acquisitions, I don’t foresee anything happening that’s eminent. so I think it would be, again, we get the seasonal nature of our business, sales are up, receivables if it holds, would probably maintain through to third quarter, and then we should be able to turn those receivables back into cash as the Temperature Control seasonal winds down. Again, a large part of it is also covered with the factoring that we do also. So the peak and trough is not as great as it was a few years back.

Right. but excluding any other acquisitions that you announced looking out, those should be in the same seasonality as what we have seen in the past few years, right?

Yes.

Okay, great. Can you talk a little bit about the mix that you guys are seeing? Is it still that the customers are looking for medium grade products and we have not seen a shift towards premium stuff again?

Okay, yes that’s an ongoing event we believe. As the vehicle population ages when you’re driving a 15-year-old car, you’re looking to save money on parts. So there is a continued push for economy lines and this is where the Forecast Trading acquisition was so helpful. Because they are the experts in that, they are the leaders in that. So yes, we view this as a permanent process and we think we’re in good shape for it.

Got it. And one last one if I may ask, at what point that debt reduction become one of the top uses of cash? I know you guys have focused on acquisitions right now and then secondly dividend to our share buyback to something that you guys are also contemplating. But at what point do you think you will get into a more to various start reducing your debt?

So if I don’t have the acquisitions, again the key focus is debt reduction followed by our dividend, our policy that will be a place. So I would expect debt to be a significant paydown in the second half of the year. Again we’re at a seasonal high point now at the end of June. But debt reduction is a key item. And again with anything that we do in acquisitions even with the completing 3 of the acquisitions we were still just barely over 1:1 on debt-to-EBITDA ratio, so again, very comfortable in that avenue. As we do bolt-on acquisitions, it’s nice to see operating cash flows could basically fund them also.

We’ll go next to the side of Jason Williams with Pinyon Pine Capital.

I just have a quick question, I’ve heard you give CapEx during the quarter, but I didn’t hear cash flow from operations, if I missed it, but I was just hoping to get cash flow from operations for the quarter?

I don’t have it for the quarter in front, but we’ll be filing our Q by later this afternoon or tomorrow morning.

[Operator Instructions] We’ll go next to Efraim Levy with S&P Capital IQ.

As far as the new business wins you’ve been able to largely offset the losses of the major customer. What's the outlook for new business win progress in the second half and into 2013?

Well, new business is pretty difficult to forecast. I can only say that we’re working aggressively in all areas, but new business is new business. We just, we’re just working towards it, and we will do our best.

So it’s not a whole lot of visibility on the pipeline, last quarter you’re able to say, we do have a new business that will be largely offsetting?

Yes. I have no new business guarantees that we can announce or anything like that.

Okay. And as far as...

We keep pushing.

As far as acquisitions, is there a preference to which side of the business to add to or will just be opportunistic?

We’re looking for both, we think both of our divisions have growth potential, and we are looking in both ways.

All right.

And yes, it is somewhat opportunistic.

And there are no more questions in queue.

Okay, very good. With that, I’d like to thank everyone for participating in our earnings call today. Thank you, goodbye.

This concludes today’s conference. You may disconnect at any time.