Standard Motor Products, Inc. (SMP) Q4 2014 Earnings Report, Transcript and Summary

Good day everyone and welcome to today’s Standard Motor Products Fourth Quarter Earnings Release. At this time, all participants 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 program is being recorded. It is now my pleasure to turn today’s meeting over to Mr. Larry Sills. Please go ahead.

Good morning everybody and welcome to our fourth quarter conference call. We are following a slightly different format this time as you see, because we want to do have the opportunity to hear from Eric Sills our new President. So, the sequence will be, first, Jim Burke will review the numbers, then I will give a general overview of the company and the industry and then third, Eric will update you on the integration of our three latest acquisitions. Then of course, we will open for questions. So, let’s begin with the numbers and I call on Jim Burke.

Okay, thank you, Larry. Good morning. First let me begin 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. We are very pleased to report our strong performance for the fourth quarter and full year 2014. These results support our positive outlook for the future as reflected in our previously announced 15% dividend increase from $0.13 to $0.15 per quarter payable March 2 and a new 2015 share repurchase program for $10 million. Looking at the P&L, consolidated net sales in Q4 2014 were $218.1 million, down $654,000 or 0.3% and year-to-date, net sales were $980.4 million, down $3.3 million or again 0.3%. By segment, Engine Management net sales in Q4 2014 were $175.9 million, which was slightly ahead of Q4 2013’s net sales. We are very pleased to match or slightly exceed last year since sales were up 14% in last year’s fourth quarter. Engine Management net sales for the full year 2014 was $709.3 million, which was slightly below 2013 net sales of $711.2 million. Larry will further touch on sales performance shortly. Temperature Control net sales in Q4 2014 were $39.7 million, up $1.4 million or 3.7% and year-to-date were $259.1 million, down $3.5 million or 1.3%. 2014 turned out to be a cool summer season in North America which was the second cool season in a row following 2013. Consolidated gross margins in Q4 2014 were 30.8%, up 0.3 points from 30.5% last year and year-to-date were 29.5% matching the full year 2013. By segment, Engine Management gross margin was 31.8% in Q4 2014, up 0.2 points and full year 2014 was 31%, up 0.3 points. Our focus on continuous improvement towards low cost manufacturing vertical integration for increased in-house manufacturing and low cost sourcing have manifested in five straight years of gross margin improvements from 24.3% in 2009 to 31% in 2014, up 670 basis points. Temperature Control gross margin in Q4 2014 was 18.6%, up 2.1 points and full year 2014 was 21.6%, down a half a point from last year. Temp Control margins were negatively impacted in the second half 2014 when we reduced production levels due to soft demand from the 2014 cool season. For 2015, Temperature Control margins will be softer in the first half due to higher average production cost in the second half of 2014. However, assuming a more normal summer season, we expect margins to improve in the second half of 2015 and increase year-over-year over 2014 levels. Consolidated SG&A expenses in Q4 2014 decreased $2.2 million to 21.1% of net sales versus 23.1% last year and year-to-date; SG&A expenses decreased $7.7 million to 19.7% of net sales versus 20.5% last year. Reductions in 2014 SG&A expenses were primarily in employee compensation and benefit costs from lower self-insured medical costs, lower incentive pay compensation and reduced bad debt provisions. SG&A expenses in 2014 averaged at a little over $48 million per quarter. In 2015, I expect SG&A expenses to increase to approximately $51 million to $52 million per quarter as we anticipate medical cost inflation, wages and incentive compensation increases, normalized provisions for bad debts, higher AR draft fees of interest rates rise and a $2.5 million annual increase from post-retirement non-cash amortization expenses. Our post-retirement medical plan as previously announced, ends in December 2016. Consolidated operating income before the one-time litigation charge, restructuring and integration expenses and other income net, in Q4 2014 was $18.8 million, up $2.5 million at 8.6% of net sales and full year 2014 was $96.1 million, up $6.9 million at 9.8% of net sales, up 0.7 points over 2013. In summary, the key takeaways for the quarter and year were, healthy fourth quarter Engine Management sales matching a 14% fourth quarter increase last year, continued improvement in Engine Management gross margins, integration of three acquisitions completed during 2014. The net result was a $6.9 million increase in consolidated operating income for the year to $96.1 million or 9.8% of sales, again a 70 basis point improvement. On an earnings per share basis from continuing operations, excluding non-operational gains and losses, diluted earnings per share were $0.49 in the quarter versus $0.42 last year and $2.52 for the full year versus $2.32 in 2013. Looking at the balance sheet, accounts receivable was up slightly $1.3 million over December 2013 which was primarily from the increase of $2.6 million from acquisitions, inventories increased $8.6 million year-over-year and again was primarily from $5.4 million in acquisitions. Total debt was $56.8 million in December 2014 compared to $21.5 million at December 2013, reflecting an increase of $35.3 million basically to fund our three acquisitions. As reflected on our cash flow statement, cash from operations were $47 million, which was inclusive of our one-time $10.6 million litigation charge. Cash from operations in 2014 were used to fund $13.9 million capital expenditures, $11.9 million in dividends and a 10 million share purchase program. In summary, while top-line sales was soft in 2014, and essentially match the prior year, we are very pleased to have reported operational margin improvements, 15% dividend increase, and a new $10 million share repurchase program. Thank you. I will now turn the call over to Larry.

Okay, so, let me begin by saying how proud I am of our people. Despite sales, that were below our expectation and I’ll come back to that in a minute. Our folks were able to achieve significant operating improvements and the result, an all-time record of profit for the company. This was established and accomplished through the skill and efforts of hundreds and hundreds of people, different parts of the company, many locations, we are now manufacturing products we used to buy. We have had savings in purchased items making use of our engineering office in Hong Kong. We’ve had expense control in all areas and we’ve done a fine job which you’ll hear about shortly integrating our recent acquisitions. Result, an all-time profit record and we congratulate and thank all our people. I’ll talk about sales for a second and then I’ll turn it over to Eric. As we say, we were not pleased with our sales performance this year. In Temperature Control, as we all know, it’s a highly weather-related business and unfortunately, 2014 was the second cool summer in a row. As a result, sales suffered for the second year in a row. Now, our goal, our strategy is to position this division in such a way that we’ll do well in a cool summer and very well in a hot summer. We are making strides here. We build up our Mexican manufacturing operation. It’s very cost-efficient, high-quality and we are beginning to gain the benefits of our joint venture in China. So we are making strides, although there is still definite room for improvement. In Engine Management, as we spoke to you during the earlier reports of the year, what we were seeing was that our customers were achieving 3% to 5% increases in their sales of our products, which was in line with our forecast. But their purchases from us which creates our sales were essentially flat. And what we said if you recall in our earlier quarterly calls that sooner or later, this was going to balance out. And it did in the fourth quarter. Fourth quarter was quite strong in Engine Management sales. To refresh your memory, in 2013, our fourth quarter had a 14% increase in Engine Management which is way beyond our normal growth rate. But we were able to match that sales figure in 2014 for the fourth quarter. So this was a very good result. Okay, looking at the industry as a whole, the demographics remain positive. The vehicle population continues to age. The average age now is north of 11 years. With the price of gas falling, miles driven is up and that’s always a good sign for our industry. We continue to forecast low to mid single-digit growth, which we believe is essentially in line with what the industry is achieving. Now, I am pleased to introduce Eric Sills, our newly appointed President. I won’t repeat his background. It was all in the release. You should just know that Eric and his people were the ones essentially responsible for the operational improvements that we’ve been talking about. Eric will discuss the integration of our three most recent acquisitions and then we’ll open for questions.

Thank you and good morning everybody. It’s a pleasure to be with you here today. Before I talk about the specifics of the three deals, I thought I would take a minute to explain our acquisition strategy. Our primary focus is on staying reasonably close to home with related businesses either by acquiring what we call bolt-ons or competitors, or vertical integration type acquisitions where we acquire suppliers of ours allowing us to become more basic manufacturer, lowering our costs and gaining increased control over our supply chain. The rationale for this approach, these types of deals have clearly defined benefits with demonstrable and immediate synergies and with minimal risk. But in addition to strengthening our core business, they also tend to get us into something adjacent to our core business either a new market, a new product category or possibly in a new geography. So with the strategy we have been very active recently with seven deals over the last three or so years and thereof bring you up to speed on the three deals that we did in 2014. The first was Pensacola Fuel Injection, Pensacola is a re-manufacturer of diesel injectors, injector pumps, high pressure oil pumps and some turbo chargers, and they were our primary supplier of these products. Diesel is a huge growth category for us and one that we needed to be basic manufacturers in. So we acquired their re-manufacturing operations in January of last year and within six months, we relocated all of that production to our Grapevine Texas plant, Grapevine being our center of excellence for re-manufacturing which is the primary skill set needed in this type of business. Now since that time, we have made significant strides improving our manufacturing processes, improving the product itself and while there is still much work to be done, we are excited on the prospects of this line and we look to expand it and really grow it. Okay, moving on, the next two deals were related, both bolstering our Temp Control business. It was a creation of joint venture of Gwo Yng Enterprises, a Chinese manufacturer of Temp Control products and Annex Manufacturing, Annex being a Texas-based distributor of temp products and Gwo Yng’s exclusive distributor in North America. And these deals were done simultaneously in April of 2014. I’ll spend a minute on each. First on Annex, again they were a distributor of Temp Control products to the US and we were their largest account, but they also did bring a substantial amount of new business to us largely in the OES and heavy-duty channels, both are being important growth areas for us. By the end of 2014, we had completely integrated the Annex business closed all their locations, folded the operations into ours and we are pleased to say that we’ve held all of their customers. Importantly, we have retained the key talents from Annex to help manage and grow the business and we welcome them to the Standard family. Gwo Yng, Gwo Yng the large manufacturer of various Temp Control products such as hose assemblies, accumulators, filter dryers and switches and these products are really the one remaining hole in our Temp Control offering where we were not basic manufacturers, so it’s really a perfect fit. This is a joint venture investment where we own 50% and the other half is owned by the founder of the business who continues to manage the day-to-day operation. As we were the largest customer of theirs through Annex, we saw immediate cost reduction and have since added many additional products that we have been sourcing from other suppliers. We’ve now begun the process of integrating them more closely into our supply chain and are making great strides there. Really extremely excited about the potential here, it’s a large capable and low cost manufacturing operation with very diverse process capabilities. So we expect to grow it significantly by adding more products, not only for our Temp Control business, but for our Engine Management business as well. Beyond strengthening our core business, they also provide us with the potential beachhead into gaining sales in the region which could be very exciting for us. So we are optimistic that all three of these deals will aid in our strategic objectives and that is a round-up of our recent investments.

Okay. Well, thanks for listening. As we said, we are very pleased with the fourth quarter and the year and we look forward to 2015. And now we will open for questions.

[Operator Instructions] We will take our first question from Chris Van Horn with FBR Capital Markets. Your line is open. Q –Cole Allen: Good morning.

Good morning, Chris. Q –Cole Allen: This is actually Cole Allen on for Chris. So, let’s get started. I have a few quick questions. First off, you guys mentioned that 4Q, your customers evened out the imbalance between their increase in sales and then you guys increase in sales to them. What are you guys seeing from your customers so far in 1Q 2015?

That’s a good question, but it’s really too soon to make any comments. It’s – we are only a few weeks into the year at this point. So I prefer to hold judgment on that and we can discuss that further when we discuss our first quarter results in a few weeks. Q –Cole Allen: Okay, okay, that’s fine. Thank you, and then another question I had was, all three acquisitions seem to fit well with your business. Are you guys looking at any more acquisitions right now? I know you said that you are looking for bolt-on or verticals, but, what should we expect from the acquisition front as we head into 2015? A –James Burke: Yes, it’s Jim Burke speaking. We are continuously looking at opportunities and again, we are pleased with the healthy balance sheet that we have. But again, once we find some, we stay close to the two categories, Engine Management and Temperature Control and look forward to hopefully having finding something in the future. We are always evaluating opportunities. Q –Cole Allen: Okay, okay, thanks so much. And one last quick one. You guys instituted or expanded the share repurchase program around $10 million, which was really good. What is your plan on executing that? Is that kind of like spread out between the next four quarters or is that all once? What are you guys thinking there? A –Lawrence Sills: Again, the timing will be over the course of the year, but obviously we’ll also be evaluating the markets and that. So, we look to – it could be over the course of the full year. Q –Cole Allen: Okay, thanks so much. Great quarter guys. A –Lawrence Sills: Thank you. A –James Burke: Thank you.

Thank you. We will go next to Scott Stember with Sidoti & Company. Your line is open.

Good morning and thanks for taking my questions. A –Lawrence Sills: Good morning. A –James Burke: Good morning Scott.

Jim, you made some comments about Temperature Control, about expectations for margins in the first half of the year and getting better in the back half of the year, could you maybe talk about for the full year where you would see the margins on a year-over-year basis? And maybe also just explain a little more granular the impacts in the first half there? Thank you. A –James Burke: Okay, very good. Okay, and because it’s a seasonal nature of the business, so the products that were – to understand, the products were building in the second half of 2014 that’s really gone into inventory with less production units. You can think of it on an average cost per piece which is going to be higher. Those are going to be the units just in on a first-in first-out basis that will be selling in the first half. So, I see margins in the first half being lower than we’ll finish for the year. On a normal season, we still think we have invested with opportunities from the Gwo Yng Annex benefits that will generate and I am looking for year-over-year improvements in Temperature Control. Our stated goal is to be able to get Temperature Control back to the 23%, 24% margin level. I am not going on record to say that will be next year, but that’s our goal to get on there and then for continuous improvement afterwards.

Okay, and maybe just touch base on the margins expectations in the Engine Management. You’ve seen a lot of benefit from acquisitions and more outsourcing of product. What’s the outlook for the year there? Would you expect growth there as well? A –James Burke: Yes, again, we are looking for year-over-year improvement. I did point out that we had – I think it was five straight years there where we had significant gains, but our day-to-day efforts of sourcing and in-house manufacturing and engineering efforts, we look for the combination of all those items offset by whatever inflationary cost you have for net incremental improvements year-over-year. Again assuming rational pricing in the marketplace.

Gotcha and, last question, I think, last quarter you guys talked about with Gwo Yng, the opportunity to benefit from winter-related products. Could you talk about the outlook for that and essential timing? A –Lawrence Sills: Gwo Yng for winter-related products, it’s primarily a Temp business. We may have a little bit more going on there. But I don’t think anything eminent. But…

Gwo Yng is providing air-conditioning related parts. So, they are much more of a summer business. We do have certain parts of our line that are winter-related, heater – winter-related, heater-related, but that’s not Gwo Yng.

Okay, gotcha. All right, thanks so much. A –Lawrence Sills: All right, thank you Scott.

[Operator Instructions] We’ll go next to Bret Jordan with BB&T Capital Markets. Your line is open.

Good morning this is actually David Kelley in for Bret this morning. Thanks for taking my questions. Just initially on – I think we discussed over the past years, so that the last couple summers have certainly been mild. What is your expectation there and what are your feelings on customer inventory levels and Temperature Control as we head into the spring season and maybe, opportunity here for ordering patterns assuming a normalized summer in 2015? A –Lawrence Sills: Well, we do get information on customer inventories and frankly I’ve been pleasantly surprised – one would have thought that after two poor summers in a row, people would have oversupply of inventory. I think our customers are getting very sophisticated and we work with them as close as we can. So, I am not seeing a lot of excess inventory out there at this point. So, we’ll wait to see what the summer holds.

Okay, great. Thank you. And then a follow-up also on the – I think the acquisition questions earlier. Have you seen an uptick and say, the multiples that historic averages you’ve paid over the last few years and recent years or maybe expectations for2015? I mean, it sounds like people are fairly bullish on industry growth this year and just want to get your thoughts on maybe the multiples you are seeing in the market right now? A –James Burke: Again, David, I am reading and seeing some of the multiples that are out there recently and they were higher, I think at one point maybe multiples were possibly in the 5 to 6 range and there has been few deals where they have been north of that. Our key is to look for bolt-on acquisitions that we can find where we have a critical mass of that potential supplier or a customer that’s in their competitor. So, I don’t envision multiples increasing for us. We look for product lines where we can integrate and again, we – once we have any opportunity to announce something, we’ll be pleased to be forthcoming.

All right. Great, thank you. I appreciate the color.

[Operator Instructions] And we have no further questions at this time.

Okay, with that, I would like to thank everyone for joining our call today. Thank you. Good bye.

Thank you.