Standard Motor Products, Inc. (SMP) Q1 2015 Earnings Report, Transcript and Summary

Good day everyone and welcome to today's program. 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 call will be recorded. I will be standing by if you should need assistance. It is now my pleasure to turn the conference over to Mr. Jim Burke with Standard Motor Products. You may begin.

Okay, thank you, Kevin. Good morning and welcome to Standard Motor Products First Quarter 2015 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’ll begin with a review with our financial highlights, and then turn it over to Larry, followed by Q&A. Looking at the P&L, consolidated net sales was soft down $5.2 million or 2.2%. The impact of foreign exchange movements negatively impacted our Q1 results by $2.1 million or roughly 40% of our sales shortfall. The fall in the Canadian dollar was the primary contributor to this shortfall. In Q2, we implemented price changes that combat this erosion in Canada. Engine Management net sales were down $2.2 million or 1.2%. Approximately $800,000 of the currency impacts was in Engine Management from the fall in the Polish Zloty. The month of January was soft to some degree impacted by the harsh winter and also following good sales in our Q4 last year. We were pleased to see a rebound in Engine Management sales in February and March and also carrying into the month of April. Temp Control net sales in Q1 primarily reflects pre-seasonal ordering and as we have cautioned in the past, one cannot read too much into these early numbers. Sales were down $2.8 million or 5.4%. Temp sales are weather dependent and Q2 and Q3 will be the critical quarters. Consolidated gross margin dollars in Q1 were down $4 million and up 1.1 points. Engine Management gross margin was 29.2% down half a point versus Q1 2014. The decline in gross margin was primarily related to our investment in our diesel remanufacturing line. We significantly enhanced our remanufacturing processes and added additional new components to ensure that we have the best diesel injectors in the marketplace. Temperature Control gross margin was 20.2% down 2.9 points versus Q1, 2014. As we discussed during our Q4 2014 earnings call, we pointed out that Temp Control margins would be softer in the first half, 2015 as we scale back production in the second half of 2014 due to the 2014 cool summer season. Sequentially Temperature Control gross margin in Q1 2015 improved to 20.2% from 18.6% in Q4 2014. We continue to look for a year-over-year improvement in Temp Control gross margins for 2015 against a 21.6% full year rate in 2014 assuming we have an average summer season. Consolidated SG&A expenses were $49.2 million in Q1, which was below our average estimate of $51 million to $52 million per quarter spend level discussed in our Q4 2014 earnings call. The $1.6 million increase was partially impacted by the amortization of prior service cost related to our post-retirement medical plan. This reduced benefit is a non-cash increase in expense. This plan will be eliminated in December 2016. Other increases reflects some incremental acquisition cost and intangibles amortization from acquisitions completed at the end of April last year. Consolidated operating income before restructuring and integration expenses and other income net in Q1 2015 was $14.7 million, 6.5% of net sales versus $20.3 million, 8.7% of net sales last year. Other non-operating income expense net improved $564,000, this was primarily from our investments in joint ventures over the Q1 2014 period, the net effect of our operational results as reported on our non-GAAP reconciliation was Q1 diluted earnings per share of $0.40 versus $0.53 last year. Looking at the balance sheet, accounts receivable increased roughly $25 million versus December 2014 and also above March 2014 levels. Sales were recorded later in Q1 2015 versus Q1 2014 with collections going to roll into Q2 2015. Inventories were up roughly $6 million against December 2014 but were essentially flat against March 2014 levels. Total debt was $71.8 million, up $14.9 million versus December last year. Our cash flow statement reflects $14 million cash used in operations in Q1 2015 as opposed to $9 million cash provided from operations in the quarter last year. The delta primarily related to the $25 million increase in receivables discussed earlier. In summary, Q1 2015 results started off slow with a minor sales reduction and reduced margins in both Engine Management and Temp Control. We believe both of these trends to be short term in nature and believe the favorable demographics to the aftermarket should bode well for us as we move forward into 2015. Thank you. And I will now turn the call over to Larry.

Good morning everybody. Jim has reviewed the numbers and I’ll just focus on a couple of key issues and then we’ll open it up for your questions. Sales, first Engine Management, just leaving aside the currency movements for a second, as Jim said and as we said in the release, January was a soft month and this was somewhat caused by all the ice and snow in January where many of our customers actually lost days for shipping. But since then, sales have been holding up nicely, February and March were good, April looks pretty good at this point and we maintain our forecast which is that Engine Management will grow along with the industry rate of roughly below to mid-single digits, primarily as a result of continuing aging of vehicles population. Okay. Temperature Control, again as Jim said the first quarter doesn't tell you much it’s primarily pre-seasoned stocking orders slightly down from last year and not surprising after two cool summers in a row. We don’t have to see how this summer works out, unfortunately April has been fairly cool so far but it’s still early. But it is what we tell our people, we cannot control the weather, some years will be hot, some years will be cold, in the long run, it will balance out and our task is to make the Temp Control business a better and better company so that we do well even in a cold summer. And the 50/50 venture with Gwo Yng is certainly a step in that direction and so that brings us two acquisitions, I’ll talk about them for a second. We have made three since last January. All three are up and running, all three fit into our strategic plan where we focus on two types of acquisitions, one is what we call bolt-on, which enables us to have growth in existing markets and get us into some new but related markets. And the second type is vertical integration, where we become more basic manufacturers which leads through a cost reduction and better control over our delivery and quality. These three acquisitions fit all of these, some fit both of these. So let me talk about each one for a second. The first Pensacola Fuel Injection, a rebuilder of diesel fuel injectors, which is a rapidly growing market, our forecast to grow 300% over the next several years and we were their major customer. Their production lines are now relocated to our Grapevine, Texas facility and they are up and running. As Jim said, we invested in this volume in the first quarter and most likely these costs will continue into the second quarter, but our goal was to first ensure that we are the number one supplier in this part of the market - number one quality supplier in this part of the market, plus we are making investments which will lead to a future cost reductions. So there is some upfront cost here, but we believe this is an excellent investment for the future. The second wasn't an acquisition, it was an investment to create a 50/50 joint venture with Gwo Yng, a Company in Foshan, China. Again we were a big customer of theirs and they supplied us with much of the Temp Control line which was not compressors. We’re working with them now to upgrade some of their methods and systems but they were good company with good products and good people. Benefits of this, we will have lower acquisition cost for much of our product line, plus they are making a profit in their own right and one day hopefully some future sales into China. And the third acquisition company called Annex Manufacturing, they were trading company, they were closely associated with Gwo Yng, their headquarters was in Fort Worth, Texas right near us. What they do was, they would source Temp related products from Far East, they would warehouse them in Fort Worth and sell them to other companies in the U.S. primarily in the heavy duty and OES areas. The benefits to us are, we will get some additional sales plus entry into some new markets and again this business has been totally moved and integrated into our Louisville distribution center. So that’s the third way of our three most recent acquisitions. We’re pleased with all three, they all fit into our long-term strategic plan. And as we’ve said before, we feel we have a very good template for future acquisitions. So to conclude, obviously not pleased with the numbers in the first quarter but we believe they are mostly short term in nature and we look forward to the balance of the year and now we will open it for questions. Thank you.

[Operator Instructions] And it appears that we have no questions at this time. : :

Okay. With that, I’d like to thank everyone for joining our conference call today. Thank you.