Standard Motor Products Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 1, 2024

There are 7 speakers on the call.

Operator

Good day, everyone, and welcome to the Standard Motor Products Second Quarter 2024 Earnings Call. At this time, all participants are in a listen only mode. Later, you will have an opportunity to ask questions during the question and answer session. Please note that today's call will be recorded. It is now my pleasure to turn the conference over to Tony Cristello, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thanks, Savannah, and good morning, everyone. Thank you for joining us on Standard Motor Products' 2nd quarter 2024 earnings conference call. With me today are Larry Sills, Chairman, Emeritus Eric Sills, Chairman and Chief Executive Officer Jim Burke, Chief Operating Officer and Nathan Iles, Chief Financial Officer. On our call today, Eric will give an overview of our performance in the quarter and Nathan will then discuss our financial results. Eric will then provide some concluding remarks and open the call up for Q and A.

Speaker 1

Before we begin this morning, I'd like to remind you that some of the material that we'll 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 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 now turn the call over to Eric Sills, our CEO.

Speaker 2

Well, thank you, Tony, and good morning, everyone, and welcome to our Q2 earnings call. It's good to be with you today. I'd like to start, as I always do, by recognizing all the S and P employees around the world that make us who we are. I really could not be more proud of what they are able to accomplish. Overall, we're quite pleased with our quarter.

Speaker 2

Sales were up 10%, which is an all time record for us, and we saw it in each of our 3 operating segments, though certainly highlighted in Temperature Control, which I'll get to in a minute. But let me start with Vehicle Control, the largest of our segments. In general, we were pleased. After a flattish Q1, the 2nd quarter was up 2.7% over last year, showing some nice sequential momentum quarter over quarter, bringing our year to date numbers to being up by 1.6%. We've benefited from some awarded business not present last year as well as generally favorable trends as vehicle control products are largely non discretionary in nature.

Speaker 2

Moving to temperature control, it was a heck of a quarter as we saw a tremendous surge due to extended heat across much of the country. Sales for the quarter were up 28% against last year, though it's always worthwhile to point out that seasonal cadence can change year to year. Last year started slow with a soft second quarter, but then the 3rd quarter saw a solid improvement. So we are facing a tougher comparison going forward. That said, year to date, we are up nearly 16% and the heat has continued through July, which bodes well for a solid full year for the segment.

Speaker 2

I'd like to say how proud I am of our operations people. They were able to keep up with this elevated demand, taking care of our customers with on time deliveries. Can't thank them enough. I'd like to shift now to talking about our non aftermarket business, our Engineered Solutions segment. This relatively new segment continues to perform to our expectations.

Speaker 2

Sales were up about 6% in the quarter and 5% on the year. And as there will always be some lumpiness due to the basic dynamics of the different end markets, the general trend has absolutely been favorable as we continue our success landing new business and ramping up production, expanding programs with existing customers and generally getting known in the space as a capable high quality supplier. I'd like to now spend a few moments on profitability, though Nathan will go into greater detail. We are pleased to see a recovery in earnings in the quarter, though we know we still have work to do. We're proud of what we've accomplished in controlling our costs and passing through pricing, but overall, we recognize that there is room for improvement.

Speaker 2

We continue to face pressures in cost of goods, both in elevated material costs and in wages, and customer factoring programs remain a significant headwind. To help combat this, we instituted in the quarter an early retirement program qualified salaried employees in North America. We are quite pleased with the level of participation. We thank our new and soon to be retirees for their countless contributions to our success and wish them well. The savings associated with this will be approximately $10,000,000 annualized once fully realized, which will happen in phases over the next year.

Speaker 2

Next, I'd like to speak for a moment about our exciting recent announcement. On July 10, we announced that we had signed a definitive agreement to acquire Nissan's Automotive. I won't repeat all the details. We welcome you to review the transcript of our call along with presentation material provided, but here are the highlights. Vistra is a leading supplier to the European aftermarket of engine cooling and air conditioning components, along with a growing line of what they call engine efficiency products, which would fall into our vehicle control category.

Speaker 2

With sales of around $260,000,000 and EBITDA margins in the mid teens, they represent an immediate significant leap forward for S and P into new markets with highly complementary products. We need to complete customary regulatory approvals, which we expect will take a few months, but once consummated, we are eager to get started on pursuing the numerous benefits we anticipate as we work together with their team. We see these benefits falling into 3 main areas: 1st, growth through cross selling. We are in many similar product categories but with differing strengths. As we leverage that, we can expand our offerings on both sides of the ocean.

Speaker 2

2nd, we anticipate cost reduction synergies as we combine our purchasing power, seek best cost, pursue in sourcing, freight consolidation and so on. And third, we believe that by joining forces, we could become a stronger company and therefore a better supplier to our customers. We can accelerate product launches, tackle new technologies faster and pursue numerous other means of collaboration. So more to come on Nissen's, but needless to say, we're excited. With that, I'll turn it over to Nathan to review the numbers with some additional color.

Speaker 3

All right. Thank you, Eric. As we go through the numbers, I'll first give some color on the results by segment and at the consolidated level, then cover some key balance sheet and cash flow metrics, and finally provide a brief update on our financial outlook for the full year of 2024. First, looking at our Vehicle Control segment, you can see on this slide that net sales of $188,700,000 in Q2 were up 2.7% and for the 1st 6 months are now up 1.6%, which is driven by solid demand for our products and new business wins. Vehicle Controls adjusted EBITDA of 10.4% for both the Q2 and 1st 6 months is down from last year driven by a lower gross margin rate and higher operating expenses.

Speaker 3

While this segment's gross margin dollars were flat to last year due to higher sales, the margin rate was lower as a result of the increases in costs that Eric noted before. SG and A expenses increased mainly due to inflationary increases, which I'll touch more on later, and factoring expenses also increased due to higher sales and timing of cash collections. Turning to Temperature Control. Net sales in the quarter for that segment of $124,500,000 were up 28.2% as we saw a very strong start to the summer selling season and this start helped our sales grow 15.7% for the 1st 6 months of the year. Temperature Control's adjusted EBITDA increased in Q2 to 12.6% and for the 1st 6 months increased to 9.7% as higher sales volumes led to higher gross margin rates and improved leverage of operating expenses for both the quarter year to date periods.

Speaker 3

Temp Control adjusted EBITDA also benefited from improved performance in our joint ventures in China versus last year. Looking now at Engineered Solutions. Sales in that segment in the quarter were up 6.1% and for the 1st 6 months were up 5.3%. We were pleased to see our sales continue to increase in this segment as new business wins with both existing and new customers support very good growth here. Adjusted EBITDA for Engineered Solutions in the quarter of 13.1% was up slightly from last year.

Speaker 3

The improvement was the result of good leverage of operating expenses that were lower as a percentage of sales and this segment also benefited from improved performance in our joint ventures in China versus Q2 last year. Engineered Solutions adjusted EBITDA for the 1st 6 months is down from last year, driven by lower gross margin due to cost pressures, but also the unfavorable sales mix we experienced in the Q1 and partly offset by better performance from Chinese joint ventures. Turning to our consolidated numbers, the change in our net sales and gross margin for the quarter 1st 6 months versus last year was the result of the changes in our segments as I just highlighted. Regarding consolidated SG and A, excluding factoring, which is shown separately on the page, expenses were up for both the quarter and 1st 6 months versus last year. As a percentage of net sales, SG and A was flat with last year at 17.5% in the quarter given strong sales volume, but was up at 18.4% for the 1st 6 months.

Speaker 3

Start up costs related to our new distribution center were $1,300,000 in the quarter and $2,300,000 year to date and without these costs SG and A would have been 17.1% in the quarter and 18.1% for the 1st 6 months. I noted last quarter that increases in SG and A costs were driven by general inflation, but also elevated distribution expenses across a number of inputs, including higher lease expense and that we'll be looking at ways to reduce our costs going forward. To that point, we executed a retirement program during the Q2, which we anticipate will save us an estimated $10,000,000 in compensation costs. We incurred a charge of $2,600,000 related to this program in Q2 expect to incur an additional charge of $3,100,000 in the second half of the year as people retire. We'll also continue to review other levers to pull to reduce our costs overall.

Speaker 3

Turning now to the balance sheet. Accounts receivable were $239,300,000 at the end of the quarter, higher than last year due to higher sales. Inventory levels finished Q2 at $508,200,000 up slightly versus June last year, but basically flat with year end as higher sales have kept inventory levels lower even though we're in peak season for the temp control business. Our cash flow statement reflects cash used in operations for the 1st 6 months of $10,100,000 as compared to cash generated of $39,400,000 last year. Cash used in operations last year was aided by a reduction in inventory balances that did not recur this year after bringing inventory back down to normal levels over the course of 2023.

Speaker 3

Investing activity show an increase in capital expenditures this year of $13,400,000 which includes $10,400,000 of investment related to our new distribution center. Financing activities show borrowings on a revolving credit agreement of $52,000,000 in the 1st 6 months, which were used to fund operations, capital expenditures and pay $12,700,000 of dividends. We also repurchased shares under an existing $30,000,000 authorization from our Board, repurchasing $10,400,000 of shares during the 1st 6 months. While we have $19,600,000 of authorization remaining, we have paused repurchases in anticipation of closing on the acquisition of Nissens later this year. Our net debt of $182,000,000 at the end of Q2 was lower than last year and we finished the quarter with a leverage ratio of 1.5x EBITDA.

Speaker 3

As we noted in July, we do expect our leverage ratio to increase to a little less than 3.5 times on a pro form a basis once the acquisition of Mizzins is closed and then we use cash flows to work our debt balance down to lower levels over time. Before I finish, I want to give an update on our sales and profit expectations for the full year of 2024. As I do, please note that our outlook does not include any impact from the Nissen's acquisition as exact timing of closing is not yet known. Regarding our top line sales, given the sales growth we saw during the Q2, we now expect to see low to mid single digit percentage growth in sales for the full year. We're maintaining our expectations for adjusted EBITDA, which we expect to be in a range of 9% to 9.5% and essentially flat with 2023.

Speaker 3

This estimate includes cost pressures, which continue to be a headwind for our Vehicle Control and Engineered Solutions segments, a U. S. Dollar that remains at a multiyear low against the Mexican peso, and factoring expenses of $48,000,000 to $50,000,000 as sales are expected to be higher than last year. We also have some costs related to our new distribution center in Shawnee, Kansas, which in total will be $7,000,000 to $8,000,000 in 2024. As a reminder, we incurred about $2,000,000 of costs for this warehouse last year, which means we have incremental costs in 2024 of $5,000,000 to $6,000,000 of which we estimate $3,000,000 to $4,000,000 is startup related and will not recur.

Speaker 3

In connection with our adjusted EBITDA outlook, we expect our interest expense on outstanding debt to be on average about $2,000,000 to $3,000,000 each quarter and we expect our income tax rate to be 25%. Regarding operating expenses in this outlook, keep in mind our operating expenses are incurred more ratably across the year, but do have some variability with sales and as such will fluctuate with seasonality in the business. Given this dynamic, we anticipate total operating expenses inclusive of factoring will range from $84,000,000 down to $76,000,000 as we go through the last two quarters of 2024. To quickly wrap up, we were very pleased with our sales growth in both the quarter and first half of the year, which helped us turn in better results than expected. As I noted, we're still seeing higher costs weighing on certain areas of the business and we'll be reviewing ways to reduce these costs going forward.

Speaker 3

Thank you for your attention. I'll turn the call back to Eric for some final comments.

Speaker 2

Well, thank you, Nathan. And just in closing, I'd like to spend a minute on how we're thinking about the future. We obviously recognize that there were in uncertain times impacted by various macroeconomic factors. We've always felt that our industries are structurally sound and highly resilient, and in the long run, they do very well. As we look at the North American aftermarket, I believe we can feel confident that it can withstand short term shocks, and we feel very good about our position in the market with key large nondiscretionary product categories and strong customer relationships.

Speaker 2

Our Engineered Solutions business is obviously in a different stage of its maturity, but we're delighted with what we've seen. It's doing what we hoped By creating a cohesive business unit with a coherent strategy, we have achieved critical mass to become a real supplier on the global stage. And soon, with Nissens acting as a 3rd leg of our stool and all it can do for us and as we integrate it, we're very bullish about the future. So that concludes our prepared remarks. At this point, we will turn it back to the moderator, and we'll open it up for your questions.

Operator

Thank you. And we will take our first question from Scott Stember with ROTH MKM. Please go ahead.

Speaker 4

Good morning, guys, and thanks for taking my questions.

Speaker 2

Good morning, Scott.

Speaker 4

In the Vehicle Control segment, nice rebound from the flattish results of the Q1. Some of your customers have reported, I guess, sluggish demand, notably, I guess, in some of the hard parts areas. And just trying to get a sense of what you guys saw at POS Retail and how that's affecting orders as we stand right now from your customers?

Speaker 2

Thank you, Scott. And I think I can agree what you're hearing more from them, but is that they're seeing softness more in front room and DIY type product, but also to a degree, more or less by the different distributors in some of the backroom product as well. What we've seen over the course of the quarter is that our POS, their sales out has been roughly flat to perhaps slightly down, but we think that that's just kind of the normal ebbs and flows in any given period and so roughly tracks with what they're purchasing from us.

Speaker 4

Okay. So really no change from that low single digit thought process going forward?

Speaker 2

Correct.

Speaker 4

All right. And on the rate front, it seems increasingly likely or at least what the market is telling us is that we'll probably see a couple of rate cuts. Can you maybe just remind us, I guess, net of any potential price givebacks, how that could benefit you and how fast that would happen on the factoring side?

Speaker 3

Yes. So, Scott, just to put a little bit of a marker on it, if you think about our factoring programs, there's about $800,000,000 of sales on those programs. Every 25 basis point move is essentially worth about $2,000,000 for us on those programs. So that's a way to think about increases or cuts as they happen. I would just say that if you think about the rate that we follow for that, it's a 3 60 day SOFR rate.

Speaker 3

And given that, that rate has been baking in some cuts in the back half of the year all year since we came into the year in January. And so this recent Fed announcement essentially being in line with that doesn't change our outlook a whole lot at this point.

Speaker 4

Got it. That's all I have for now. I'll jump back in the queue. Thanks.

Speaker 2

Thank you, Scott.

Operator

Our next question comes from Bret Jordan with Jefferies. Please go ahead.

Speaker 5

Could you talk about what you are seeing in inventory at your customers in Temperature Control? We stay hot through August into the fall, or is there likely another round of ordering or are they reasonably stocked?

Speaker 2

Well, our inventory visibility is a little bit delayed. So we really see it more through June than what happened in the last several weeks. We're not as attuned to. What we saw through the quarter was that their shelves stayed pretty flat, which means that we were able to keep up with their demand and keep their shelves where they wanted them. As we think about what their sell through was in July versus their purchases, we anticipate that that's continued to track.

Speaker 2

And the heat is now continuing really throughout much of the country. So we're pretty pleased with that. And what that tends to show, but time will tell, is that prolonged heat tends to have the replenishment orders continuing throughout the season as opposed to in a different cadence to a summer where they may start to taper off the replenishment orders, we're not anticipating this at this time. But it's still early days and we'll see what happens throughout the balance of the summer.

Speaker 5

Okay. And then I guess what's your outlook on pricing? You talked about inputs input costs being up, obviously factoring. If you think about how receptive are your primary

Speaker 3

price side?

Speaker 2

As we've always said, we do our best to cover inflation through a combination of pricing and cost reduction. It is a competitive market. I think that the receptivity is challenging. But beyond that, really can't get into any specific customer discussions. There's a lot that goes into it, and we do our best.

Speaker 5

Okay. And then I guess one last question. You commented about new business wins in Vehicle Control. Is that bringing business back that might have gone to direct import programs? Or is that business taken from sort of more normal peers like Wells?

Speaker 2

I'm not going to get into the specifics of it, Brett, but that just in general, there's always certain nominal wins and losses. We tend to win more than we lose. And so that's really what we see here. But in terms of who we got it from, I'll kick it into that.

Speaker 5

All right. Thanks.

Speaker 2

Thank

Operator

And our next question will come from Carolina Jolley with Gabelli. Please go ahead.

Speaker 6

Hi, thanks for taking my question. Just a quick note on overall inventories. I know Brett asked about temp control. But just overall, the inventory in the market, how do you feel about that?

Speaker 2

Good morning, Carolina. And so on the vehicle control side, again, very similar. We're seeing that inventory is stable month over month. So there's no specific inventory strategy shift for any of our customers. They have what they want to have and are operating accordingly.

Speaker 6

Got it. And then also, you discussed leases, some of the pressure from leases. I know you talked about kind of if the interest rate lowers the impact from the factoring, would there be any benefit on that lease expense?

Speaker 3

Yes. So Carolina, we renew leases over time just as they come to do. So I don't think lower rates will have any impact on what already renewed over the last couple of years. But certainly going forward, that should be some sort of a benefit as we look at the renewals.

Speaker 6

Great. Thank you.

Speaker 1

Thank you.

Operator

And with no further questions, I'd like to turn it back to our presenters for any additional or closing remarks.

Speaker 2

Okay. Well, we want to

Speaker 1

thank everyone for participating in our call today. We understand there was a lot of information presented and we'll be happy to answer any follow-up questions you may have. Our contact information is available on our press release or Investor Relations website. Hope you have a great day. Thank you.

Operator

And this will conclude today's conference. Thank you for your participation and you may now disconnect.

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Standard Motor Products Q2 2024
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