Q3 2019 Earnings Call
Good day and welcome to the standard motor products third quarter earnings release at this time all participants are in listen only mode. Later, you have the opportunity to ask questions forget question answer session to registered to ask a question. You May proceed star and one on your Touchtone telephone at any time soon.
Please note today's call may be recorded and I'll be sitting by if you shouldn't read any assistance. It is now my pleasure to your the program over to Mr., Larry sales Executive Chairman. Please go ahead Sir.
Well. Thank you I've got a good morning, everyone.
Welcome to standard motor products third quarter conference call and we thank you for attending.
Here for the company.
Eric Sills, President and CEO .
Jim Burke.
Chief operating officer.
A third we welcome Nathan Isles, our new CFO .
And then finally myself, Larry Sills executive Chairman.
Oh agenda will be Jim will begin by reviewing the numbers Eric will highlight a few key areas and then we'll open for questions and we thank you again for attending.
Turn it over to Jim Burke, Okay. Thank you Larry.
Before I begin I'd like to ask Nathan just to comment on his first 30 days or so with a SMP.
Hi, Thank you Jim Good morning, everyone. It's very nice to be here into a joined the team and standard.
It will be good highlight what had been doing joined the company.
Over the last month and a half I've had the opportunity to spend a couple of weeks time with the leadership of the organization and very thoughtful conversations about the business initially with the board of an executive team and annual strategic planning sessions and second review sessions with the management teams of our various divisions and administrative functions across the organization.
Additionally, I'm spending time getting to know or finance and accounting teams look in both in New York and around the world on a more end up level and transitioning with Jim as he continues to move into his new position.
Let me finish by giving you my first impressions of the business as you know I spent a good number of years in the automotive aftermarket and work specifically with some standard product categories, while that you see I international.
My impression then was that the company. It was a strong competitor with strategic long term focus and great longevity.
After having been here just a short while I can say that I'm more than polices that I've seen in those sentiments remain intact and I intend to help the company remained strong for another 100 years.
Thanks for your time today, and allowing me. This brief introduction and I look forward to getting to know each of you better in the future.
I'll now turn it back over to Jim to go over the quarter results.
Very good thank you Nathan.
I'm going to begin with a.
Preliminary statement a forward looking statement here and then anticipate the this would be my last and I will turn it over the Nathan for year end to when we close out our year, but 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 unexpected financial risk.
Well, we use words like anticipate believe estimate or expect these are folks 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.
We 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.
All right to begin looking at the personnel consolidated net sales in Q3 were 307.7 million up 11.1 million or 3.7% as previously disclosed we acquired the pilot business from Stoneridge on April 1st of this year incremental sales from the policy.
Acquisition were 9.3 million in the quarter and 20 million year to date from April through September .
Our consolidated net sales excluding the Pollick acquisition in Q3 were 298.4 million up 1.8 million or 0.6% and for the nine months were 876.6 million up 31.6 million or 3.7%.
Looking at it by segment engine management that sales, excluding pollack and wiring cable sales in Q3 were 171.5 million up 12.4 billion or 7.8% and for the nine months were 518.7 million up 36 point.
1 million or 7.5%.
Our wire and cable net sales in the third quarter with 35.1 million down 3.3 million or 8.6%.
For the nine months were 108.5 million down 9.4 million or 7.9%.
We continue to forecast long term trends for engine management, excluding acquisitions and wiring cable of low single digits, and our wiring cable business, which isn't secular decline down 6% to 8% per year.
Temperature control net sales in Q3 were 88.3 million down 7.8 million or 8.1% and for the nine months were 241.6 million up 5 million or 2.1%.
We anticipated Q3 temp sales to be down following a very strong first half preseason ordering by our customers 28 team was one of the hottest summers on record and we are pleased to have slightly exceeded last year sales for nine months, which sales volume up 2.1%.
Consolidated gross margin in Q3 was 29.9% first 29.4% ups 0.5 points and for the nine months was 28.9% first 28.5% ups 0.4 points by segment and Jim manner.
Judgment gross margin in the third quarter was 30.7% first 28.9% up 1.8 points and for the nine months was 29.3% first 28.6% ups 0.7 points gross margin improvement in engine management.
It was driven by significant improvements from our wiring cable operations as the general cable wire business is fully integrated.
Continuous cost reduction efforts from in house manufacturing and low cost sourcing and pricing efforts, including pass through of tariff costs, which have a slight dampening impact on margin percentages.
Temperature control gross margins in the third quarter or 26% first 27.6% down 1.6 points and for nine months 2019 was 25.5% first 25.8% down 0.3 points.
The lower temperature control gross margins in the quarter and year to date up primarily the result of the dampening effect of tariffs pass through to customers that are costs.
As I stated in our last earnings call, we were lower in temperature control production levels in the second half 2019, which would impact gross margins Q4 sales levels are the lowest than any quarter during the year and hence small dollar differences can have an impact on margin percentages I.
I anticipate the fourth quarter temp margins in the low 20% range with full year margins still under 25% to 26%.
Consolidated SGN a expenses in Q3 were 59.9 million down 0.2 million at 19.5% of net sales versus 20.3% last year and for the nine months were 180.5 million up 4.9 million at 20.
80.1% of net sales versus 20.8% last year.
Savings were achieved in the quarter and year to date from reduced temperature controlled distribution expenses. If you recall, we launched a new automated distribution system last year at our Lewisville, Texas distribution center and incurred additional expenses and inefficiencies chairman to launch our temperature control team did an excellent job refined.
During the distribution system, eliminating inefficiencies and more important turning around customer orders on time during the peak summer season.
Partially offsetting these savings were incremental SGN, a expenses related to our Polycarpic was vision and other variable expenses on higher sales volumes.
Consolidated operating income before restructuring and integration expenses and other income that in Q3 was 10.4% of net sales up 1.2 points over Q3 18 and for the nine months was 8.8% of net sales up one point over nine months 18.
The net effect of our operational performance as reported on our non-GAAP reconciliation was Q3 19 diluted earnings per share of the dollar to versus 83 cents last year and for the nine months diluted earnings per share of $2.51 versus $2 and.
Three cents for nine months 18.
Looking at the balance sheet accounts receivable increased 11.4 million since December 18, and up 5.7 million since September 18.
This increase reflects our seasonal temperature control business and the impact of our Pollack acquisition.
Inventory levels increased earlier in the year for our seasonal leads and from our Pollack acquisition in the third quarter, we were able to reduce inventories 35 million to $340.2 million and for the year inventory levels are now down 9.6 million.
Total debt at September 30, 19 was 83.6 million, reflecting an increase of 34.3 million from December 18 levels.
Our cash flow statement reflects 43 million cash generated from operations 5 million cash received from the sale of our Grapevine, Texas facility.
Last year, and 35 million incremental borrowings totaling 83 million, which was used to fund 12 million for capital expenditures 44 million for deposit acquisition and our see why Jay joint venture investment 15 million for dividends paid and 11 million.
For share repurchases.
In summary, we're very pleased with our strong third quarter at nine months results, reflecting higher sales volumes higher gross and operating margins significant performance improvements from our wire manufacturing consolidation and our temperature control automated distribution system and anticipated benefits from our.
Holic acquisition to be realized than 2020 and longer term, our see why Jay joint venture investment for electric AC compresses for electric vehicles in closing I want to thank all of our dedicated employees for the 2019 significant improvements achieved thank you for your attention I'll turn the call over time.
Eric.
Thank you Jim good morning, everybody.
I'd like to open by adding my welcome to Nathan aisles, our new CFO , Ed as you heard Nathan comes to us where the wealth of experience, including strong background in the industry and we're excited to have them here and it will also now allow Jim Burke to focus on his new assignment as Chief operating officer.
Many I look forward to many more years of his contributions.
So Jim went through the numbers will only add some color talk about a few new strategic pieces and then open it up to questions.
Overall as you've heard we're very pleased with the quarter, both divisions performed quite well posting strong sales and profits and we've been enjoying positive momentum all year long and this is continued through the third quarter.
Our view each division separately, starting with engine management.
Overall, our divisional sales remained strong for the quarter setting what I believe as an all time record.
Our wire and cable business continues to track downwards, reflecting ongoing decline of the product category. However, excluding wire the rest of the engine management business was up almost 14% in the quarter a gain of almost $22 million.
There are few components here first and largest as the contribution from our recent acquisition of the pilot business at nearly 10 million in sales in the quarter it contribute almost half the entire gain.
I'll speak more about the acquisition a bit later in my remarks, but we're quite pleased so far.
Excluding Pollock, our non wire engine management business was up slightly less than 8% for the quarter.
This strong performance is a combination of a few elements.
First we enjoyed above average pipelines from some of our aftermarket customers.
As frequently discussed these tend to come in lumpy often in different quarters and can cause a bit of noise in year over year revenue comparisons.
Secondly, as previously stated we have been passing through tariffs and I've also achieved some nominal price increases.
Matt ongoing aftermarket demand is keeping pace with our expected low single digit growth.
Now while all this is good news, we do wish to express some caution heading into the fourth quarter.
Our customer Sellthrough has been tracking slightly lower than their purchases and as we always state this tends to even out over time and the early fourth quarter, we have seen some softness.
Moving to temperature control sales were down around 8% from last year. However, this was expected and discussed on our last earnings call.
There are couple of key elements to this.
First our customers ordered much heavier in the pre season this year than they did in 2018 preparing themselves for the summer.
This pulled forward the pattern of their purchases from the prior year.
If you recall, we were up 9% for the first half.
Secondly in 2018, the heat began early towards the end of the second quarter. This caused an order backlog coming into July artificially bolstering Q3 of 2018 and as such Q3 of 18, we are up 18% over 17, making for a difficult comps.
No I realize that this makes for confusing story, but all that being said, while we've had different dynamics quarter to quarter. Overall, we are up 2% year to date.
Next I'd like to give an update on the Pollack business acquired from Stoneridge in April to remind you of what it is that this is a $40 million plus business selling various switches sensors and connectors largely for commercial vehicle applications.
About 75% of it has for eight.
The remaining 25% is aftermarket sold into the heavy duty aftermarket channel as opposed to through our typical distributors.
The products for manufactured into stoneridge plants, the majority in canton, Massachusetts, and the balance in Juarez Mexico.
As stoneridge retains the plants they continue to manufacture the product for us until the production lines or relocated to existing SMP facilities.
The majority will go into our engine management plan to Mexico, and as you can imagine once we relocated from Massachusetts, we will be able to enjoy significant cost savings.
We're about halfway through the line moves which will take the balance of the year to complete we expect to realize full synergy sometime in 2020, when they're receiving locations are fully up to speed.
But we believe that the more important benefit will be in the ability to grow the business by taking advantage of the full resources of S&P as well as our breadth of products to expand the offering.
So while the business is still quite new to us and we have a great deal to do we're very excited about the potential.
Lastly, I'd like to discuss a recent investment we made in the new technology company.
On August 1st we acquired a minority share of a small compressor manufacturer in China.
The company called see wide Jay for short manufactures compressors for electric vehicles their customers are mostly Chinese electric car and bus manufacturers, which is an exciting growth area.
In addition to gaining.
Access to the large new vehicle market in China. We will also use this plan to make compressors for the electric vehicles on us roads, including all of the hybrids.
See wide Jay is quite young and quite small, but we're very excited to have entered into this at the ground level.
We believe that with their technical skills and customer relationships, coupled with our stability in resources, we can really grow this business.
Additionally, it fits very well with our other to temp control joint ventures in China with complimentary products and many other synergies.
So in closing when you add it all together, we're quite pleased with the quarter in the year overall sales margins and earnings are up we've recovered from all of our short term cost challenges, which although they were painful while they were occurring there are all designed to make us a better company.
We continue to be strategically acquisitive with two deals done this year.
We have an excellent new business with pilot, allowing us to diversify our portfolio and adjacent spaces with clear synergies and now we have a strategic partnership with a company, making parts for electric vehicles and so we feel very good about our future as we continue to celebrate our 100th yet.
So that concludes my prepared remarks at this point I'll turn it back over to the moderator and we'll open it up for questions.
Thank you as a reminder, at this time, if you would like to ask a question. It is the star and one on your Touchtone telephone.
If at any point you find your question has been answered you may remove yourself from the Q by pressing the pankey.
We'll go first to the line of Scott Stember from CL King. Please go ahead.
Good morning, and thanks for taking my questions.
Thanks.
Early this week one of your competitors talked about some softness in the WD, a warehouse and distribution side of the business can you maybe.
Talk about whether you're seeing that and maybe just talk about the demand trends.
From your large retail customers versus the Wses.
Scott we Don.
Big data details between the different customers within the aftermarket we're just seeing.
In general all year, along that they have in purchasing slightly better than their sales out their doors.
No different customers.
Our having slightly different experiences, but in aggregate thats. That's the panel the pattern that we're seeing.
Got it and.
Jim did you give the gross margin targets are engine management in the fourth quarter and the full year and what the longer term targets are again, if you could just confirm that.
Sure and again, we're Santa by what we forecasted for 2019 at engine management gross margins would be in the.
29% to 30% range, and then going into 2020 looking for 30% plus.
And for temperature control, we were in the 25% to 26% range for 2019, I did call out that the as being very low sales quarter and targeting low 20% margins for the fourth quarter, but still coming in between 25 and 26% for the year going.
Forward for temperature control, we're moving it off then to be.
26% plus in 2020.
Got it and Erica going back to Apollo could you talked about it being half way through.
Through right now is.
As far as the amount of heavy lifting that has to be done. It seems like it really has not had much of any impact.
On or negatively on the results like like.
Wire and cable did it should we look for anything in the next few quarters or.
Are we.
Thinking that it's going to be pretty benign.
As far as any negative impact goes.
We expect this went to be frankly, an easier integration and the wire and cable.
One.
Mostly due to scale, if you recall the wire and cable integration, we doubled the plant.
And we required us not just a double it in terms of.
Headcount, but we needed to do a significant facility expansion, which created a lot of additional complexity and.
Significant lengthening of the of the overall project. This one is frankly much simpler.
A much smaller.
Increase for this plant, which by the way I should note if not the same plant that the wire business went into is I believe you now have several different operations in Reno. So this is going into one that's been very stable for several years.
It's a much smaller head count increase and we had ample space within the building. So we expect this winter.
Go much smoother and Thats certainly to experience we've had so far in the first half for some of the news.
All right and just last for me on tariffs.
I think maybe a couple of quarters ago, you gave what the impact was on margins could you maybe just for maybe the first nine months, just let us know what.
If the impact has been on temperature control and engine management.
Yes, Scott and I Didnt roll up the numbers again on that it's a dampening effect I think we called out originally that engine management would be in the half a percent range that was there around with temperature control I think I had said that it was going to be about 6.7, 0.8%.
And probably with if there's a higher concentration on tower of sitting there, it's probably slightly higher than that.
Your control.
Got it.
Thats all have thanks.
Thank you.
Thank you and again that is a star and wanted to ask your question.
Our next to Bret Jordan from Jefferies. Please go ahead.
Good morning, guys.
Correct.
Jim I assume your new job is going to be turnaround the wire and cable trends.
Hi, accomplish that already now so it's a fairly evident get something else go up I think Brett wants you to gotten sell it yes.
Yep.
In the wire and cable business is that as it did too as it declines in volume does it become a drag on the margin or is it really sort of flexible fixed overhead in that segment.
Well it will be twofold, that's there one.
Always on all what are all the variables for margin. So pricing is always one point that's in there when we look to pass on any cost increases that we incur there and again.
Right.
Reminding everybody, we were able to double our volume and here to be able to improve the margins. When we put the two businesses together and we have contiguous programs for cost reduction efforts that are in there so with the the doubling the scale, we still feel that were able to.
Hold margins in this business so it's a very healthy business.
Okay, and then Eric other see why Jay investment could you give us some more color I guess, maybe that category size of the Avi hybrid compressors and maybe timing of what you can bring to the U.S market sort of how we expect that to show up in year use results.
Okay.
It's very early days, Brett we really just begun this and as mentioned, it's a very small business from a technology and capabilities standpoint.
They have their quite strong but in terms of their actual out the door production. So it's still small.
To date, we do have.
A certain amount of coverage for the hybrid vehicles on US roads. We just have not had an effective source of supply. This allows us to get there. There is development work that we need to do to be able to make that part specific for all the processes et cetera on our roads, but this now gives us a great jumping off.
Point to do it in terms of the Chinese vehicle.
Electric vehicle market or what they call the new energy vehicles any views there. It's the fastest growing portion of that marketplace. There are certainly several competitors over their pursuing the same market that we are but we believe that theres a lot of business to go around there.
We already had a lot of good customer contacts as mentioned in my remarks, both in the passenger vehicles as well as in the bus market and we believe that that we then with what we bring to the party it strengthens.
Our ability to go after these customers to say, we have real horsepower to pursue itself very early days, we're excited but I wouldnt expect it to show any substantial impact on our financials for it for a little while.
Okay, Great that's going to work in one last quick one on temperature control did you comment about how you saw the inventory at the retail level now I mean, obviously, we had a mild second quarter. Some some warm up in the third quarter, but how we stand in in year over year retail inventory.
It's.
We do look at that as you know and compared to where we were this time last year.
It's it's about equal in the summer little bit higher somewhere a little bit lower but overall, it's about equal.
Great. Thank you.
Thank you Sir.
And again that is the star in one to ask a question.
We'll go to Robert Smith with Center performance. Please go ahead.
Good morning warning Robert.
Yes, I just want to circle back to the Chinese investment quite interested in that as far as its potential. So what is the first what does the minority interests.
Our that as Jim Burke, our share ownership is approximately 29%.
And do you have the ability to increase.
Again, we just entered it we're pleased one of them one of the part or all the partner is in one of our other joint ventures and the.
Each party would always have a REIT to able to assume the others, but there is no requirement in there that we.
That they have to turn it over to us.
Could you give us some color is through the product product line and.
The Genesis of the company I mean, how long is the been around.
The company is very new its 2016 it was founded.
And it was founded.
The combination of people add the technical ability to manage to design and manufacture, but another one of the the partners is a manufacturer of new energy vehicles, which is a nice tie in.
To the product it's entirely about a lecture compressors for electric vehicles. The majority of compressors for traditional internal combustion engine vehicles, It's bell driven running on the same belt system one Jim.
Since there is no about system and electric vehicles it needs its own electric motor and so that's what's different about this technology.
And so now has the capability that they brought.
So I understand that you're not going to see anything near term, but you must is sent down and essentially push to pencil in stores.
What you might see in the period and say five years or so.
How substantial and market could this be.
It could be.
But the market itself. The overall market is going to be enormous. So the real question is what do we believe our share can be there's a lot of competitors in this space, including some of that the big multinationals. The way. We are currently thinking about it is to pursue the local Chinese vehicle market as oppose to the big.
Big joint venture players over there such as the Volkswagen's in General Motors in China, where there's a lot of the smaller Chinese niche guys, who are looking where local content in local partners and within that space. There are a lot of a lot of vehicle manufacturers.
And we're developing relationships with these guys.
Sounds good.
And some potentially important step regulations and good luck.
Thank you Robert we're excited about it.
Thank you and again that is the star one to ask a question, we'll pause momentarily for any further questions to Q.
And gentlemen, it looks like we have no further questions at this time.
Okay. If there are no further questions.
This concludes.
Third quarter.
Conference call and again, we thank you will for attending.
Okay. Thank you bye bye.
We'd like to thank everybody for their participation. Please feel free to disconnect your lines anytime and have a wonderful day.
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