Q4 2019 Earnings Call

Good day, everyone and welcome to todays standard motor products fourth quarter earnings release.

This time, all participants are in listen only mode.

Later, you will have the opportunity to ask questions. During the question and answer session. You may have registered ask a question at any time by pressing the star and one on your Touchtone phone.

Please note this call may be recorded and it is now my pleasure to turn the call over to Larry Sills. Please go ahead.

Good morning, everyone.

And welcome to standard Motor products fourth quarter conference call and we thank you for attending.

Here for the company.

Eric Sills, President and CEO.

Jim Burke Chief operating officer.

Nascent <unk> Chief Financial Officer.

And myself, Larry Sills executive Chairman.

The agenda for today.

Nathan will begin by reviewing our 2019 results.

Then Jim Burke will emphasize a few of the highlights of 2019 and.

Some early thoughts about a 2020.

Hi, Eric will then go into some of our key operational and strategic issues and then we'll open it for questions. So with that let's go a nascent.

Thank you Larry 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 financial results. We use words like anticipate believe estimate or expect these are generally forward looking statements.

Although we believe that the expectations.

Forward looking statements or reason.

There are based on information currently available to us and certain assumptions made by us and we cannot assure you that they will prove correct.

Should also read our filings with Securities Exchange Commission for discussion of the risks and uncertainties that could cause our actual results to differ from are forward looking statements.

I will turn into the financial results for the company.

Looking at the piano consolidated net sales in Q4, 2019 for 241.3 million down 5.7 million or 2.3% versus Q4 last year.

As discussed throughout the year, we acquired the polymer business from Stoneridge on April 1st of 2019.

Incremental sales from the public acquisition for 8.1 million in Q4, and 28.2 million for the full year, our consolidated net sales in Q4, excluding the pilot acquisition.

233.2 million down 13.9 billion or 5.6%.

For the full year 2019 finished higher at 1.12 billion, an increase of 17.6 million for 1.6%.

By segment engine management net sales in Q4, excluding policy in wire and cable sales were 159.1 million down 6.5 million or 3.9%, but coming in line with their customers Pos sales as noted in our last call.

However for the full year 20 night gene sales were 677.8 million, finishing up 29.6 million or 4.6% over last year.

Wire and cable net sales in Q4 were 34.7 million down 2.7 million or 7.2% and for the full year over 143.2 million down 12 million or 7.8%.

Temperature control net sales in Q4, 2019 were 36.7 million down 5.1 million or 12.1% and for the full year were 278 point Fourmillion, which is essentially flat with the prior year.

We anticipate a temperature control fourth quarter sales to be down following the very strong first half preseason ordering by our customers in 2019.

Further 2018 was one of the hottest summers on record and we're pleased to have seen our full year volumes stay in line. Despite some cooler temperatures.

Consolidated gross margin in Q4, 2019 was 30.2% versus 29% last year up 1.2 points and for the full year was 29.2% versus 20.6% last year, a 0.6 points looking at the segments engine management gross margin in Q4 2019.

30.6% versus 28.8% last year up very nicely at 1.8 points and for the full year was 29.6% versus 28.6% last year up one full point.

The improvement in gross margin for engine management was driven by significant improvements from the completion of the general cable wire business as well as continuous cost reduction efforts from in house manufacturing a low cost sourcing.

These improvements were partially offset by the pass through of tariffs that cost, which have a slight dampening impact on our margin percentages.

Temperature control gross margin in Q4, 2019 was 22.7% versus 22.9% last year down 0.2 points and for the full year 2019 was 25.2% versus 25.3% last year dump 0.1 points.

As we noted in the engine segment tariffs that had a dampening effect on our margin percentages and the slightly lower temp control gross margins in the quarter info here are primarily the result of this effect.

Looking to SG universe consolidated <unk> expenses in Q4, 2019 were 54.2 million down 1.5 million at 22.5% of net sales versus 22.6% last year and for the full year were 234.7 million up 3.4 million at 20.6% of net sales.

Versus 21.2% last year.

For both the quarter and full year, we continued to see savings from the reduction of distribution expenses in our temp control business.

Partially offsetting these savings were incremental S. You going to expenses related to our Pollick acquisition and for the full year an increase in other variable expenses on higher overall sales volumes. However, we were very pleased to see 1.6 points a favorable operating expense leverage for the full year.

Consolidated operating income before restructuring and integration expenses and other income net in Q4, 2019 was 18.6 million or 7.7% of net sales up 1.3 points over Q4 2018.

For the full year was 97.1 billion or 8.5% of net sales up one full point over 2018.

As we noted our GAAP to non-GAAP reconciliation of operating income our performance resulted in Q4 2019 diluted earnings per share of 59 cents versus 52 cents last year and for the full year diluted earnings per share of $3.10 versus $2, a 55 cents last year.

The increase in our full year operating profit was impacted by higher sales and engine management, partly as a result of the acquisition of the polymer business as well as improvements in engine management gross margin and lower SGN, a expenses and temperature control.

Looking now at the balance sheet accounts receivable were 135.5 million down 22 million since December 2018.

Accounts receivable in 2018 included 5 million from the sale of our Grapevine, Texas property, excluding that item accounts receivable declined mainly as a result of lower sales during Q4 2019 versus the prior year.

Inventory levels finished the year at 368.2 million up 18.4 million from December 2018, with the increase coming primarily from the acquisition of the polymer business.

Total debt at December 31st 2019 was 57 million, reflecting an increase of 7.8 million from December 2018 levels. The slightly higher level of debt includes the impact of acquisition activities, which totaled 43.5 million in 2019.

Our cash flow statement reflects 77 million of cash generated from operations 5 million of cash received from the sale of our Grapevine, Texas facility and 8 million, an incremental borrowings, which all totals to 90 million and was used to fund 16 million of capital expenditures 44 million for the Pollick acquisition and see Vijay investment 21.

<unk> million of dividends paid and 11 million of share repurchases.

In summary, we were very pleased with our strong 29, well your results, reflecting higher sales volumes higher gross and operating margins and significant performance improvements from our wire manufacturing consolidation and are temp control automated distribution system [noise].

Thank you for your attention and I'll now turn the call over to Jim to provide some additional color on our results.

Okay. Thank you Nathan.

What do you 19, how was it a record books, reflecting new highs for sales and earnings as we look back at 2019 sales volumes were very strong in the first half the year for both engine management and temperature control.

It's best to analyze each segments separately.

Engine management sales, excluding wiring cable and the Pollick acquisition over the first three quarters of 2019 exceeded our customers Pos sales during that period customers were broadening their assortment and deploying inventory closer to demand to better serve the installed base. Many times. This is rob.

Reflected in large pipeline orders the sales growth in the first three quarters of 2019 were sequentially, 9.3%, 5.3% and 7.8%.

As we pointed out on our earlier calls we expected our sales to fall back in line with customer Pos trends.

In Q4, our sales were down 3.9% with full year growth of 4.6%, which was still above our customer Pos for the year.

In the first quarter 2020, we expect this downward trend to continue as we're up against large pipeline orders in Q1 19, a comp of 9.3% in the first quarter last year.

Public customer disclosures, probably thing too soft demand due to milder weather conditions [noise].

Again long term, we expect engine management, excluding wiring cable in acquisitions to mirror, our customers Pos in the low single digits.

Temperature control sales were very strong in Q1 in Q2 of 2019, reflecting large pre season orders. Following the very hot 2018 summer season, temp sales were up better than 14% in Q1 and 5% in Q2.

This trend reverse then the second half as we finished 2019 essentially flat to 2018 levels going into 2020, our customers' inventory inventories were at more normal levels and we do not anticipate the same magnitude of early pre season orders.

We expect the first quarter 20 sales to be down as we're up against the better than 14% comp last year.

Ultimately 2020 temp sales will depend how hotter summer we get.

And long term, we forecast low single digit growth with all other variables equal.

Lastly on sales, we continue to forecast wiring cable sales that are in secular decline to the decrease in the 6% to 8% range on an annual basis.

Turning to our 2019 record earnings performance. This reflects improvements in two critical areas first our general cable wire integration has been completed achieving historic efficiencies one of the key drivers to the improvement was the hiring training and retaining of a stable workforce.

We're very pleased by the wire team's efforts on performance at 29 team.

The second area driving our earnings improvement was a reduction in our temperature controlled distribution costs. Following the installation of an automated warehouse system at our Lewisville, Texas facility.

During the off season, our distribution and I T teams developed many system enhancements that significantly reduce our costs and improve customer turnaround times.

These were two major areas that drove our results in 2019, but there were many other contributors, including in house manufacturing and low cost sourcing.

Our go forward emphasis is on continuous improvement.

Looking to Twentytwenty gross margins tend to drop back into first quarter, each year reflective of the prior year fourth quarter lower production levels and hence higher costs.

Normally as we progressed into the second and third quarters, we tend to see incremental improvements in our gross margins.

By segment engine management gross margin target is 30% plus on an annual basis for 2020 and as I. Just explained Q1 margins will start the year below to 30% annual target.

The temperature control, we are targeting gross margins in the high 25% range for the full year again Q1 levels will start lower.

Lastly, our projected SGN a expenses should begin to 59 to 62 million range per quarter in Twentytwenty.

In summary, 2019 was an excellent year and with our dedicated employees. We are optimistic looking into 2020 m. beyond. Thank you for your attention I will turn to call over to Eric.

Well, thank you Jim and good morning, everybody I'd like to open by thanking all the folks here at standard motor products for helping to deliver a record breaking year setting new highs for both sales and profits. It's it's a terrific achievements and I congratulate you all.

Well, Nathan and Jim reviewed the numbers and what's behind them. So I'll just hit on a few topics and then open it up for questions.

First let me address where we stand with the Corona fire situation.

Although the majority of our product comes from North American Paul and we do have a significant manufacturing and supply base in China.

After a difficult situation the timing was fortunate.

As we always do we built inventory ahead of the Chinese new year shutdown and as such our inventory position is in good shape.

Furthermore, winter as our slowest season for our temp control Division, which has higher exposure to China than engine management does.

As you're aware, we have three joint ventures in China, all in the temperature control side. We're pleased to say that all of them are now reopened and are coming back up to full speed and we don't expect any disruption.

Regarding third party suppliers, we've been in constant communication with them and they are all coming back online.

We therefore feel reasonably confident from what we know what this time that we won't have any near term disruption, but that being said there remains a great deal of uncertainty as China continues to address the situation. So it's very difficult to predict a longer term implications.

I would like next like to give you an update on where we are with our 220 19 acquisition starting with Pollack acquired in April.

To remind you of pollack is a $40 million plus business selling various switches sensors and connectors largely for commercial vehicle applications.

75% of it is for original equipment with the remaining 25% sold into the heavy duty aftermarket channel.

The products were manufactured in two stoneridge plants, the majority in canton, Massachusetts with the balance in Juarez Mexico.

We have now relocated all of the manufacturing to existing S&P locations, mostly into Reynosa, Mexico.

The lines have been re commissioned and where visibly busily going through the approval process with all the customers.

Now that the production is in our low cost plans, we expect significant savings. So we'll take the next several months to get up to full productivity.

But what we're most excited about is the ability to grow the business. We are applying resources to both the OE and aftermarket side and believe there is a very nice opportunity ahead.

Next I'd like to discuss our investment last August in see why Jay a Chinese manufacturer of compressors for electric vehicles.

See why Jay is quite yet still small, but we're very excited to have entered into this hit the ground level.

The customers are mostly Chinese electric car and bus manufacturers, which is a major growth area and one that is new to us.

In addition to penetrate into Chinese OEM markets will be able to utilize their product capabilities to manufacture compressors for the electric vehicles on U.S. roads, including all of the hybrids.

And additionally, it fits very well with our other two temp control jvs in China with complementary products in many other synergies so while we're still in the early days, we are delighted that they have joined the S&P family.

Lastly, we are happy to have announced an increasing our dividend to 25 cents. This marks the 11th consecutive year of increases and we believe that this shows our commitment to returning value to our shareholders.

So in closing when you add it all together, we're quite pleased with the year overall, and where we're positioned for the future.

Sales margins and earnings are up and while there can always be some lumpiness period to period. The aftermarket fundamentals remain quite strong as does our standing within the industry.

We continue to be strategically acquisitive with two deals done last year.

Both of which complement our core business, while also providing us nice diversification into new markets products and geography, and so we feel very good about our future.

That concludes our prepared remarks with that I will turn it back to the moderator and we'll open it up for questions.

Certainly at this time, if you would like to ask a question. Please press star and one on your Touchtone phone you may withdraw yourself from the question Q it anytime by pressing the pound key.

Once again to ask a question. Please press star one now.

And our first question comes from Daniel Umbro from.

Stephens Inc.

Please go ahead.

Hey, this is Andrew on for Daniel Congrats on the quarter guys.

My first question here is I mean, I've a follow up after that is that with Oh integrated how are you thinking about going forward in terms of that product line expansion you mentioned in the release.

I appreciate the question, Andrew and need to look at at the two segments separately I'll start with a the aftermarket which is the smaller piece of it as mentioned, it's about 25% <unk>.

They had a relatively limited product offering going into the.

To the aftermarket channel of heavy duty, which is very different by the way from what we typically think of is the aftermarket. It's not the O'reilly is a map is in a world, but it's the channel that sits adjacent to it. So those traditional guys also are participating in heavy duty, but this is is a market its alongside it and.

We already have within our.

Legacy portfolio a lot of products that are suitable a that we can add to the pilot brand to go after that market, but we're also going to be applying.

Some additional product management resources to see what it is that that channel needs and build out our portfolio. Accordingly, So I really John.

And to integrate the business get all the production moved.

We'll now pretty close with that and we'll turn our attention to grow in the business.

Oh, we side of that.

Several of the customers that came with the acquisition where existing customers for US others were new to US we've already been in discussions with many of them about what's next to be to be honest stoneridge.

By the road admission had really stopped investing in this in this business.

And so there really has not been very much new product development going on there are a lot of opportunities and so we're actively in discussion. So while it's still early days and and again. The first job is to integrate what we got and make sure that they're all customers are taking care of we're pretty much ready to go to that next chapter and.

Start growing the business. So we're excited about the potential.

That's very helpful. And then my follow up here is Ah interesting. Some success with yeah warehouse automation is any potential for similar upgrades and some of your engine management disease or elsewhere.

Yes, good morning, it's Jim Burke.

The enhancements that we put in for a further lewisville, Texas facility. This is a common system that we have a we're upgrading up in Virginia also but the automation mirrors, what we have in Lewisville. This was one of the it was more a manual operation in Lewisville, Texas.

Whereas I rather facilities already had enhancements put in so.

I would not have I would not anticipate a significant change.

Change and I, rather distribution facilities.

Great. Thanks for answering my question guys.

Alright, Thank you Andrew.

And once again that is Saar in one to join the question Kim. Our next question comes from Scott Stember from C.L. King.

Please go ahead.

Hi, Good morning, Thanks for taking my question guys.

Good morning, sorry.

Eric you talked about Oh early Jim talking about I guess.

How a Pos it sounds as if we're still running in the low singles to give you talked about how it.

Performed in the fourth quarter I guess, you know in the context of the comments that your customers are making about softer end demand have you seen any actual pullback.

Particularly on the engine management side as of late or even in the fourth quarter.

It was a it was a soft quarter, but it was still positive as we always say.

This is representative of the overall market, we don't get Pos information from our entire customer base by but it is certainly reflective we believe.

It it remained positive but it was very low single digits coming into 2020 were continuing to see that kids.

Okay got you mentioned wire and cable temperature control, our wire and cable continues on its on its minus seven or so in temp control really fourth quarter is largely irrelevant.

And moving over to Paul I know you're.

Obviously, we'd expect that probably to mirror with the industry's doing as well.

You know some of these product extensions and growth in the aftermarket.

What kind of growth rates would you be forecasted for Pollack I guess within your full year one of ownership.

We're really.

At this point, what we had at what we inherited which was largely steady state no growth I. In fact, there were a couple and I believe a I'm not saying a couple of of the OE contracts that were coming to a close.

Huh.

So really at this point until we start to refresh the offering we're not projecting any near term growth.

Got it and on the tariff front have you seen any changes.

With your exposure there or is it.

Expected to be a steady state going forward or at least for 2020.

Yeah. Scott This is Nathan Yeah, it's really a steady state at this point there are some exclusion request it had been filed but they're very very small and as we've noted before any refunds would go back to the customer.

Okay got it.

All right. That's all I have for now thank you.

Hi, Thank you.

And our next question comes from Bret Jordan from Jefferies. Please go ahead.

Hey, Good morning. This is Ethan only on for Brett Thanks for taking my questions.

First one here just on the engine management margins.

20, 29.6% for the year I know you sort of guide that 30 30 plus percent.

Following two consecutive quarters of sort of 30 plus percent engine management, I guess sort of what other changes we see something you know in a 31 range, maybe even a bit higher moving into 20 and 21 here.

It is Jim Burke.

Pointed out again, but we step back into first quarter always that's there and we look to build on the margins going forward. We always look to be you know with all the variables to be move and a you know what half a point per year. There about sets in there so while I always have a high hopes for moving up.

On the 30 to 31 and beyond that let me, let me get over the 30 hurdle off for the first year, but not all work on the others.

[laughter] Fair and then just again sort of the mild winter I'm, just trying to sort of gauge impact or CNN either segment here either in temperature control or engine management.

On temperature control, we do have some.

Some portion of the line that is heating related a lot has been somewhat soft, but that's a very small portion of our temperature control business, it's really more of a summer related category and so we're hopeful.

That we're going to have a nice hot summer as it relates to engine management, we're not as temperature.

Impacted as say batteries are wiper blades or some of the true winter type product categories, but it does have an impact and we have seen that on a customer reported Pos Lyons and and therefore reflected in what they're purchasing from us. So we are seeing some soft it's not dramatic softness, but we are seeing a little bit itself.

Okay, Great. That's all I got thanks for taking my questions.

Thank you.

And our next question comes from Robert Smith from Center for performance and investing please go ahead.

Good morning, Thanks for taking my question.

Give me a feel for what you're thinking as Uh huh.

The joint venture and electric vehicles in China, you see this jumping off point the to broaden that product line through the joint venture or you're looking for additional joint ventures.

Who uh huh.

Yes.

Who.

Penetrate that market right.

Good morning, rather than a great question and the answer it really is both so let's start with what we see for see why Jay as mentioned, it's it's very small and and very new.

They have the technology to pursue a the electric vehicle market there as well as to have the product suitable for TV is elsewhere in the world. What they really didn't have was was the horsepower and that's where we come in with with our resources and our stability and so on we think the combination becomes very strong.

Then you combine that with our other two temperature control jvs in the region, we're really starting to build out of portfolio product to take care of temperature control category in China.

Beyond that we continue to look for appropriate strategic.

Investments in the region.

As we have demonstrated.

We really forever in terms of our acquisition strategy, we're very careful in what we select it needs to fit our objectives and our strategy, but what we are seeing is that there are certainly other opportunities.

There and Oh, we're always investigating we see the Chinese Oh E car market, especially in the H.B.A.C. area to be a very nice opportunity for us and we're continuing to build it up.

[laughter].

Thanks, very much good luck.

Thank you Sir.

And it does appear that there are no further questions over the phone at this time.

[noise] Oh right. This concludes our fourth quarter conference call. Thank you very much for attending.

Thank you goodbye.

This does conclude today's program. Thank you for your participation you may disconnect at anytime.

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