Q1 2020 Earnings Call

I appreciate your patience.

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It was about.

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Good day, everyone and welcome to be standard motor products first quarter earnings call.

At this time all participants are in I'll listen only mode. Later, you'll have the opportunity to ask questions. During the question answer session.

They register to ask a question that anytime by pressing star in one on your Touchtone phone every move yourself from the Q by pressing the panicky.

Please note today's call is being recorded its my pleasure to turn the conference over to executive Chairman Larry Sills.

Ahead.

Hi, good morning, everybody and welcome to standard motor products.

First quarter conference call.

Which will include an update on the.

Nicole good.

Pandemic at all.

Actions.

Regarding that.

We thank you for attending a here, representing the company or Eric Sills, Chief Executive Officer.

Jim Burke Chief operating officer.

Nascent I'll Chief Financial Officer.

Myself.

Those are executive chairman.

As.

He fits the current situation.

Well operating remotely so let's hope everything works smoothly.

Agenda for todays Nathan will begin with the forward looking statement.

Well, then discuss the Colby pandemic and.

I was affecting us in what we're doing about it.

Jim will give an update on the operations.

Nathan will then review the first quarter results.

Eric will summarize and finally I will open for today.

So with that let's get started and I'll turn it over to Nate.

Thank you.

Thank you Larry before we begin this morning, I back to remind everyone 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 the lead estimate or expect <unk>.

These are generally forward looking statements, although we believe that the expectations reflected in these forward looking statements are reasonable there based on information currently available to us in certain assumptions made by us and we cannot assure you that they will prove correct. You should also read our filings with the Securities Exchange Commission for a discussion of the risks and uncertainties that could cause or.

Actual results to differ from are forward looking statements well now turn the call over to Eric.

Oh, Thank you Nathan and good morning, everybody I appreciate you taking the time too.

Good day.

So our call. This morning will not follow the usual well it's important that we spend more time talking to the impact at the krona virus car crisis is having on the measures were taking to manage our way through it well then turned to a discussion of the first quarter results.

Again, I wish to emphasize that we have entered the situation extremely healthy.

We have a very strong balance sheet low debt and ample liquidity.

100, your history of stability based on a foundation of Conservative cash management and this will serve us well as we navigate through the current situation.

As you know the auto care industry was deemed essential first by federal guidelines and then echo throughout the various states and municipalities and we are essential.

The foundation of our country's infrastructures transportation book of people end up goods.

Although mobility may be reduced in the crisis, such as yes. It has no less essential.

First responders rely on their vehicles to divide their invaluable services medical professionals to get to their jobs and it just how deliveries are made in an environment, where so many are confined to their homes.

This requires the entire supply chain to operate effectively.

Repair shops to the part stores in distributed up to the manufacturers, who supply them with a critical parts needs.

Therefore in order to perform at our usual high level I primary concern, which for the safety and welfare of our employees.

Jim Burke will speak of the specific actions, we've taken but we're pleased to see that they have proven effective we had very few employees, who have tested positive I've no reason to believe any of them contracted the virus at work.

I've never been more crowded, that's and P. employees and I am right now.

Well, our people and listen to the challenge that's contributed far more than I could expect and have done so in a very intense situation.

For this reason I am reassured that once this temporary situation is behind us, we will be stronger than ever.

And this must be the emphasis this is a temporary situation.

Although it's difficult to predict how long it will laugh at some point It will act.

Therefore, the emergency actions, we are putting in place are designed to be temporary as well and will not impact the longer term objectives of the company.

Well, we didn't need to put in place various measures to reduce costs preserve cash and ensure adequate liquidity.

The larger ones. Among these are as follows.

Oh senior executives have volunteered for reductions and pay for the balance of the here.

Salaries for the top executives are being reduced by 25% and the next year of executives by 10%.

I Board of directors have also agreed to a 25% reduction in there.

The cash perspective, we have temporarily ceased our share repurchase program.

Additionally, the board has voted to temporarily suspend the dividend starting with the June 1st payout.

This was a difficult decision.

We've enjoyed 11th straight years of dividend increases coming out of the great recession and that remains a key part of how we returned value to shareholders.

However out of an abundance of caution we felt this was the prudent course.

We will revisit our stance in the quarters to follow.

We also elected to draw down watch, but not all of our revolver simply as an insurance policy.

As you'd expect we've also cut back on much of our discretionary spending.

When I handed over to Jim He will address how we're handling temporary reductions in headcount in our plants to accommodate reduced requirements.

Now we have chosen not to cut into our professional workforce again. This is a temporary situation and we feel that it would be an error in the while not to lose our talented basis employees.

It's important to note that we have performed significant stress analysis on our financials to determine what type of a downturn we can withstand.

Well if model the various scenarios and we're pleased to see the due to our historic Conservative financial management practices and entering the crisis with a very healthy balance sheet, we can withstand quite a bit.

Yes, again, it's why we took prudent conservation measures, but nothing that will affect our long term plans.

[noise], so what have we seen in terms of business.

Well make an overview the first quarter, but the impact of the Corona virus began at the tail end and the trend has obviously can take.

Customer orders for must have been down substantially around 30% to 40% in April.

But as we monitor the weekly Pos we're pleased to see that the sell through was down only around 20% to 25% get the lowest point.

We believe the difference between purchases and POS is the result of planned inventory reduction that our customers and they look to rightsize the inventory this will balance overtime.

We have now also seen some encouraging things in their Pos.

Got to blow very quickly, but then stabilize there for a few weeks and over the most recent a couple of weeks, we've seen a fairly significant sequential rebound and this is now being reflected in their orders to us.

So while it is far too early to call the trend or to suggest the worst definitively behind us we remain confident that we have the wherewithal to manage through this.

Before turning it over to Jim I would like to mention what we're doing to help with really.

We're pleased to have been able to re purpose and automotive heat exchanger did you use that's a critical component gonna ventilator.

In our Poland facility, we are three D printing face yields for our local hospital.

We're asking all about employees to find ways to volunteer.

Lastly, I just wish to talk a bit about the future.

The business World is in no doubt in crisis, and our industry is no exception.

However, the auto care industry is extremely resilient and tends to outperform in economic downturns.

The market, we serve has not changed.

Merely been idled.

Cars are still out there and are essential to how our country operates.

It's predicted that the economic impact on Americans will lead to a reduction in new car purchases. This tends to benefit our industry as people need there to keep the older vehicles operating.

The majority of what S&P produce it does nondiscretionary, especially within engine management, our parts you acquired the safe and proper functioning of vehicles.

Therefore, the moves we are making in the short term a tactical could deal with the current situation. Meanwhile, our business strategy remains unchanged it will be as applicable and relevant once the market recovers as it was before the crisis <unk>.

For all of these reasons S&P leadership team remains very confident that we will emerge from this crisis as we ask them every crisis over 100, your history stronger than ever and able to deliver shareholder value.

Due to the thousands of S&P employees, whose tireless dedication has gotten that's where we are in whom I cant banking.

That I will turn it over to Jim.

Okay.

Thank you, Eric and I plan to provide some highlights on employee and facility safety, our global supply chain and production planning in light of lower customer orders.

Some perspective, S&P has 19 locations and approximately 4500 employees.

On behalf of the entire management team I want to think a wonderful employees, who have been conscientious co-operative during these difficult times.

While managing through it is fantastic, which is temporary we are fortunate to have a seasoned management team and long tenured workforce, a recipe culture reflection reciprocal relationship with the comedy caring for its employees and our employees contributing to that help Uh huh.

We're also managing through this process with a very healthy and on leveraged balance sheet reflection of our key strategic value.

First one shore employee facility safety, we implemented the following oracle's employee daily temperature checkers before entering our facilities.

[laughter] cleaning and hygiene expansion efforts throughout the deep cleaning of disinfection measures on weekends and for any incident reporting.

Mandatory use a protective massa gloss staggered and flexible shifts changes to reduce density and were working efforts for administrative functions. In addition, the engineering purchasing demand planning and our sales force.

Hey across all our facilities, we have only had six positive reported cases, and thankfully all longer covering an hour danger.

Next to return to work next turning to our global supply chain, we have not had any significant disruption.

Our initial concerns or was there a free jvs and China following the outbreak huh.

Just on board R.J., these and other Asian suppliers fully recovered well, we maintain high fill rates, what our customers our supply chain management team did an excellent job working with our suppliers to plan to prioritize our needs during this restart process.

The last area I wish to highlight our efforts to make.

Manage spending and balance our production planning in light of lower customer orders.

Efforts included reducing discretionary expenses and concert conserving cash since we deemed as pandemic temporary we are cost that will not have any long term negative impacts our business.

We plan to fully fall continuous improvement projects and cash spending to increase every house manufacturing.

We reduced our temporary flex workforce from temp agencies in the area manufacturing and distribution to match customer orders and reduce costs.

In addition, we were able to close for manufacturing facilities over a two week theory, a tougher the balance manufacturing work formats.

However, despite these efforts to date further manufacturing reductions are warranted following our soft baseball waters. Our operational teams are finalizing plans. This week from production requirements. We will also consider the latest news on improved customer Pos sales in the last week and implement the appropriate action.

And plans for next week.

To summarize I believe the key takeaways are we are starting from a position of strength with a very healthy unlevered balance sheet, we have a seasoned and long tenured management team.

While sales are being pressured in the near term our industry fundamentals it sounded stable.

Operating margins will also be pressured in the short term for manufacturing under absorption and S.A.S.G. you need de leverage, but we fully expect to take the adequate steps necessary and be prepared for an expected folmer card.

We're all focused on the challenges that yeah, and expect to weather the storm service, our customers and be a leader in our engine management of temperature control categories. Thank you for your attention and I'll turn the call, but the Nate.

Great. Thank you Jim.

Before I go through the numbers I would also like to thank the entire S&P family for their hard work dedication.

Our employees or the source of our strength and stability and we greatly appreciate their contributions in the minutes to this extremely difficult environment.

Looking now do you know consolidated net sales in Q1, 2020 were 254.3 million down 29.5 million per 10.4% versus Q1 last year.

As discussed in prior quarters, we acquired the Polish business from Stoneridge on April 1st of 2019.

Incremental sales Nikolic acquisition were 9.5 million to do you want to 2020, and excluding me sales from our consolidated sales. Our net sales were 244.8 million down 38.9 million or 13.7%.

Looking at it by segment now engine management net sales in Q1, excluding pollack in wire and cable sales were 155.1 billion down 21 million or 11.9% as you may remember remember from our calls last year engine management sales in Q1 2019 were 9.3% higher.

Mainly as a result of large pipeline orders and customer orders, which were higher than the Pos sales to customers experienced.

As expected in Q1 of 2020. These pipeline orders did not recur and we saw a customer orders come back in line with their sales.

While these two items.

Primary contributors to our lower sales level, we were further impacted by the cobot 19 pandemic in the last two weeks of March.

Temperature control net sales in Q1 of 2020 were 51.4 million down 17.5 million or 25.4%.

Net sales in this segment last year were impacted by very high pre season orders as customer inventory levels heading into 2019 were lower than usual coming into the 2020 customer inventories, where it more normal levels and therefore, we expected lower sales as noted on our last call.

As always in the settlement. The early part of your is largely pre season orders, which can falling into the first or second quarter and therefore, the first quarter for temperature control is typically not indicative of how the year will turn out.

Looking at gross margins now consolidated gross margin in Q1, 2020 was 27.7% versus 27.5% last year.

Two points.

By segment engine management gross margin in Q1 of 2020 was 28.2% versus 28% last year with the improvement driven mainly by our continuous cost reduction efforts.

Temperature control gross margin of 23.5% in Q1 of 2020 was exactly flat with last year.

We were very pleased to both divisions maintain gross margin percentages that previous levels. Despite the lower sales, we do expect margins to decline in the near term as Jim noted earlier as lower sales related to cope with 19 will bring our margins down.

Consolidated <unk> expenses in Q1, 2020 were 55.9 billion down 4.1 million from Q1 last year lower SGN expenses, primarily reflect lower distribution costs and lower accounts receivable factoring cost given our lower overall sales volumes, partially offset by incremental expenses related to our policy.

Acquisition.

Consolidated operating income before restructuring integration expenses and other income that in Q1 of 2020 was 14.5 million were 5.7% of net sales down 1.6 points over do you want to make cheating.

As we note on our GAAP to non-GAAP reconciliation of operating income.

Four minutes resulted in Q1 2020 diluted earnings per share a 43 cents versus 57 cents last year.

The decrease in our first quarter operating profit was impacted by lower sales in both the engine management and temperature control divisions, partly offset by lower SGN expenses across the company.

Looking at the balance sheet now accounts receivable were 165.7 billion up 30.2 million from December 2019, but down 8.5 million from March 2019, you increase every year end reflects seasonal patterns in our business all the decline from Q on 2019 reflects lower sales versus the prior year.

Inventory levels finished the quarter at 370.9 million up 2.7 million from December 2019, and up 5.7 million from March last year.

The increase from year end again were less than seasonal nature of the business, while the impact versus Q1 last year, primarily reflects the impact on inventory levels from the Pollack acquisition.

Our cash flow statement reflects a 32.8 million use of cash and operations in the first quarter 2020, as compared to a 26.7 million use of cash last year.

Our seasonal working capital needs drives the use of cash from operations earlier in the year in normal times are generally followed by positive cash flows from operations for the balance of year.

During the quarter, we made investments at 4.4 million for capital expenditures.

Financing activities included 5.6 million of dividends paid following our fourth quarter 2019 performance as well is 8.7 billion or repurchases of our common stock.

Financing activities also included 52.5 million of increased borrowings used primarily to fund our working capital requirements, but also our other investing and financing activities.

Lastly, let me turn to the code at night Gene pandemic.

Well our company is strong and entered the current crisis in a very healthy position there remains tremendous uncertainty from that shutdown of economic activity across the U.S.

And the crisis unfolded, we began to see headwinds in front of this we took several precautionary measures to increase our cash cash position and make sure we had ample liquidity.

As Eric noted previously we temporarily suspended share repurchases and dividend payments and our board and top executives will take pay reductions for the balance of the year.

Further as a cautionary measure and to preserve financial flexibility, we drew down 75 million from our revolving credit facility on April 15, and hold that balancing cash.

Following this dropdown or total indebtedness under the facility was approximately 191 billion.

We had an additional 47 billion with availability remaining.

As we are holding the drawdown in cash our overall debt leverage remains very low.

As we evaluate our liquidity and use of capital moving forward will continue to prioritize maintaining our strong financial position, we have a long history of conservatively managing our balance sheet and we'll continue to take prudent steps to ensure the long term health and stability of our company.

For your attention than <unk> I'll now turn it back to error to wrap up.

Well. Thank you Nathan so to summarize before opening it up the questions here are the key takeaways, we want to leave it with.

First we entered the situation very healthy able to withstand an extended period of difficulty.

Second out of Prudence, we are making short term surgical moves to cut costs and conserve cash all without harming our long term strategic goals and finally Oh. This is built on the fact that our basic industry fundamentals remain intact, making its a temporary situation.

In time to market will bounce back and we will be there to serve is that a strong as ever as we have to the last 100 years.

With that I will turn it over to the moderator and we will open it up for your questions.

And at this time, if you'd like to ask your question. Please press the star and one on your Touchtone keypad, you can always remember yourself from the Q by pressing the pound key once again that is star and one for your questions.

We'll go first to date or Scott Stember East go ahead. Your line is open.

Hi, good morning, and thanks for taking my questions guys. Good morning, I didn't want to spot.

Keep this tells him the engine management segment before the I guess the impact of cobot started hitting.

What was your sell through rates.

At Pos looking like again in engine management.

Well I got good morning, Scott This is Eric or.

The first couple of months, we're hovering at.

Lightly slightly positive it was ER.

You know.

Very low single digits and then what we saw an IND in the first half in March we began to see a bit of a recovery and I think you're seeing something similar to what the public distributors are saying and then for the last two weeks it though.

So again started out pretty slow start to pick up in the beginning of March and then the dropped off.

Great. Thanks, and just following up on your comments about I guess, a recent days I guess you were talking about or just the last week you were talking about Pos seem really picking up again are we talking that up to you all else being up year over year or just.

Being less down then the 20 to 25.

For said Oh.

Oh, it what we saw and it's it's been for the last two weeks and I need to preface. This by said you know where we're basing this on some of my larger customers this which tends to be directional, but it's not based on the entirety of by passing Iraqi market customer base. What we saw it is a really it was about three weeks of that really be.

Down in the.

Twentys down in Twentys, and then for the past two weeks it moved at least 10 points each week over the last two I'm talking about engine management, which is really the driver at this point wire and cable saw some similar trends, although actually outperformed a little bit and temperature control, yes. Its April.

Still a semi irrelevant, what's happening in the marketplace until the summer begins.

You say moved 10 point, you're talking about 10 points and then it incremental 10 points with that insinuating that were flattish right now [laughter] last week was flattish.

Okay great.

Right and.

I know you guys, obviously are doing a lot of things that too.

Curb expenses and and so forth, but just.

Remind us of your ability or youre inherit model before.

Yeah, the news that you're making your ability to flex up.

And flex down with sales your cost of your fixed costs, maybe just.

Just talk about your how much of your costs are fixed versus <unk>.

All right.

'cause Jim Burke.

Again within the within cost of sales as a general rule what I usually go look out there is tend to say to the material cost. Many times will make up 65, 70% that's truly variables. All the balance is half 50 50 between variable and fixed costs.

Within our rest gionee as a general rule I wouldn't say the majority of it we're probably in the.

70, 580% Quantite fixed area that's there.

At the end a truly variable items says, that's where we classify our distribution expenses. So we have so picking and packing labor. We are afraid out and we have a where we were caught out draft fees. Those those items would be the variable items in the U.S.G. and a area.

Got it and just last question on your revolver.

He just tell us what the covenants are if any and I'm just talking about the liquidity one more time.

[laughter].

Oh, yes, so it's got like <unk> do we have we have ample liquidity. It's a our credit facility I think you can classify as the typical a asset backed facility.

With and with regard to or any covenants that are out there. It's sub screen covenant based on certain certain levers in the facility were nowhere close to being.

Near any covenants like that.

Got it.

Right. That's all I have thanks, guys.

Thank you Scott.

Well take our next question from Daniel Embryo. Please go ahead.

Yeah, Hey, good morning, guys, it's taking my questions.

Morning, wanting to wonder stored on the April commentary you just you just kind of touched on it sounds like things are improving but curious can you give us a sense of where inventory levels are just trying to think through if sales do stay pressured for longer how much longer your sales Ken can maybe underperform Pos before customers have to start repurchasing again.

Oh this is Eric Daniel into and it's a great question.

Our our visibility into our customers' inventory is a few weeks David So we're really looking a few weeks back and therefore, we have to back into the numbers by.

I look in the appeal asbestos purchases. So we do believe there.

When you get down to where they want a and some of the early indications that we're getting from the accounts is that now this they're going to begin.

Getting back to ordering more what they're selling.

But again, that's very early indications.

Helpful. Thank you and then a follow up on that are you, losing any noticeable sales discrepancy by channel or you know or the are you seeing the smaller customers dial back for just is diminished has more than your large customers are there any noticeable change in the marketplace new years day from a customer level.

Well, we don't get into the details of the different segments of the different customers, you're seeing a little bit of variability or account by account, which is partly gonna be based on on a geography as well as their own internal strategies. We don't give you don't get into specifics of different accounts, we are going to see a little bit of variation customer to customer.

Got it and then even maybe moving designing the financials on the engine management side really impressed by the operating margin leverage. Despite the sales decline can you provide some more color on kind of what drove the strength both gross margin and yesterday and then how sustainable you think some of those factors ours be hopefully see sales recovery.

Coming quarters.

Yeah, well I think just with regard to the gross margins a as I noted in my comments. The strength is really just from continuous cost reduction efforts. We have these programs going on a year after year and that helps us a improve our margins in normal times like I said, we will see sales decline you've heard them.

Numbers Eric.

And Jim talked about as far as what we think we see in sales declines and so that will drag on margins down in the near term.

If you go back to SG today, a you know Jim kinda throughout there that the fixed cost numbers. If you will distribution costs and receivable factoring hospital flex down a bit 70, 580% of that cost is fixed.

Got it and then last one from me Jim I think you mentioned your temporarily closing the manufacturing facilities to match your cost.

As you think about the recovery how difficult is it to reopen those facilities or you know in past cycles, when you've had to closing down to reopen the mother typically incremental inefficiencies that come up or do you expect that to be a pretty smooth shut down and reopening process.

Right, Okay, Hi, Daniel.

Generally very smooth and so we would have a skeleton crew that comes in before the ER. The re launching all of the full day, that's coming in so that goes very smooth.

They're one of the things I just want to follow up on the margins and refresh everybody. That's on the call you know there's a lag between.

You know our production variances and I wouldnt rolls through to the P. and also our margins held up pretty well into first quarter, but really towards the end of the second quarter and elsewhere or reducing production levels and what we went through on the variable and fixed costs well start to see those impacts in Q2 in Q3 this week.

All right there.

And then as you are asking why don't we were car they'll be a lag for that coming through to the margin. So kind of think of it sounds like a rolling quarter like three bostra that roll through.

Got it very helpful Best of luck guys.

Thank you Sir.

As a reminder of star in one on your Touchtone phone for questions. Today, We'll go next to Bret Jordan. Please go ahead.

Hi, good morning, guys.

Right.

I guess can we talk a little bit about supply chain outside of China, I guess, there's been some.

Difference at how Mexico is treating manufacturing as an essential or non essential business and I guess could you give us an update there does that situation relatively stable now as far as nice going not shutting or not shutting production.

Right.

Hi, Brad it's Jim Burke a.

Very good question and Ah you know we monitor it every day we.

This is defined as a an essential business, but there appears to be a Ah you know disparity between the federal let alone the state level, let's say a it's a fluid situation. We believe you know we believe we haven't put defenses. There but are you know back over the holidays, we thought it was prudent to.

To close down I mentioned, we had four facilities that close for two weeks balancing narrow manufacturing requirements.

Sure enough situation, we closed or Mexico plants for two weeks that are there. We feel we have the out of Quinn documentation and there is an essential business software. So some of their own manufacturers been close, but they reopen and Ah, it's a tentative situation, but at this point.

We continue to remain open and what I would say is.

I remember Tory levels and we we've looked at this with our inventory levels, we feel even if there was a short term disruption again, we think we'd be able to maintain a pretty strong fill rates you're in a period and then hopefully be able over a retired at reopened strong.

Okay, great. Thanks, and I guess the question as far as you're the retailers inventory intentions. I think you were talking about them working balances down obviously, we haven't seen in the shock like this ever before.

Do you.

See them meaningfully changing their their inventory balances your how they're managing their working capital and running a theater levels going forward or do you think this is going to remain a relatively inventory intensive retail industry.

Oh, I think it's a it's a dark but I think it's going to continue to be a inventory intensive I believe that that the accounts in each one of them, it's making their own decisions, obviously, but I think that they are our would have reduce some of their inventory not so much reduced it but we do.

Yes that purchases because their own inventories were going up as their sales dropped.

And then they needed to bring it back down to where they wanted it I still see that's especially within our categories to be lines that need inventory depth deployed and so we're not expecting any substantial changes there.

Great. Thank you.

Thank you Sir.

Once you got star and one for any further questions today.

It appears we have no further questions I'll return the floor to our presenters for any final comments.

Well I believe that concludes our first quarter presentation and Ah. Thank you all very much so attending.

Thank you.

Okay. Thank you.

Yeah.

And this will conclude today's program. Thank for your participation you may now disconnect have a great day.

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