Q1 2021 Standard Motor Products Inc Earnings Call
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Ladies and gentlemen, good day and thank you all for joining US for this standard motor products first quarter earnings call. As a reminder, all phone participants are in a listen only mode. But later you will have an opportunity to ask questions. During the question and answer session. You may registered to ask a question at any time by pressing the star in one.
On on your Touchtone phone. Please note that today's session is being recorded it is now my pleasure to turn today's program over to Mr. Larry Sills. Please go ahead Sir.
Good morning, everyone and welcome to standard motor products first quarter earnings call.
My name is Larry Sills, I'm chairman of the board.
With me this morning.
Eric Sills, President and CEO.
Jim Burke.
<unk> operating officer, and Nathan Iles, Chief Financial Officer.
Today, our agenda will be Eric will go over some of the first quarter highlights.
Jim will discuss operations and finally, Nathan will go into more detail on the numbers.
Then we'll open it to Q&A, so, let's go and I'll start by turning it over to Nathan for the forward looking statement.
Yeah.
Alright, Thank you Larry and good morning, everyone. 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.
We believe that the expectations reflected in these forward looking statements are reasonable they are based on information currently available to us and certain assumptions made by us and we cannot assure you that they will prove correct.
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 will now turn the call over to Eric.
Well, thank you Nathan and good morning, everybody welcome to our first quarter earnings call.
So as always I would like to open today by thanking all of our employees for continuing to go above and beyond last year, it's been a roller coaster and while the challenges were undoubtedly significant I believe we navigated it quite well.
Theres no doubt in my mind that we would not have managed it is successfully if it were not for the dedication and skills of all of our people around the world I couldnt be more proud of how they guided us through.
The first quarter had many high notes our sales were very strong up almost 9% as we saw the ongoing market strength continue from the second half of last year.
Furthermore, we posted the highest earnings we've ever had in the first quarter more than doubling last year's profitability due to a combination of sales leverage and cost control.
It's important to note that the first quarter of 2020 was only modestly impacted by COVID-19 for us with a minor downturn in the last two weeks of March so while comparisons going forward will be money. The first quarter is a bit cleaner.
Yes.
Sales in our engine management division were up more than 5% as previously discussed we lost a large accounts and had a sizable reduction in sales to them in the quarter as they transition the business, but this loss was more than made up for by strong demand from our other customers.
Often in the first quarter as March with some large pipeline orders, but that was not the case this year.
Rather we believe that our customers strong purchases from US were the direct result of surging sell through rather than inventory building. Their P. O S was extremely strong with many accounts showing gains well into the double digits.
Now obviously March Pls comparisons are not relevant due to last year's March COVID-19 shutdowns.
But our customers are also up double digits against their more normalized 2019 March Pos and we are pleased to see that this trend is continuing into the second quarter with no apparent signs of abating.
Temperature control also posted strong sales, but as stated every year. The first quarter is largely related to pre season orders, which can vary in size year to year, depending on various factors and the full year will depend on demand in the summer months.
We're encouraged however by very strong P O S in the quarter, which suggests that some other purchases is intended as pre season are actually being sold through already and similar to engine management. These trends have continued into the second quarter.
Okay.
Looking forward, we're quite bullish on the market in general.
Overall industry trends are very favorable cars are getting back on the road miles driven are increasing and the repair base are getting busy again.
In all likelihood this will continue as more Americans are vaccinated in more restrictions are lifted.
We believe that this will favor the ongoing recovery of the D. I F M market, which is where our product categories itself.
Key economic indicators are also favorable unemployment is dropping and cuts in consumer spending is storage and we expect S&P to enjoy those tailwind.
As for our own initiatives, we are seeing very strong success and programs. We have developed with our customers to pursue market share gains at the street level.
And while there are always some gains and losses. We are happy to report that we have been able to secure some new business, which annualized it will replace roughly a quarter to a third of the business that we lost.
This new business will begin to phase in over the next few quarters.
We're also very excited about our strategy to expand our original equipment business with a focus on heavy duty commercial and off road vehicles targeting sectors, such as heavy truck construction and agricultural industrial and power sports.
Over the past many years, we have been quietly building up this part of our business both organically and through acquisition.
As previously announced during the first quarter, we acquired the particulate matter sensor product line from Stoneridge.
This sophisticated technology, often referred to as such sensors is utilized in heavy duty trucks to reduce tailpipe emissions.
We inherited 12 to 14 million business.
With blue chip customers, but almost more importantly, we acquired the intellectual property and complex manufacturing capabilities to court more business in this fast growing product category and new opportunities are already presenting themselves.
Overall, the OE channel accounted for over $150 million in sales last year and is the fastest growing part of our business.
We believe that we are now at a point of critical mass, where we have the internal resources and competencies to support it as well as credibility with the customers to be an important supplier to them.
We also strongly believe that this focus is complementary to our aftermarket business for several reasons first off it tends to be in similar product categories and technologies, which can be leveraged on the aftermarket.
Secondly, the OE customers hold us to extremely high quality standards, which get universally adopted throughout all of our operations.
And finally, we believe that in time, it will help us shift away from an overreliance on conventional powertrains.
Does this in two ways it gets us into products for alternative energy vehicles as with our successful compressed natural gas injection program or a joint venture in AC compressors for electric vehicles or it moves us further into product categories that are not powertrain related such as many of the product types that came with the pollak acquisition.
So overall, we are very pleased with the state of the market and of our position within it.
Most trends are favorable and while the COVID-19 crisis is not completely over we are confident that the worst is behind us and that we have emerged from its stronger than we went in both operationally and from a financial standpoint.
Our core business is doing very well we have initiatives in place to take advantage of the momentum and we are very excited about our prospects on this adjacent commercial vehicle space and as such we look forward to the future.
So with that I will hand, it over to Jim to talk about our operations.
Okay. Thank you Eric and good morning, I will provide some color around our operations to begin as you have seen in our release, our first quarter gross margins in both segments reflected some of our best results on the last 10 years at a very high level. This is primarily the benefit of increased production.
To meet strong customer demand and the associated efficiency gains generated in our factories.
Very pleased with how our manufacturing and supply chain teams have adapted to meet this higher demand.
Our supply chain team also address headwinds first from a material source of supply we face semiconductor chip in resin supply delays our teams worked with our suppliers, increasing lead times and working around allocation limitations.
Fortunately, we were able to mitigate much of the supply issues with existing safety stocks and where necessary alternate vendors.
On the material inflation front, we experienced price increases on semi conductor chips resins, and other general commodity such as copper and aluminum, but no single commodity has a significant impact on our overall cost structure.
Lastly, Asia sourced products face the same global inflation pressures, but also the compounded effect from higher container cost and vessel fees.
Fortunately, our global manufacturing footprint has been a benefit as compared to our peers sourcing 100% from Asia recall, our low cost manufacturing facilities are in Mexico, and Poland with other highly skilled and less labor intensive operations in the U S and Canada.
We believe our NAFTA footprint provides advantages for lower costs improved supply chain logistics and Tyra co op cost avoidance.
To offset these inflationary pressures, we look internally at our margin enhancement efforts first to expand in house manufacturing versus buy initiatives. In this effort. We are targeting to tool products earlier in the product life cycle to better control, our cost quality and supply.
Hi.
Next is our new vendor sourcing initiatives. This effort is driven.
Driven by our overseas sourcing office working with our engineering teams to validate new vendors capturing significant cost reductions.
Other internal effort is referred to as value engineering, where we evaluate existing processes for automation and other cost improvements.
Externally recognized on we're in a competitive marketplace, we look for pricing to offset inflationary costs incurred.
Overall, our intent is to alleviate any cost increases and strive for incremental margin improvements.
Looking forward, we will continue to enjoy increased production levels to meet our strong customer demand as we go into Q2 or.
Our goal is to be the number one full line supplier for premium parts in our product categories. On this point many of our customers recognize the SMP with their 2020 vendor of the year Award.
We are thankful for this customer recognition, but still have room for further improvements to ship on time at 95% or better performance levels.
I want to thank all of our operations team and all our SMP family members, who are focused on our mission to be the number one supplier across all our channels of distribution.
You for your attention and I will turn the call over to Nathan for all financial wrap up.
Alright. Thank you Jim now turning to the numbers I'll walk through the operating results for the first quarter and also cover some key balance sheet and cash flow metrics.
Looking first at the P&L consolidated net sales in the first quarter were $276 6 million up $22 3 million or eight 7% versus Q1 last year with increases coming from both of our segments.
Looking at it by segment engine management net sales in Q1, excluding wire and cable sales were $173 7 million up $9 1 million versus the same quarter last year. This five 6% increase is partly reflective of the softness we experienced in Q1 last year, but also reflects continued growth in sales and the ongoing customers.
Eric noted before.
Wire and cable net sales in Q1 were $38 4 million up $1 8 million or four 7%.
Sales continued to be positively impacted by strong DIY sales as consumers work on their own vehicles, but were help to buy strong sales to OE customers as business ramped up in that channel as well.
The sales on the wire and cable business continues to be steady product category remains a secular decline. We believe sales will ultimately resume a trend line.
From declines in the range of 6% to 8% on an annual basis.
Temperature control net sales in Q1, 2021 were $62 5 million up 21, 4% versus the first quarter last year, an increase primarily as a result of stronger preseason ordering by your customers as.
As we always point out in the first quarter is not indicative of how the year will turn out for this segment as the year ultimately depends on summer weather.
Turning to gross margins, our consolidated gross margin in the first quarter was 33% versus 27, 7% last year up two six points with both of our segments reporting increases for the quarter.
Looking at the segments first quarter gross margin for engine management was 37% up two five points from Q1 last year and for temperature control was 25, 6% an increase of two one points from 23, 5% last year.
The higher margins in both segments were mainly the result of three things.
First the higher sales volumes, we experienced versus last year.
Second favorable plant absorption from inventory production in the quarter and third the carryover impact of favorable manufacturing variances from the record sales and production levels. We saw on Q4 of last year.
Looking ahead, the gross margin expectations for the year on engine management, we are seeing strong customer Pos sales and new business wins, which should help offset the loss of a customer from a sales perspective.
However, we're also facing headwinds from inflationary cost and labor raw materials and transportation as Jim touched on earlier, while we expect the impact of higher sales and higher costs will have somewhat offsetting effects gross margins will vary across quarters, and we continue to forecast full year 2021 gross margin of 29% plus for this segment.
Temp control segment, we continue to target a gross margin of 26% plus for the full year in 2021.
Moving now to SG&A expenses, our consolidated SG&A expenses in Q1 declined by $1 4 million to $54 5 million ending at 19, 7% of sales versus 22% last year.
Expenses declined despite some higher distribution costs, mainly due to continued cost control around discretionary spending and the improvement as a percentage of sales mainly reflects the improved expense leverage due to higher sales volumes.
Looking at our SG&A costs for the full year in 'twenty, one we expect expenses to be about $54 million to $58 million each quarter on slightly higher range noted on our last call is we'll see some higher expenses as a result on higher sales.
Consolidated operating income before restructuring and integration expenses and other income net in Q1, 2021 was $29 3 million or 10, 6% of net sales up four nine points from Q1 2020.
As we noted on our GAAP to non-GAAP reconciliation of operating income our performance resulted in first quarter 2021 diluted earnings per share of <unk> 97 versus <unk> 43 last year.
The increase in our operating profit for the quarter was mainly due to higher sales volumes higher gross margin percentage and slightly lower SG&A expenses.
Turning now to the balance sheet accounts receivable at the end of the quarter were $174 1 million up $21 9 million from March 2020, but down $23 9 million from December 2020.
The increase over March last year was due to the increase in sales during the quarter. While the decrease from December mainly reflects the timing of collections and management of our supply chain factoring arrangements.
Our inventory levels finished the quarter at $390 9 million up 20 million from March 2020, reflecting the need to carry higher balances to support higher sales levels as.
As compared to December 2020, our inventory was up $45 4 million, mainly due to our effort to restock their shelves to normal levels. As a reminder, our inventories were depleted during 2020 due to strong sales in the last half of the year and we expect it to build back our inventories in the quarter.
Looking at cash flows our cash flow statement reflects cash used in operations in the first quarter of $11 4 million as compared to cash used of $32 8 million last year to $21 4 million improvement was driven by an increase on our operating income as noted earlier and by changes in working capital.
The changes in working capital on the first quarter of 2021 were mainly again, a result of timing and where to be expected and sales returned to normal levels.
Inventory balances finished higher as we replenished our shelves the cash used for inventories was partly offset by an increase in accounts payable.
Additionally, we generated cash from accounts receivable again due to the timing of collections and management of our factoring programs, while we use cash for customer rebates that were earned and accrued last year.
Turning to investments, we used $5 million of cash for capital expenditures during the quarter, which was slightly more than the $4 4 million. We used last year. We also used $2 1 million to purchase the soot sensor business from Stoneridge that was discussed earlier.
Financing activities included $5 6 million of dividends paid and $11 1 million paid for repurchases of our common stock.
Financing activities also included $31 million of borrowings on our revolving credit facilities, which were used to fund operations investments and capital and returns to shareholders through dividends and share buybacks. We finished the quarter with total outstanding borrowings of $42 5 million in available capacity under our revolving credit facility of $206 million.
Thank you for your attention I will now turn the call over to the operator and open it up for questions.
Gentlemen, thank you, ladies and gentlemen, and then listening audience at this time, if you would like to ask a question. Please press the star on one on your Touchtone phone you may remove yourself from the queue at any time by pressing the pound key once again that is the star and wanted to ask a question. If you have previously press star and one during today's call.
Session. We invite you to press it once more to be certain that youre signal did reach our equipment. Once again that is star and one for a question. We will hear first from the line of Daniel <unk> Stephens, Inc.
Yes, Hey, good morning, guys, congrats on the quarter and a good start in the year.
Thank you very much Daniel.
Eric I wanted to follow up on how you guys are successfully offsetting this customer loss I guess first you noted in the release and you talked about on some of your existing customers.
I'll take that share and in the past you talked about how you've been able to help that talking technician. During the technician T thing can you just update us on how thats going what kind of reception, you're getting from technicians and maybe why brand loyalty does matter and it is helping you gain the share back.
Sure Danielle.
Great question.
And we've always had programs with our customers to go arm in arm two to those installers to try to build that loyalty back upstream through our brands.
This year, we double down on some of those initiatives are not going to go into the specific tactics that we've used but really to get programs to show that in market. There are multiple sources of supply and that our brands are still very much available within the market and to help them find them and to help them make that decision.
We don't have any exact data on market share gains or anything like that but anecdotally, we find that it seems to be working quite well the feedback we get from our channel partners is that they feel that it's been successful. So so we're pleased with the results, but again, it's very difficult to measure market share downstream, but.
Anecdotally, we feel very good about it.
That's really helpful. That's very helpful. And then on the inflationary topic. Nathan you mentioned, it's going to be a headwind to margins just on the cost side.
But how are conversations going with your customers I think typically you guys noted a pass through broad based cost pressures do you think that'll be the same this year or maybe you can pass that through on the topline and any way to help quantify kind of how youre thinking about that isn't moving through the year.
Well.
To summarize your question, you're asking about our ability to price for inflation and.
If I'm understanding what you're saying and this is Eric.
And look we're in a competitive space always have been.
But we do believe that we are in an inflationary period right now and not just for our product types, but just in general the market is.
Seeing commodity inflation cost inflation, whether it's wages materials freight transportation et cetera. So we work with our customers with the hopes of being able to.
Two to pass some of that through but also as Jim Burke mentioned, we also look to work on that inflation with our other cost reduction initiatives and combined we come out.
Hopefully okay.
Got it and then last one from me and I'll hop back in the queue just on a topical issue with the proposals coming on in Washington around Green Energy and public transportation you guys see opportunities to leverage your JV is over in China thinking specifically you guys have that EV bus joint venture over there. So curious if any opportunity to maybe lever.
That knowledge and bring that over.
Over here to the U S.
Yeah.
Well there are certainly opportunities right now are our joint ventures in China, and specifically the one you're referring to where we're doing electric vehicle compressors.
Our joint venture with a company called C y J.
The majority of what we're working on is to stay within the country for both pass car and heavy duty, but there are also absolutely opportunities are elsewhere.
Elsewhere in the Globe, we're still a very small company over there.
But we see that theres opportunities really in general is as you're referring to emphasis on green energy emphasis on infrastructure spending and so on that we think that we're well positioned to hopefully takes advantage of some of that.
Interesting question got it okay.
Thanks, So much guys best of luck.
Thank you Daniel.
Thank you and our next question today is going to come from Matt Brookmyre. Please go ahead. Your line is open.
Hey, Thanks, and good morning.
I was wondering if you could.
Talk to the large customer that was lost in.
In the quarter or are you able to put it.
Number to.
How much that impacted revenue in the first quarter and how we should think about it going forward through the rest of the year.
Sure Matt This is Eric.
Well as as previously announced this accounts and this was only on the engine management segment.
<unk> represented approximately $140 million on annualized revenue.
And.
As again previously stated we only saw a partial first quarter as they transition the business.
So it was.
Roughly a 50% reduction of what they typically would have bought in the period and it is gone essentially gone from here on out from the second quarter forward.
Okay. That's helpful. And then do you have any direct recourse.
With this customer.
You know Paul pulling this business from you and I know you talked about right youre going out youre being proactive youre getting new customers, but is there any recourse with this customer in terms of.
Getting something back.
For what they call.
I'm not exactly sure I understand what you're referring to is recourse this is still.
A customer of ours within our temperature control segment.
And they chose to make a decision we honor that decision and we move forward, but maybe if you clarify what you mean by recourse I can give a clearer answer.
No I mean I was just.
If there was investment around equipment to source products to this particular customer is there any way debt re queue.
A portion on that I see what you're saying I see what you're saying no. There was nothing dedicated to this accounts.
It was just additional volume for the same or similar products that we sell to others in the channel.
So there was no obsolescence associated with it or anything like that if that's what you're asking about that yes.
Okay. Thank you that does it from me. Thanks, Okay. Thank you.
Next we'll hear from the line of Scott stemmed Blair. Please go ahead.
Good morning, guys.
Congratulations on the other great results as well.
Scott Good morning.
Yes.
Can you talk about the cadence of sales in the quarter and also.
It doesn't sound like you guys hit nearly as bad as some of your competitors from a supply chain standpoint.
Do your customers do you believe have an adequate amount of inventory.
Sorry.
As we are on the early stages of Q2.
Sure well in terms of the cadence of sales through the quarter. It was it was pretty strong throughout and as we look at their P. O S.
For the most part.
Within really all three areas engine tamp and wire.
The first couple of months January February we're in the low double digits, and then March really accelerated and I think you're hearing some of that from their public comments as well whether it was related to the stimulus checks.
GAAP kicking in or whatever it is but we really saw an uptick in margin and that has has continued.
Inventory in the channel.
Engine management.
Is is basically normal yes. This is where we would expect it to be.
And has been pretty consistent over the last several months temperature control is an interesting story from what we have visibility of they are roughly at the same levels that they were.
I'm talking about quarter end, so end of March to end of March last year.
And as you know and as we stated last year their preseason orders were light. So you would've expected their inventory would be higher now, it's not which is further evidence that they're really talented through rather than stocking up.
And we also think that that bodes well.
I think that answers most of your question Scott I think you were asking some of that supply chain. If you want more on that true Jim can speak to it.
Yes, maybe Jim just give us an update there it sounds like it's not as bad as some competitors are talking about given your footprint.
Yeah.
Scott I think we may have benefited a little bit there with the.
The inventory levels that we may have had in place on safety stocks on.
Part of this goes back to our efforts from over a year ago were right before COVID-19.
COVID-19 hit from the spring product in before Chinese new year, So we had healthy inventory levels.
The teams have just done a phenomenal job working with our suppliers finding alternate vendors and we've had hiccups on we've had we've had some challenges, but we seem to have worked through many of them.
Got it and then just last question on temperature control.
You mentioned, Eric that debt I.
I guess.
Pull through at retail has been pretty strong.
Yes.
Obviously, the weather hasn't turned that warm yet so is there anything going on that you're aware of from a trend perspective throughout the country that would drive that.
It's a very interesting question, you're right. It's not that there have been heat waves or anything that's so how much of a potentially as pent up demand for cars getting back on the road I'm guessing that that is somewhat of an influence.
Uh huh.
And so it's positive, but it's hard to put your finger on on what's driving it it could well be a combination of that pent up demand and people having.
Some excess savings from the past year that Theyre now investing back in their vehicles and you're seeing that in a lot of categories and perhaps air conditioning is benefiting from that as well.
Got it that's all I have thank you guys.
Thank you Sir.
Once again, please press star one to ask a question.
And next from Bret Jordan.
Hey, good morning, guys.
Good morning, Brett.
On the.
I guess on the heavy duty side, you were talking about in the prepared remarks.
When you think about that business is it.
Is the visibility attached to the OE side greater than what you might see in the aftermarket and how do you think about the growth rate in that segment going forward now that you sort of seem to be broadening your exposure.
Well, it's a very interesting question.
In terms of more visibility, yes, because as opposed to just receiving replenishment orders and shipping and we're able to work with longer.
Horizons with them in the end it is.
Encouraging what we're seeing I think that those.
What sectors are also roughly in the long run that similar low to mid single digit growth, but right now they are seeing a very nice comeback.
And a lot of these categories that I'm, referring to Brett are really very much related to some of the other.
Growth areas that we're seeing in our economy right now whether it's construction getting back in some of the other areas that we're now selling parts into so we're encouraged by it but what were I think in many ways more encouraged by is the receptiveness that we're getting from these accounts as they are really learning, who we are and seeing the breadth of our capabilities in.
The breadth of our product offering so for example, we acquire.
A company like Pollock, and these accounts only know what that narrow.
Portfolio is that they had previous visibility to now we're able to show them Hey, We're also in the air conditioning business were also in a lot of these other electronic components and it starts to open doors. So nothing happens that quickly as you know.
You go through the negotiations validation and so on but we're very encouraged by the by.
What we're seeing in this space and the Receptiveness from the accounts.
Okay, Great and then I guess on the inflation side do you have a feeling I guess sort of back of the envelope, where do you think the inflation rate might be this year, when you sort of compound the materials and labor and freight and everything what you might see sort of on from a percentage increase in your catalog.
Okay.
Hi, Brett this is Nathan.
I think.
Maybe what Jim alluded to earlier, we're seeing some of the same impacts that other companies in the market are seeing and so when you see headlines out there inflation in the low single digit range.
And that's again the headlines 1%, 3% I think we're seeing the same thing in that area. So.
Not any different than what you hear about already.
Okay, great. Thank you.
Great.
And gentlemen, there are no further questions in the queue. At this time I am pleased to turn the session on back to Mr. Larry Sills for any additional or closing remarks.
No closing remarks.
But we thank you all for attending the call. Thank you very much.
Thank you everybody.
All right.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
Yes.
Yes.
Yeah.
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