Q3 2021 Standard Motor Products Inc Earnings Call
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Good day and welcome to the standard motor products third quarter earnings call. At this time all participants are in a listen only mode. Later, you will have the opportunity to ask questions. During the question and answer session.
You May register to ask a question at any time by pressing star one on your Touchtone phone. Please note today's call is being recorded its now my pleasure to turn the conference over to Larry Sills. Please go ahead.
Good morning, everyone.
And welcome to standard motor products third quarter call.
I am Larry Sills, chairman of the board.
With me are Eric Sills, President and CEO, Jim Burke, Chief operating officer and Nate.
And I was chief financial Officer.
What we plan to do this morning.
As Eric will review the highlights of the quarter and year to date.
Jim will go over some of our operations and Nathan will go deeper into the financial results.
And then we will open for question and answer.
So let's go.
And just to get US started alternatives to Nathan for the forward looking statements.
Okay. Thank you Larry.
Before we begin this morning, I'd like to remind you that the material that will be discussing today may include forward looking statements regarding our business and expected financial results. When we use words like anticipate believe estimate or expect these are generally forward looking statements. Although we believe 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. You should also read our filings with the Securities and Exchange Commission for a discussion of the risks and uncertainties that could cause our actual results to differ from our forward looking statements I'll now turn the call over to Eric.
Thank you Nathan and good morning, everyone and welcome to our third quarter call. Overall, we're very pleased with our performance in the quarter, we set a record for sales even when compared to a surging third quarter last year, we were able to consummate an acquisition in Europe was terrific strategic value and we were able to accomplish this while continuing to navigate the complexities of the auto.
<unk> pandemic, including the related supply chain challenges.
We achieved sales of over $370 million in the quarter up nearly 8% from the prior year with both divisions, having all time highs.
This marks five consecutive record sales quarters with year to date sales up now at 17% over 2020.
As noted in our press release, our gross margin saw some compression in the quarter, most notably in engine management and there were two drivers for this first as with many companies we have been experiencing inflationary headwinds across a host of our costs, including raw materials labor and transportation.
We will be passing these along through price increases starting in the fourth quarter and will therefore see recovery going forward, Jim and Nathan will provide some more color on this later on the call.
The other element is an ongoing strategic channel shift as I will discuss in greater detail in a few minutes, we have been dramatically growing our specialized OE business.
This business represents 25% of our engine management sales in the quarter as compared to 14% of it last year.
This OE channel has a different cost structure from our aftermarket business. While it has lower gross margin. This is entirely offset by lower SG&A as there are substantially lesser costs associated with distribution sales and marketing and therefore, it is comparable operating margins.
All in we were able to post strong profits in the quarter comparisons to the third quarter of 2020 are difficult as last year, we experienced multiple onetime benefits due to the pandemic, but this years quarterly earnings of $1 30 to surpass a more normalized 2019 by 30% and in the nine months basis.
We're up over both 2019 and 2020 by 40%.
Overall, we believe that our strong performance reflects ongoing successful execution of our strategic initiatives both in our core aftermarket as well as in our diversified business channels and I can't say often enough that we could not have done this without the tireless efforts of our skilled and dedicated employees who have risen to every challenge they have faced.
And let me now go into a review of our two product segments, beginning with temperature control.
As this division is mostly air conditioning products not only is it highly seasonal meaning that the majority of the sales happened in the summer months. It is also weather dependent meaning that there can be fluctuations year to year, depending on how hot the summer is.
This year, we experienced both a very long and very hot season.
The demand began early in the second quarter and continued unabated for the next many months, we finished the quarter up nearly 8% over a very robust third quarter last year, but more importantly, we were up 23% on the year.
Yes.
So let me now speak about engine management, our topline sales in the quarter remained quite strong up nearly 8% versus a strong 2020 and up 14% over 2019 as noted in the release there were several contributors.
Our aftermarket business has been very healthy we continue to enjoy the ongoing elevated demand that the whole industry is experiencing but it is our understanding based on certain industry data that we are outperforming in some key categories and we believe that there are two contributing reasons.
First as we've discussed we have implemented programs with all of our customers to pursue market share gains at the street level and indications are that these have been successful in <unk>.
Second we believe that while our service levels are not where we like them to be as we too have been hit with supply chain disruption. We believe that our in stocks are better than many other suppliers, which of course can lead to increased sell through.
Furthermore, as we've been reporting we've been quite successful, earning new business with existing aftermarket customers. We have demonstrated our ability to be a strong supplier partner, who has performed well in this challenging environment and we have been rewarded for it.
Sales of this new business have been phasing in throughout the year with more of this past quarter.
Yeah.
Beyond our strong aftermarket our specialized original equipment channel has also contributed to our growth both with rebounding legacy business as well as the addition of recent acquisitions.
By specialized OE I mean that while we do have a certain amount of passenger car business. Our efforts have been much more in niche areas, such as medium and heavy duty vehicles construction and agricultural equipment lawn and garden power sports and others.
We find these markets to be very attractive product life cycles tend to be longer technology more stable.
Competition, less fierce and price pressures tend to be less as well.
While we have grown this business through organic product development, the bigger push has been through M&A.
This year, we have made three acquisitions in this arena, including one during the third quarter.
In September we acquired to Bill a European manufacturer of Oh electronics sensors in clamping devices doing approximately $25 million in annual yes.
We welcomed a 200 plus employees to the S&P family.
The company is headquartered on the outskirts of Stuttgart, Germany considered the epicenter of the German auto industry and their manufacturing facilities in Hungary, taking advantage of the great combination of high skills and low cost that the area has to offer.
Their strong R&D capabilities, along with our long standing relationship with Blue chip customers make for a powerful combination with our existing location in Poland, where we employ over 700 people.
The three acquisitions this year combined for annual sales of around 100 million and when added to our legacy business. In these niche channels. We are now at a run rate of nearly $300 million.
And while each of the pieces as attractive individually, what's really exciting to us is the power of the combination.
Each as a stand alone represented a limited product offering a narrow customer base and specific geography.
As we put the pieces together, we are already seeing opportunities to cross sell taking advantage of expanded manufacturing footprints and engineering capabilities.
Our geographic reach has expanded significantly in recent years, we have added four joint ventures in China to sell into the region and now have a broad European presence.
Importantly, a significant portion of the product is not reliant on combustion engine powertrain as.
Many are not powertrain specifics such as the power management products of the Trump better acquisition, where the air conditioning products from our Chinese JV is while others are specifically geared towards alternative energy vehicles, such as battery cooling products for electric buses and trucks HVAC compressors for electric vehicles, and our compressed natural gas injectors for heavy duty truck.
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As I look at this new business channel I truly believe that the sky's the limit and I am very excited to see where we can take it.
At this point I'll hand, it over to Jim to review our operations.
Okay. Thank you Eric.
To provide a brief update on our supply chain challenges and the associated and flush inflationary pressures first on our supply chain S&P similar to other manufacturers and distributors has been challenged procuring our basic raw material and commodity needs such as semiconductor chips plastic resin silicon.
<unk> and metal based commodities. Many of these components have been place on allocation with lead times in some cases, expanding 365 days or longer.
This results in a substantial strain on our efforts to schedule and manage the production cycle.
However, through the benefit of our North American footprint and Poland manufacturing operations. We believe we are better able to manage these challenges than our suppliers, who elect to source. The vast majority of their products from China being a low cost basic manufacturer would operations in Mexico. The U S.
In Poland, we are in a far better position to control our own destiny than sourcing finished goods from China for resale.
Transportation logistics from Asia have caused significant delivery delays the impact of container shortages vessel availability congested ports on each and all of which causing havoc within the supply chain. While S&P is not immune to these delays through a combination.
Of our higher North American in Poland manufacturing footprint, and our willingness to invest in inventory. We are better served to meet our customer demand spikes, our supply chain manufacturing and distribution operating teams have been creative finding alternate vendors alternative materials and alternate ports.
Entry to improve our competitive position.
Our customers have acknowledged these efforts, stating S&P as one of their top tier suppliers.
In addition, we believe this has been a real differentiator assisting S&P with new business wins in 2021.
One last point on the supply chain has been a shortage of skilled and unskilled labor, our HR and operating teams develop flexible and creative incentives to add additional heads and to minimize turnover. We also thank our team members, who volunteered to travel to different locations to meet varying demand spikes.
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Next on the inflationary front inflation is real and it's anyone's guess, if its peaked or transitory we have experienced increases across the board from semiconductor chips to commodities with the most volatile increases from international shipping costs.
International container costs have increased eightfold from $3000 pre <unk> pre pandemic rates to heights of 25000 per container.
After highlighting the supply chain challenges and inflationary pressures. The obvious question is what are we doing to mitigate these issues.
First let me reiterate again, how fortunate we are to have our north American and Poland manufacturing footprint, which helps alleviate some of these pressures. In addition, we are very proud of our restaurant team members, who have successfully implemented new and alternative creative ideas. However, despite these heroes.
The efforts, we have been burdened with higher costs. So we have implemented price increases taken effect in early Q4 to offset cost pressures and improve gross margins.
In closing these have been challenging times 2021 has been a remarkable year with lost customer volume to start the year, followed by supply chain challenges that Ironically, we believe gave us a competitive advantage leading to new business wins, all the while completing three <unk>.
T J acquisitions in 2021.
Our overall success is a direct reflection of our dedicated team members driven to meet our customer needs. Thank you for your attention I will now turn the call over to Nathan for his financial summary.
Alright, Thank you Jim.
The numbers through the operating results for the third quarter and first nine months and also cover some key balance sheet and cash flow metrics looking first at the P&L consolidated net sales in Q3 2021 were $370 3 million up seven 8% versus Q3 last year and for the first nine months were $988 9 million.
Of 16, 9% versus last year.
Looking at it by segment engine management net sales in Q3 were $247 2 million up $17 6 million versus the same quarter last year for the first nine months were up $88 6 million.
While these are significant increases the comparisons are made against the highly volatile year in 2020, and so it's better to compare our results to 2019.
On this two year stack comparison engine net sales were up 14, 4% for the quarter and up 7% for the first nine months with the increases being a result of successful customer initiatives, new business wins and generate robust market demand.
Further acquisitions made this year contributed sales of $20 5 million in the quarter and $30 million for the first nine months.
Temperature control net sales in Q3, 2021 were $119 1 million up seven 9% versus the third quarter last year.
And were up 23% for the first nine months.
And like we said for engine, it's better to compare 2021 results to 2019 and on that basis temp control sales were up 34, 9% for the quarter and 19, 2% for the first nine months with the increases mainly reflecting a very long and hot summer selling season as noted before.
Turning to gross margins our consolidated gross margin in Q3, 2021 was down three points to 28, 4% versus last year, but for the first nine months remained 0.4 points higher than last year at 29, 1%.
Looking at the segments third quarter gross margin for engine management was 27, 1% down 4.4 points from Q3 last year.
And while there are certainly many moving pieces the decline in margin during the quarter reflected three things primarily.
One normal production volume and therefore, lower absorption versus Q3 last year when sales of production both surged the impact of cost inflation across a variety of inputs and a change in sales mix between the aftermarket and specialized OE channels.
For the first nine months engine management gross margin was relatively flat at 1.2 points to 28, 8% as lower margins in the quarter offset the higher performance from the first half of the year, which benefited from a rebuild of our inventories.
Gross margin for temperature control in the quarter. It was 28, 4% a decrease of <unk> eight points from 29, 2% last year, but for the first nine months was up 1.2 points to 27, 2%.
The decrease in margin during the quarter was driven mainly by inflation in our costs, partly offset by strong sales in production, while the improved performance for the year. So far reflects the impact of strong summer season sales volumes.
Looking ahead, the gross margin expectations for the rest of the year and engine management, we continue to see strong sales volume and expect to see a benefit from higher pricing as we pass higher costs onto our customers as such we expect our fourth quarter margin for engine to recover from the Q3 level and be in the range of 28% to 29%, which also means we expect our full year 2020.
One margin for engine to be in the same 28% to 29% range.
For attempt controls segment, we expect gross margin to remain consistent with our year to date performance, so far and finish at approximately 27% for the full year.
Moving now to SG&A expenses, our consolidated SG&A expenses in Q3 increased by $7 million ending at 18% of sales versus 17, 3% in Q3 last year and included $3 million of expenses from acquired businesses for.
For the first nine months SG&A spending was up $19 6 million, including $4 $1 million of expenses from acquired businesses and as a percentage of sales ended lower at 18, 5% of net sales versus 19, 4% last year.
The increases in expenses for both the quarter and first nine months resulted mainly from higher selling and distribution costs due to both higher sales levels and inflation in our costs as a percentage of sales SG&A increased in the quarter as certain discretionary spending cuts implemented during the pandemic were removed this year and inflation had distribution costs, but the percentage declined in the first.
Nine months, which reflects improved leverage on higher sales volumes helped by our specialized OE business acquisitions, which come with lower overall operating costs.
Our consolidated operating income before restructuring integration and acquisition expenses and other income net in Q3 2021 was down three four points to 10, 7% of net sales versus Q3 last year, but for the first nine months was 10, 8% of net sales up one five points from last year.
As we noted on our GAAP to non-GAAP reconciliation of operating income our performance resulted in third quarter 2021 diluted earnings per share of $1 32 versus $1 59 since last year and.
And for the first nine months diluted earnings per share of $3 54 versus $2 53 last year.
The decrease in our operating profit and earnings per share for the quarter was mainly due to lower gross margin percent and lower SG&A expense leverage, but as we noted before Q3 'twenty 2020 margins were abnormally high sales and production surge, where lockdown kept lockdowns kept expenses low.
And will profit as a percentage of sales and earnings per share declined in the quarter. They remained better than more normalized third quarter of 2019, which was not impacted by cost inflation.
As for the first nine months the increase in our operating profit and earnings per share was mainly due to higher sales volumes higher gross margin percent and improved SG&A expense leverage.
Turning now to the balance sheet accounts receivable of $224 4 million at the end of the quarter were down $13 6 million from September 2020, and up $26 4 million from December 2020.
With the decrease in the quarter, mainly a result of timing of sales in the quarter versus last year and the increase over a year and a result of higher sales.
Inventory levels finished the quarter at $414 7 million up $102 7 million from September last year, and up $69 2 million from December last year with the increase as a result of both higher sales levels. This year and the rebuild of our inventory position. After the sales surge we experienced in the last half of last year.
Looking at cash flows our cash flow statement reflects cash generated from operations in the first nine months of 2021 of $79 1 million as compared to $78 6 million last year and while cash generator was flat the working capital movements were different from last year.
And regarding working capital accounts cash used there was $44 million for the first nine months, both this year and last year, while we use more cash for inventory. This year as we replenished our shelves. This was offset by higher accounts payable balances as well as less cash used in funding accounts receivable due to the timing of collections and management of our supply chain factoring programs.
Looking at investments, we used $19 4 million of cash for capital expenditures during the first nine months up from $13 2 million last year as we continually find investment opportunities to expand our capabilities and become more efficient in our processes. We also used $124 7 million to fund our acquisitions of the aforementioned from bad us to Bill and soot sensor.
Businesses.
Our financing activities included $16 7 million of dividends paid and another $26 5 million paid for repurchases of our common stock.
Financing activities also included $121 9 million of borrowings on our revolving credit facilities, which were used mainly to fund our acquisitions, but also for investments in capital and returns to shareholders through dividends and share buybacks.
While borrowings were higher this year, we finished the quarter with total debt of less than one times EBITDA and had more than sufficient remaining available capacity under our revolving credit facility of $119 million, even after making record levels of investments and shareholder returns.
In summary, we were very pleased with our operating results. So far this year. These results led to strong cash flow generation. We're supported three great acquisitions significant continued returns to shareholders and helped us finish the third quarter with low levels of debt substantial amount of liquidity.
Additionally, and as announced this morning, our results for the year, so far let our board to approve a new $30 million stock repurchase program.
And last but most important we thank all of our dedicated employees for their continued effort in helping the company achieved these results.
Thank you all for your attention I will now turn the call back to Eric to wrap up.
Nathan and before opening it up for questions. Let me just close by again, stating that we are delighted with our quarter and the year to date and our.
Very proud of how our people performed.
Our financial performance has been strong both in sales and profits we've been active in M&A with three complementary deals this year and have done so while navigating the complexities of the ongoing pandemic, keeping our people safe and managing through supply chain challenges and I, absolutely feel we are a stronger organization for it.
Pleased with the overall state of the industry and of our standing within it and we are very excited about the future.
With that I will turn it over to the moderator and we'll open it up for questions.
And at this time, if you'd like to ask a question. Please press star one on your Touchtone phone star and one on your Touchtone phone.
We'll take our first question from Daniel Umbro with Stephens, Inc. Please go ahead.
Hey, guys. This is Joe <unk> on for Daniel Thanks for taking my question.
Okay.
Good morning, good morning.
So you you touched on today that you're going to start passing through costs in the fourth quarter.
We were just wondering how have your customers responded to your plan to raise prices and then are you seeing any evidence of any customer traffic slowing because of these price is going up.
Well, thank you for the questions and so let me answer the two pieces.
First in terms of.
Customer acceptance and responsiveness I think what we're seeing and I'm sure you're hearing this from all other suppliers and the animal distributors is right now everybody is experiencing the same inflationary pressures and and the sentiment is that as long as all boats rise it makes sense too.
Should be able to accommodate the cost increases so.
It is.
It's always competitive, but we believe that it's been well received.
As it relates to potential impact on demand I guess is what you're asking the vast majority of our products are non discretionary items. Your vehicle is down and you need the part so.
In that regards it's not entirely price sensitive if you need that ignition coil youre going to buy that ignition coils. So we don't expect any.
Suppression of demand as a result.
Thank you that's super helpful. As a follow up I was going to ask the balance sheet is in good shape today how.
How much leverage would you be willing to take on to fund acquisitions, if the right deal became available.
Yes.
Joe It's Nathan so our balance sheet is very strong as you say I would say overall, our capital allocation strategy remains the same.
We're disciplined in our M&A outlook and so we'll focus on the things that makes sense for us.
But we won't take on any more leverage.
And what makes sense for the company as a whole so.
Got it thank you so much.
Once again star and one for our questions today.
We'll go next to Scott <unk> with C. L. King. Please go ahead your line is open.
Good morning, guys and congrats on the strong results.
Hi, Good morning, Scott.
Just a question on I.
I guess your inventory situation on the engine management business, you've talked about how you.
Yes.
Hi, guys.
Outperform all other guys because of your manufacturing footprint, and where you're sourcing your products on but.
Could you just talk about.
You know how has been your inventories are and potential.
How much sales are being left on the table just because of what's going on.
Yeah, Hi, Scott Jim Burke.
Yeah, Eric pointed out earlier.
Our fill rates were not satisfies where they are we're doing we believe we are doing better we hear from the customers that are there and thats a direct.
The reflection of the investment that we've had in inventory and dealing with vendors and.
The difficulties in supply and product.
I would not quantify a significant amount of loss sales because of it yes. There are some but I wouldn't call. It significant that's in there because our fill rates.
As I said are not to where we want them to be but still very strong.
I would say we have inventory as part.
Working capital has been a significant increase this year. We ended last year at a low point, we and the investment that we've made so far has benefited us but I would say we are we're managing through that investment level now and I would not anticipate replicating any further increases there. Thank you.
Yes.
Got it and then on the engine management, some structural changes for the gross margin.
Assuming price increases go through as you want them what is the longer term basically the longer term gross margin expectations I think in the past, it's been 29% to 30%.
If I'm not mistaken.
That change it sounds like it just structurally well.
Yes, Scott this is Nathan and just to maybe reiterate what I said in my remarks, we think our margins for engine will recover to the 28% to 29% range in the fourth quarter. After some of the pricing comes through we would expect to sort of stick at that level going into 2022, but certainly have our eyes on the many moving pieces as I said inflation.
Pricing being two of those so we'll just continue to monitor that as we go forward.
Okay.
And just lastly on the SG&A side.
$66 million in the quarter and you talked about some.
Reasons, why it was up and I know last year, we were an austerity measures but.
How should we look at SG&A.
Operating expenses in the fourth quarter and.
If that run rate would continue into next year.
Yeah got it so we expect to continue to have pretty good leverage.
I think for the full year as a percentage of net sales, we would expect our SG&A to be around the 19% level.
And then again, depending on where sales volumes go next year that would be the baseline for any further improvement.
Alright, Thats all I have at this time thank you.
Thanks Scott.
Once again, Thats star and one for any further questions today, we'll pause a few moments to allow any further questions to queue.
And we do have another follow up from Scott <unk> with C. L. King. Please go ahead.
I knew I forgot to ask a question.
Our temperature control.
Obviously, another very very strong year, how are we on inventory heading into the slower season and heading into the pre buying season early next year.
Scott I assume you're referring to customer inventory levels correct, yes, yes exactly.
Okay.
Well, what we've seen is that.
They were able to stay pretty healthy really throughout the season.
Sell in roughly matched the sell through and so they're coming out into the off season and pretty healthy stead.
Yes.
Okay.
Thanks.
Thank you.
Bigger it appears we have no further questions in queue I'll return the floor to you for any additional or closing remarks.
Okay. This concludes our <unk>.
Third quarter call and we thank you all for attending.
Thank you.
Alright.
This does conclude today's program. Thank you for your participation you may now disconnect.
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