Q2 2019 Earnings Call
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Our second quarter and year to date gross margins benefited from favorable pork production levels, yielding favorable absorption variances, we are planning a lower production levels in the second half 2019, which we believe will bring our full year margins back within our forecasts of the 25% to 26% range.
Consolidated ESG M&A expenses in Q2 were $60.5 million up 2.8 million over Q2, 18 at 19.8% of sales versus 20.1% last year.
For the first half ESG M&A spend was $120.5 million up $5.1 million at 20.5% of net sales versus 21.1% last year.
The SGN a expense leverage was achieved with our incremental sales volumes and also savings achieved in our temperature control district distribution center compared to 2018 incremental costs incurred during the automation installation.
Consolidated operating income before restructuring and integration expenses and other income net in Q2 19 was 9.3% of net sales up 1.1 points over 2018.
And year to date was 7.9% of net sales up 0.9 points over the first half 18.
The net effect of our operational performance as reflected on our non-GAAP reconciliation was Q2 19 diluted EPS of 92 cents versus 74 cents last year and for the six months diluted EPS of $1.49 versus $1.20 in the first half of 2018.
Looking at the balance sheet, a our increased 21.9 million since December 18, due to seasonality and was up $5.5 million versus June 2018 levels, both increases reflect our higher sales levels.
Inventories increased 25.4 million over December 18, and increased $43.8 million over June 18.
We have planned inventory reduction efforts over the second half 2019, which will reduce our inventory and debt levels.
Funding for the seasonal working capital increases was through our bank revolver.
Total debt at June 30 was $135.2 million, reflecting an increase of 86 million against December 18.
Almost $40 million of this increase was to fund our Pollick acquisition on April Onest 2019.
Our cash flow statement reflects.
A $19.5 million use of cash in the first half 2019 versus 4.2 million cash generated from operations in 18.
Changes in working capital accounted for the differences and these increases are expected to lessen over the second half 2019.
Investing activities reflect spending for our Pollick acquisition of $38.4 million in 2019 compared to our China joint venture funding of $8.6 million in 2018.
Also included in the 2019 was cash receipts of 4.8 million from the sale of our Grapevine, Texas facility in December 18, with cash proceeds received in early 2019.
Financing activities included dividend payments of $10.3 million and share repurchases of $10.7 million.
In the second quarter, we completed our 20 million authorized share repurchase program.
In summary, we are very pleased with our Q2 and first half results, reflecting higher sales volumes higher gross and operating margins and more specifically significant improvements from our wire manufacturing operations and our temp control distribution automation efforts I want to thank all our employees for the sick significant operational improvements of 2019. Thank you for your attention and I will turn the call over to Eric.
Thank you Jim and good morning, everybody again went through the numbers I'll only add some color on a few pieces and then provide an update on our latest acquisition.
Overall as you heard we are very pleased with the quarter, both divisions performed quite well posting strong sales and profits and this reflects recovery from some of our recent short term challenges previously discussed and positive momentum from our various initiatives.
I'll review each divisions separately, starting with engine management.
Overall, our divisional sales remained strong for the quarter.
Our wire and cable business continues to track downloads, reflecting the ongoing decline of the product category. However, excluding liner the rest of the engine management business was up almost 12% in the quarter a gain of almost $20 million.
There are a few components here.
First and largest is the contribution from our recent acquisition of the pod business.
This deal closed on April 1st So we had and for the entire quarter.
Contribute a bit more than half of the entire goal.
I'll speak more about the acquisition a bit later in my remarks, but we are quite pleased so far.
Excluding Pollock, our non wire engine management business was up a bit over 5% for the quarter.
This strong performance is a combination of a few elements.
First we enjoyed strong demand within our OE business.
That said this segment can be somewhat volatile and while the first half has been favorable we expect a slight softening for the second half.
Secondly, as previously stated we are have been passing through tariffs and have also achieved some nominal price increases beyond that ongoing aftermarket demand is keeping pace with our expected low single digit growth.
Our customer sell through in the quarter was also up in the low single digits tracking with their purchases.
Engine management gross margins also continued to improve nicely showing positive sequential performance.
Much of this performance much of this improvement is due to finally, achieving his store productivity and our wire plant in Mexico.
To remind you we spent the last several quarters integrating the acquired general cable production doubling the plant and incurring fairly substantial temporary costs.
The plant is now fully stabilized and doing quite well and we are delighted at what they have accomplished.
We also saw the benefits of certain pricing actions, although from a gross margin percent standpoint. This was largely offset by passing through the task at our costs.
Moving to temperature control. This is always a somewhat complicated sale story to tell due to ordering dynamics.
Sales were up 5% from last year. However, it's important to split the quarter into two pieces.
April and May are really still pre season as customers prepare their shelves for summer.
As discussed in the first quarter call pre season activity far surpassed last year in that country and that trend continued into the second quarter.
June marks the beginning of the summer season.
If you recall last year the summer heat began early on demand was very strong in June .
However, due to the strong demand coupled with our early struggles with new warehouse automation. We ended last June with an order backlog, which transports and sales into July .
Although this June was substantially cooler and incoming demand was lower we ended the quarter fully current on shipping our orders. So while this makes for a good quarter. We are cautious in how we are viewing the third quarter, which really defines our temp control here on we are going against very strong comps.
Customer sell through in the quarter was down mid single digits.
That said it has now gotten hot around the country and their early indications are positive Pos trends in July .
Notably within SSG, and we saw a nice improvement in distribution expense as previously mentioned last year. We are operating our distribution center very inefficiently as we implemented new systems and that is now behind us.
This should prove to be a continuing trend throughout the season as we incurred high distribution costs throughout the entirety of 2018.
Lastly, I'd like to give an update on our recent acquisition of the pilot business from Stoneridge.
To remind you of what it is this is our 40 million plus business selling various switches sensors and connectors largely for commercial vehicle applications.
About 75% of it is for OTI.
The remaining 25% is aftermarket sold into the heavy duty aftermarket channel as opposed to through our typical distributors.
The products are currently manufactured to stoneridge plants, the majority in canton, Massachusetts, and the balance in Juarez Mexico.
We acquired all of the production equipment, but did not acquire the plants or any of the employees. Therefore, stoneridges manufacturing the products for us as we gear up to relocate the production to existing SNP plans.
The majority will go to our engine management plant in Mexico.
As you can imagine once we relocated from Massachusetts, we will be able to enjoy significant cost savings.
The relocation will take the balance of the year. So we expect to realize full synergy sometime in 2020.
But we believe that the more important benefit will be in the ability to grow the business by taking advantage of the full resources of S&P as well as our breadth of products to expand the offering.
So while the business is still quite new and we have a great deal to do we are very excited about the potential.
When you add it all together, we're quite pleased with the quarter.
Sales are up for both divisions and after a cool spring things are starting to get hot across the country.
We've recovered from all of our short term cost challenges, although they were painful while they were occurring there were all designed to make us a better company.
We integrated acquisitions shifted production to low cost plants and invested in process improvements and now that they're done we can reap the rewards.
We have an excellent new business with pilot, allowing us to diversify our portfolio and adjacent spaces with clear synergies and so we feel very good about our future as we continue to celebrate our 100th year.
That concludes my prepared remarks with that I will turn it back over to the moderator and we will open it up for questions.
Thank you at this time, if you would like to ask a question over the phone. Please press. The Star then one key on your Touchtone phone.
So your question at any time by passing the pound key and once again Thats Star then one for question.
Well take our first question from Bret Jordan with Jefferies. Please go ahead. Your line is now open.
This is mark Jordan on for Brett Good morning.
Good morning, Mark.
So thinking about the engine management sales increase ex the Pollack acquisition and the wire and cable is up.
5%.
Low single digit organic so thinking about how much of that was from.
Pricing and how much of it was from are we.
Oh, we don't get into the specifics of the different segments within it but if you look at the general growth.
As mentioned, we did have a little bit from pricing and tariffs and so.
It's a balance between organic unit volume growth and some of the benefits of pricing in tax.
Okay great.
And looks like right now as a facility is now up and running pretty efficiently.
Should we expect to see gross margin benefits going forward in the segment and then how should we think about the pollick volumes transitioning down there should we should maintain the same productivity.
Okay, Yes, hi, Mark and as Jim Burke, and just to be clear on Reynosa, we basically have three facilities sound. They are separated between the different plants. So this is separate from the wire plant, which now we feel is humming along at a historic productivity levels is going into our other engine management facility. That's there.
And from a margin standpoint of we are anticipating a healthy margin improvements from the public acquisition as we transfer the bulk of this from.
Can't and bass now to our Reynosa facility, a smaller portion of it to our independence, Kansas location and part of it is moving from.
One of Stoneridges locations in Mexico, Juarez over to Renaud so were anticipating.
Very nice.
Margin improvements from this business when we put pollack altogether, we believe the operating margins will be very strong matching or exceeding our engine management margins.
Great. Thanks, Jim.
And then just one quick question for the engine management gross margin what is it that were expecting this year I think I missed to any mentioned earlier.
Well, we have targeted for the full year to be in the 29% to 30% range as were looking for our longer term guidance and state that the then for next year, we'll be looking to get back into the 30% and hopefully.
Look for continued in house manufacturing, a low cost sourcing to stay above 30% and grow it.
All right great. Thank you very much guys.
Thank you Mark.
Thank you and as a reminder to audience Thats Star one to ask a question today will pass gentlemen, well now questions to queue.
And well take our next question from Robert Smith. Please go ahead.
Yes, good morning, a warning that Smith.
Hi.
Looking looking ahead long longer terms, you could see a OEM.
Contributing a greater share of.
Your total mixes the amount.
Accounts for.
Are you asking if if if that's a growing trend. If you are Robert yes, a job well Paul that being largely Oh, we that does move a move the needle a bit prior to that it was tracking at about 12%. So now maybe it brings it up to about 14% of our overall of our overall business I think it is and as it does grow I think it's worth perhaps to finding it a little bit more clearly than perhaps we have in the past much of our OE business. It's not your typical selling to the car manufacturers light vehicle markets a lot of what we're doing is more a niche areas commercial vehicle heavy duty industrial.
Farm agricultural et cetera, so it's not it's a slightly different business than what most people think of when they think of a weaver lifecycles tend to be a bit longer and technology changes don't don't occur quite as rapidly. So we are seeing this as a nice area for growth for us.
The pilot piece fits very nicely within that strategy and we do hope to continue to grow it.
Great looking for further opportunities to acquire.
Well, both through acquisition as well as organic growth or our as I mentioned in my prepared remarks. It out when we we acquired policy intent was not to milk at the intent was to grow it and so we'll put resources behind that.
It brought some very blue chip accounts with it.
Some of which we had already doing been doing business with others were newer to us, we'll be adding technical resources, and ER and expect to be able to capitalize on it.
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And this isn't a oh through sort of a longer term in nature.
Your thoughts about the.
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Beyond the man card services that are seem to be a anymore.
Visibility and popularity as far as the population of cars themselves go.
Oh on demand, you're referring to rideshare services, it will get a lift here, hoping things like that.
The car yet.
It is growing it still represents a very small percentage of total miles driven are largely because it's mostly a an urban phenomenon at this point a there's a <unk>.
Yeah, there's a lot of speculation of what it will do to vehicle Parc versus total miles driven you will need potentially fewer of them, but they're going to get work too much harder sodas that to those cancel each other out in terms of replacement parts demand of that some of the speculation we see this as just another one of the very long term slow moving evolutionary trends that the whole industry is watching to see how it's going to play out.
We don't anticipate it as as a negative really or a positive for us.
It's certainly not in the near term.
Yeah, and or can you comment on any of the trends that you see in your particular.
Industry that might not be better parentage.
Uh huh.
Again, just to reiterate what I, what I, just said nothing happens, particularly quickly in the aftermarket which is Uh huh.
Yes, we're not going to have a dramatic ops, but it also means we're not going to have any dramatic downs, it's very stable and predictable and slow moving so yeah. There's always.
These ongoing evolutionary trends of automotive technology, some of which prevents presents challenges others present opportunities more parts are to be sold more different types of.
Emissions controls and safety related devices and ER.
Systems cooling products so.
Well some of it is.
Creating us to develop some new muscles.
Theres as much upside to it as there is downside. So it's just the ongoing trends that you see everybody talking about whether it's technology trends customer purchasing behavior trends and we roll with it as we have for the last 200 years.
Mm to impose we were then thanks.
Okay. So I guess on where the for the summer and bring on the heat <unk>. Thanks.
I couldn't agree more.
Thank you and wellness next to Kyle Kavanaugh Palisade capital. Please go ahead.
Hi, good morning, gentlemen.
I had a good morning.
I had a question on the temperature control side, because you give a little bit more color. So some of your assumptions like if you know if the weather stays where it is you remain cautious or you need good weather to get hotter for to kind of comp differently and I don't know if you can put any numbers on different scenarios like trends are what they are right now or you would expect on the third quarter and maybe implications on margins as well.
And I think it was in the past you've talked about the long term goals on margins and does that remain the same.
Hey.
This is Jim Burke speaking.
Good morning.
Maybe first on the on the sales really at this point or many of the on the Pos which if it stays hot should stay strong, but they'll be eating out of the distributors' inventories hopefully it last longer and we get the replacement orders that are in there, but I still we still stand behind that the Q3 18 was a very large quarter that were going up against so we remain cautious on that regarding margins or we have had the benefit of a inventory growth. That's there. So your productivity in your absorption you get benefits on that.
We depended upon a we're cautious now so will curtail inventory a little bit that can change depending on the orders, but if it's as we predict production levels will be lower.
That means our unit costs will be slightly higher the bulk of that will probably be felt in Q4 and a little bit as similar patterns in the past into Q1 of next year, because what's going to hit the cost of sales for Q3 of next quarter as what we've been building. So far so we think temperature control gets back to 20, 526% versus the high 26.7, I think in Q2.
And then into 2019, we're very pleased with our operations on a on a balanced basis, we think that we exceed the 26% and grow the margins in temperature control.
Hopefully does that answer your all your questions.
Yes that was very helpful. Thank you.
Very good.
Thank you and again that's star then one to ask a question or comment on that.
Any further questions to queue.
And we have no further questions over the phone at this time I'll return the floor back to our speakers.
Okay folks said.
Concludes our second quarter.
Conference call. Thank you all for attending.
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