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spk00: Good day, everyone, and welcome to the Standard Motor Products Second Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question and answer session, and you may register to ask a question at any time by pressing star 1 on your telephone keypad. You may withdraw yourself from the queue by pressing star 2. Please note that today's call will be recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Tony Cristello, Vice President of Investor Relations. Please go ahead.
spk01: Thanks, Savannah, and good morning, everyone. Thank you for joining us on Standard Motor Products' second quarter 2024 earnings conference call. With me today are Larry Sills, Chairman Emeritus, Eric Sills, Chairman and Chief Executive Officer, Jim Burke, Chief Operating Officer, and Nathan Isles, Chief Financial Officer. On our call today, Eric will give an overview of our performance in the quarter, and Nathan will then discuss our financial results. Eric will then provide some concluding remarks and open the call up for Q&A. 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. Although 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 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 Sills, our CEO.
spk02: Well, thank you, Tony, and good morning, everyone, and welcome to our second quarter earnings call. It's good to be with you today. I'd like to start, as I always do, by recognizing all the S&P employees around the world that make us who we are. I really could not be more proud of what they are able to accomplish. All right, overall, we're quite pleased with our quarter. Sales were up 10%, which is an all-time record for us, and we saw it in each of our three operating segments, though certainly highlighted in temperature control, which I'll get to in a minute. But let me start with vehicle control, the largest of those segments. In general, we were pleased. After a flattish Q1, the second quarter was up 2.7% over last year, showing some nice sequential momentum quarter over quarter, bringing our year-to-date numbers to being up by 1.6%. We've benefited from some awarded business not present last year, as well as generally favorable trends as vehicle control products are largely non-discretionary in nature. Moving to temperature control, it was a heck of a quarter as we saw a tremendous surge due to extended heat across much of the country. Sales for the quarter were up 28% against last year, though it's always worthwhile to point out that seasonal cadence can change year to year. Last year started slow with a soft second quarter, but then the third quarter saw a solid improvement, so we are facing a tougher comparison going forward. That said, year-to-date we were up nearly 16%, and the heat has continued through July, which bodes well for a solid full year for the segment. I'd like to say how proud I am of our operations people. They were able to keep up with this elevated demand, taking care of our customers with on-time deliveries. Can't thank them enough. I'd like to shift now to talking about our non-aftermarket business, our engineered solution segment. This relatively new segment continues to perform to our expectations. Sales were up about 6% in the quarter and 5% on the year. And as there will always be some lumpiness due to the basic dynamics of the different end markets, the general trend has absolutely been favorable. as we continue our success landing new business and ramping up production, expanding programs with existing customers, and generally getting known in the space as a capable, high-quality supplier. I'd like to now spend a few moments on profitability, though Nathan will go into greater detail. We are pleased to see a recovery in earnings in the quarter, though we know we still have work to do. We're proud of what we've accomplished in controlling our costs and passing through pricing, but overall we recognize that there is room for improvement. We continue to face pressures in cost of goods, both in elevated material costs and in wages, and customer factoring programs remain a significant headwind. To help combat this, we instituted in the quarter an early retirement program for qualified salaried employees in North America. We are quite pleased with the level of participation. We thank our new and soon-to-be retirees for their countless contributions to our success and wish them well. The savings associated with this will be approximately $10 million annualized once fully realized, which will happen in phases over the next year. Next, I'd like to speak for a moment about our exciting recent announcement. On July 10th, we announced that we had signed a definitive agreement to acquire Nissan's automotive. I won't repeat all the details. We welcome you to review the transcript of our investor call along with presentation material provided, but here are the highlights. Nissan is a leading supplier to the European aftermarket of engine cooling and air conditioning components, along with a growing line of what they call engine efficiency products, which would fall into our vehicle control category. With sales of around $260 million and EBITDA margins in the mid-teens, they represent an immediate significant leap forward for S&P into new markets with highly complementary products. We need to complete customary regulatory approvals, which we expect will take a few months, but once consummated, we are eager to get started on pursuing the numerous benefits we anticipate as we work together with their team. We see these benefits falling into three main areas. First, growth through cross-selling. We are in many similar product categories, but with differing strengths. As we leverage that, we can expand our offerings on both sides of the ocean. Second, we anticipate cost reduction synergies as we combine our purchasing power, seek best cost, pursue insourcing, freight consolidation, and so on. And third, we believe that by joining forces, we can become a stronger company and therefore a better supplier to our customers. We can accelerate product launches, tackle new technologies faster, and pursue numerous other means of collaboration. Some more to come on Nessun's, but needless to say, we're excited. With that, I'll turn it over to Nathan to review the numbers with some additional color.
spk04: All right, thank you, Eric. As we go through the numbers, I'll first give some color on the results by segment and at the consolidated level, then cover some key balance sheet and cash flow metrics, and finally provide a brief update on our financial outlook for the full year of 2024. First, looking at our vehicle control segment, you can see on the slide that net sales of $188.7 million in Q2 were up 2.7%, And for the first six months are now up 1.6%, which is driven by solid demand for our products and new business wins. Vehicle controls adjusted EBITDA of 10.4% for both the second quarter and first six months is down from last year, driven by a lower gross margin rate and higher operating expenses. While this segment's gross margin dollars were flat to last year due to higher sales, the margin rate was lower as a result of the increases in costs that Eric noted before. SG&A expenses increased mainly due to inflationary increases, which I'll touch more on later, and factory expenses also increased due to higher sales and timing of cash collections. Turning to temperature control, net sales in the quarter for that segment of $124.5 million were up 28.2%, as we saw a very strong start to the summer selling season, and this start helped our sales grow 15.7% for the first six months of the year. Temperature controls adjusted EBITDA increased in Q2 to 12.6%, and for the first six months, increased to 9.7%, as higher sales volumes led to higher gross margin rates and improved leverage of operating expenses for both the quarter and year-to-date periods. Temp control adjusted EBITDA also benefited from improved performance in our joint ventures in China versus last year. Looking now at engineered solutions, sales in that segment in the quarter were up 6.1%, and for the first six months were up 5.3%. We were pleased to see our sales continue to increase in this segment as new business wins with both existing and new customers support very good growth here. Adjusted EBITDA for engineered solutions in the quarter of 13.1% was up slightly from last year. The improvement was the result of good leverage of operating expenses that were lower as a percentage of sales, and this segment also benefited from improved performance in our joint ventures in China versus Q2 last year. Engineered solutions adjusted for the first six months down from last year, driven by lower gross margin due to cost pressures, but also the unfavorable sales mix we experienced in the first quarter, and partly offset by better performance from Chinese joint ventures. Turning to our consolidated numbers, the change in our net sales and gross margin for the quarter and first six months versus last year was the result of the changes in our segments, as I just highlighted. Regarding consolidated SG&A, excluding factoring, which is shown separately on the page, Expenses were up for both the quarter and first six months versus last year. As a percentage of net sales, SG&A was flat last year at 17.5% in the quarter, given strong sales volume, but was up at 18.4% for the first six months. Startup costs related to our new distribution center were $1.3 million in the quarter, $2.3 million year-to-date, and without these costs, SG&A would have been 17.1% in the quarter and 18.1% for the first six months. I noted last quarter that increases in SG&A costs were driven by general inflation, but also elevated distribution expenses across a number of inputs, including higher lease expense, and that we'll be looking at ways to reduce our costs going forward. To that point, we executed a retirement program during the second quarter, which we anticipate will save us an estimated $10 million in compensation costs. We incurred a charge of $2.6 million related to this program in Q2, and expect to incur an additional charge of $3.1 million in the second half of the year as people retire. We'll also continue to review other levers to pull to reduce our costs overall. Turning out of the balance sheet, accounts receivable were $239.3 million at the end of the quarter, higher than last year due to higher sales. Inventory levels finished Q2 at $508.2 million, up slightly versus June last year, but basically flat with year end, as higher sales have kept inventory levels lower even though we're in peak season for the temp control business. Our cash flow statement reflects cash used in operations for the first six months of 10.1 million as compared to cash generated of 39.4 million last year. Cash used in operations last year was aided by a reduction in inventory balances that did not recur this year after bringing inventory back down to normal levels over the course of 2023. Investing activities show an increase in capital expenditures this year of 13.4 million, which includes 10.4 million of investment related to our new distribution center. Financing activities show borrowings on a revolving credit agreement of $52 million in the first six months, which were used to fund operations, capital expenditures, and pay $12.7 million of dividends. We also repurchased shares under an existing $30 million authorization from our board, repurchasing $10.4 million of shares during the first six months. While we have $19.6 million of authorization remaining, we have paused repurchases in anticipation of closing on the acquisition of Nissans later this year. Our net debt of $182 million at the end of Q2 was lower than last year, and we finished the quarter with a leverage ratio of 1.5 times EBITDA. As we noted in July, we do expect our leverage ratio to increase to a little less than 3.5 times on a pro forma basis once the acquisition of this is closed, and then we use cash flows to work our debt balance down to lower levels over time. Before I finish, I want to give an update on our sales and profit expectations for the full year of 2024. As I do, please note that our outlook does not include any impact from Nissan's acquisition, as exact timing of closing is not yet known. Regarding our top line sales, given the sales growth we saw during the second quarter, we now expect to see low to mid single digit percentage growth in sales for the full year. We're maintaining our expectations for adjusted EBITDA, which we expect to be in a range of nine to nine and a half percent, essentially flat with 2023. This estimate includes cost pressures, which continue to be a headwind for our vehicle control and engineered solution segments. A U.S. dollar that remains at a multi-year low against the Mexican peso. And factoring expenses of 48 to 50 million, as sales are expected to be higher than last year. We also have some costs related to our new distribution center in Shawnee, Kansas, which in total will be 7 to 8 million dollars in 2024. As a reminder, we incurred about 2 million costs for this warehouse last year, which means we have incremental costs in 2024 of 5 to 6 million, of which we estimate 3 to 4 million is startup related and will not recur. In connection with our adjusted EBIT outlook, we expect our interest expense on outstanding debt to be on average about 2 to 3 million each quarter, and we expect our income tax rate to be 25%. Regarding operating expenses in this outlook, keep in mind our operating expenses are incurred more ratably across the year, but do have some variability with sales, and as such will fluctuate with seasonality in the business. Given this dynamic, we anticipate total operating expenses, inclusive of factoring, will range from $84 million down to $76 million as we go through the last two quarters of 2024. To quickly wrap up, we were very pleased with our sales growth in both the quarter and first half of the year, which helped us turn in better results than expected. As I noted, we're still seeing higher costs weighing on certain areas of the business, and we'll be reviewing ways to reduce these costs going forward. Thank you for your attention. I'll turn the call back to Eric for some final comments.
spk02: Thank you, Nathan. And just in closing, I'd like to spend a minute on how we're thinking about the future. We obviously recognize that they were in uncertain times impacted by various macroeconomic factors. We've always felt that our industries are structurally sound and highly resilient, and in the long run, they do very well. As we look at the North American aftermarket, I believe we can feel confident that it can withstand short-term shocks and we feel very good about our position in the market with key large non-discretionary product categories and strong customer relationships. Our engineered solutions business is obviously in a different stage of its maturity, but we're delighted with what we've seen. It's doing what we hoped. By creating a cohesive business unit with a coherent strategy, we have achieved critical mass to become a real supplier on the global stage. And soon, with Missins acting as a third leg of our stool and all it can do for us as we integrate it, we're very bullish about the future. So that concludes our prepared remarks. At this point, we will turn it back to the moderator, and we'll open it up for your questions.
spk00: Thank you. And at this time, if you would like to ask a question, please press star 1 on your telephone keypad. You may remove yourself from the queue by pressing star 2. Once again, that is star 1 to ask a question. And we will take our first question from Scott Stember with Roth MKM. Please go ahead.
spk03: Good morning, guys, and thanks for taking my questions. Good morning, Scott. In the vehicle control segment, nice rebound from the flattish results of the first quarter. um you know some of your customers have reported i guess a sluggish demand notably i guess in some of the hard parts areas um and just trying to get a sense of what you guys saw at pos retail and you know how that's affecting orders as we stand right now from your customers well uh thank you scott and and uh i think i can agree what you're hearing more from them but uh
spk02: is that they're seeing softness more in front room and DIY type product, but also to a degree more or less by the different distributors in some of the backroom product as well. What we've seen over the course of the quarter is that our POS, their sales out has been roughly flat to perhaps slightly down, but we think that that's just kind of the normal ebbs and flows in any given period. roughly tracks with what they're purchasing for less.
spk03: Okay. So really no change from that low single-digit fall process going forward.
spk02: Correct.
spk03: All right. And on the rate front, it seems increasingly likely, or at least what the market is telling us, is that we'll probably see a couple of rate cuts. Can you maybe just remind us, I guess, net of any potential price givebacks How that could benefit you and how fast that would happen on the factoring side.
spk04: Scott, just to put a little bit of a marker on it, if you think about our factoring programs, there's about $800 million of sales on those programs. Every 25 basis point move is essentially worth about $2 million for us on those programs. So that's a way to think about, you know, increases or cuts as they happen. I would just say that if you think about the rate that we follow for that, it's a 360-day SOFR rate. And given that, that rate has been baking in some cuts in the back half of the year all year since we came into the year in January. And so this recent Fed announcement, essentially being in line with that, doesn't change our outlook a whole lot at this point.
spk03: Got it. That's all I have for now. I'll jump back in the queue. Thanks. Thank you, Scott.
spk00: Our next question comes from Brett Jordan with Jefferies. Please go ahead.
spk05: Hey, good morning, guys.
spk00: Good morning, Brett.
spk04: Good morning.
spk05: Talk about what you're seeing in inventory at your customers in temperature control. If we stay hot through August into the fall, is there likely another round of ordering, or are they reasonably stocked?
spk02: Our inventory visibility is a little bit delayed, so we really see it more through June. What happened in the last several weeks, we're not as attuned to. What we saw through the quarter was that their shelves stayed pretty flat, which means that we were able to keep up with their demand and keep their shelves where they wanted them. As we think about what their sell-through was in July versus their purchases, we anticipate that that's continued to track. um and and the heat is now continuing really uh um throughout much of the country so we're pretty pleased with that and what that tends to show but you know time will tell is that prolonged heat uh tends to have the replenishment orders continuing throughout the season as opposed to in a different cadence to a summer where they may start to taper off the replenishment orders We're not anticipating this at this time, but it's still early days and we'll see what happens throughout the balance of the summer.
spk05: Okay. And then I guess, what's your outlook on pricing? You talked about input costs being up, obviously factoring. Do you think about how receptive are your primary customers to price increases for the balance of the year? What do you see as inflation from the price side?
spk02: As we've always said, we do our best to cover inflation through a combination of pricing and cost reduction. It is a competitive market. I think that the receptivity is challenging. But beyond that, really can't get into any specific customer discussions. There's a lot that goes into it, and we do our best.
spk05: Okay. And then I guess one last question. You commented about new business wins in vehicle control. Is that bringing business back that might have gone to direct import programs, or is that business taken from, you know, sort of more normal peers like Wells?
spk02: I'm not going to get into the specifics of it, Brett, but that just in general, there's always certain nominal wins and losses. We tend to win more than we lose, and so that's really what we see here. But in terms of who we got it from, I can't get into that.
spk05: All right, thanks.
spk02: Thank you.
spk00: And again, if you would like to ask a question, please signal by pressing star 1. And our next question will come from Carolina Jolly with Gabelli. Please go ahead.
spk06: Hi, thanks for taking my question. Just a quick note on overall inventories. I know Brett asked about temp control, but just overall the inventory in the market, how do you feel about that?
spk02: Good morning, Carolina. And so on the vehicle control side, again, very similar. We're seeing that inventory is stable month over month. So there's no specific inventory strategy shift for any of our customers. They have what they want to have and are operating accordingly.
spk06: Got it. And then also, you've discussed leases, some of the pressure from leases. I know you talked about kind of if the interest rate lowers the impact from the factoring, would there be any benefit on that lease expense?
spk04: Yes. So, Carolina, we renew leases over time just as they come to. So, I don't think lower rates will have any impact on what we've already renewed over the last couple years. But certainly going forward, that should be some sort of a benefit as we look at the renewals.
spk02: Great. Thank you. Thank you.
spk00: And with no further questions, I'd like to turn it back to our presenters for any additional or closing remarks.
spk01: Okay. Well, we want to thank everyone for participating in our call today. We understand there was a lot of information presented, and we'll be happy to answer any follow-up questions you may have. Our contact information is available on our press release or Investor Relations website. Hope you have a great day. Thank you.
spk00: And this will conclude today's conference. Thank you for your participation, and you may now disconnect.
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