Standard Motor Products, Inc.

Good day everyone and welcome to the Standard Motor Products Third 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. You may register to ask a question at any time by pressing the star and one on your telephone keypad. You may withdraw yourself from the queue by pressing star two. Please note 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 Crostello, Vice President of Investor Relations. Please go ahead.

Thank you Brittany and good morning everyone and thank you for joining us on Standard Motor Products Third 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 Iles, 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 that they will prove correct. You should also read our filings with the Security and Exchange Commission for 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.

Well thank you Tony and good morning everyone and welcome to our third quarter earnings call. I'd like to start by thanking all of our employees around the world, recognizing them for the outstanding efforts in driving our company forward. They continue to do a fantastic job for us. Overall we were very pleased with the quarter posting a .3% increase over the last year's record setting quarter, putting us up almost 6% year to date. And this included revenue gains in all three operating segments which I will discuss in greater detail. We were also pleased with the ongoing rebound of our profitability. Adjusted diluted EPS was up over 15% from last year's third quarter and we are now nicely ahead on a year to date basis. While we continue to face elevated costs across a host of inputs, we were able to overcome some of it through our various cost reduction initiatives. Let me discuss the segments starting with vehicle control. Sales were up 5% in the quarter against a relatively easy comparison and up 3% on a year to date basis. Our customers continue to invest in our lines as they enhance their assortments, expand their footprint and recognize the benefits of strong stocking positions in this largely non-discretionary category. Turning to temperature control, we were pleased to see continued strong demand in the quarter. I think it's always helpful to remind people of the sales cadence of this highly seasonal category as it can vary substantially year to year. 2023 had a slow start, but then in the third quarter it got quite hot across the country and we had a record setting period. This year it got hot earlier and we were up 16% at the half. We knew the third quarter comp would be difficult, so we were quite pleased to see sales remain robust, allowing us to beat last year's strong numbers by nearly 2% and year to date we are up now nearly 10%. As we head into the last few months of the year, it's worth reminding people that the fourth quarter is the lowest sales quarter and thus can be the most volatile. Next I'll address engineered solutions, our non-aftermarket segment selling products to vehicle and equipment manufacturers across multiple end markets. We continue to do well here, up nearly 1% in the quarter against a tough comparison as last year's third quarter was up more than 8% over 2022. Here we do see some challenging market dynamics. The majority of our sales in this segment are geared towards new vehicle production and therefore are at the mercy of our customers' production schedules. Certain of these customers' -to-end markets are beginning to show a slowdown, creating a headwind for us. We have always said that our success in this segment will be on achieving new contracts as we get known by these various global customers as a capable and committed supplier, and we are pleased that we have been more than able to offset the production slowdowns with the ramp up of some new business wins. However, we do expect some market softness to continue and face another tough comp in the fourth quarter. Lastly, I want to spend a moment on a major acquisition announced in July. To remind you, we reached a definitive agreement to acquire Europe-based Nissens Automotive pending regulatory approval. We have now achieved this approval, and as such, we expect to complete the transaction soon. Let me provide you with a thumbnail sketch of the company and our plans. If you wish to dig deeper, please review the materials and transcripts from our investor call on July 10th. Headquartered in Denmark, Nissens is a leading aftermarket supplier of both thermal management and engine efficiency products, with annual sales of approximately $260 million and EBITDA in the mid-teens. Both sides are eager to get started working on the synergies, which we believe will fall in three main buckets. First is growth. We have overlapping product categories, though with differing weights and strengths. We believe we can expand each other's portfolios and grow sales in our respective markets. Second is cost reduction. While there are many areas for cost savings across all functional areas for both Nissens and S&P, we believe this biggest area for savings is likely product cost as we leverage our purchases with third-party suppliers and in-source production where applicable. The third area for synergies is in helping each other become better companies and thus better suppliers to our customers. We can seek best practices across common functions. We can combine resources to tackle new technologies and pursue many other benefits through collaboration. We've been extremely impressed with the talents of the Nissens team, with the energy and excitement that they have demonstrated and truly believe we have matching cultures. So again, we are very eager to get started and we'll keep you posted on our progress. With that, I will turn it over to Nathan to dive into the numbers.

All right. Thank you, Eric. Good morning, everyone. As we go through the numbers, I'll first give some call-out results by segment into 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 $200.9 million in Q3 were up 5.2 percent, and for the first nine months are now up 2.8 percent, with the increase driven by solid demand for our products and new business links. Vehicle controls adjusted EBITDA of 13.2 percent for the third quarter is up from last year, driven by a higher gross margin rate and better leverage of operating expenses. The gross margin rate was helped by higher sales and favorable cost absorption, and operating expense leverage also benefited from the higher sales volume. Vehicle controls adjusted EBITDA of 11.4 percent for the first nine months is down from last year, mainly as a result of higher operating and factory expenses. SG&A expenses increased, mainly due to inflationary increases, which I'll touch more on later, and factory expenses increased due to higher sales and time of cash collections. Turning to temperature control, net sales in the quarter for that segment of $126 million were up 1.9 percent, and for the year so far, sales are now at 9.9 percent, as we had another year of favorable weather patterns that started early in the season and continued into the third quarter, helping the segment turn in higher sales against a difficult comparison. Temperature controls adjusted EBITDA increased in Q3 to 14.7 percent, and for the first nine months increased to 11.7 percent, as higher sales volumes led to higher gross margin rates and improved operating expenses as a percent of sales for both the quarter and -to-date periods. Looking at engineered solutions, sales in that segment in the quarter were up 0.8 percent, and for the first nine months were up 3.8 percent. We were pleased to see our sales continue to increase in this segment, as new business wins with both existing and new customers support growth here, despite some slowing of production in certain end markets. Adjusted EBITDA for engineered solutions in the quarter of 11.9 percent was down from last year, but was up against a difficult comparison in the third quarter last year, where the gross margin rate benefited from favorable customer mix. While gross margin was lower due to a more normal sales mix, it also continued to see cost pressures, and was partly offset by operating expenses that were lower as a percentage of sales. Engineered solutions adjusted EBITDA for the first nine months is down from last year, mainly due to lower gross margin as a result of cost pressures, and partly offset by good control over operating expenses. Turning to our consolidated numbers, the change in our net sales and gross margin for the quarter in the first nine months versus last year was the result of the changes in our segments 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 nine months. As a percentage of net sales, SG&A was flat with last year at 16.9 percent in the quarter, given strong sales volume, but was up a little to 17.9 percent for the first nine months. Startup costs related to our new distribution center were $1.1 million in the quarter and $3.5 million year to date, and without these costs, SG&A would have been 16.6 percent in Q3, and for the first nine months would have been 17.6 percent and flat with last year. I noted earlier in the year that increases in SG&A costs were driven by general inflation, but also elevated distribution expenses across a number of inputs, and that we would be looking at ways to reduce costs going forward. To that point, we continued to execute the retirement program we announced at the beginning of the quarter, and we were pleased to see that benefit our expenses. As a reminder, we anticipate the savings of about $10 million from this program will be realized over time, phasing in starting in the second half of this year, running through December 2025. We incur a charge of $3 million related to this program in Q3, in $5.6 million year to date. We expect to incur an additional smaller charge of $1.3 million in the remainder of the year as people retire. We will also continue to review other levers to pull to reduce costs overall. On our consolidated bottom line, we were pleased to see a combination of sales growth, margin improvement, and operating expense leverage help us achieve a 15 percent increase in non-GAAP diluted earnings per share in the quarter, and also put earnings ahead of last year for the first nine months. Turning now to the balance sheet, accounts receivable were $217.1 million at the end of the quarter, higher than last year due to higher sales. Inventory levels finished Q3 at $503 million, up versus September last year, mainly due to levels needed to satisfy higher sales volumes. Our cash flow statement reflects cash generated in operations for the first nine months of $78.2 million as compared to cash generated of $132.9 million last year. Cash generated 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. Investing activities show capital expenditures increasing this year to $34.1 million, which includes $16.5 million of investment related to our new distribution center. Financing activities show payment of $19 million of dividends and $10.4 million of share repurchases in the first nine months, as well as repayments of debt of $13.4 million. Regarding share repurchases, while we have $19.6 million of authorization remaining from our board, we have paused repurchases in anticipation of closing on the acquisition of NISMT soon. Our net debt of $116.5 million at the end of Q3 was lower than last year and we finished the quarter with a leverage ratio of .9 times. As we noted in July, we do expect our leverage ratio to increase to three to three and a half times on a pro forma basis once the acquisition of NISMT has closed and we'll then use cash flows to work our debt balances down to lower levels. And speaking of closing the NISMT's acquisition, we were extremely pleased to enter into a new five-year $750 million credit facility during the quarter. The new facility gives us the ability to complete the acquisition and allows for continued flexibility to grow our business. I'd like to thank our team and banking partners for helping us get this new facility in place in the quarter. Before I finish, I want to give an update on our sales and profit expectations for the full year of 2024, which are unchanged from our previous outlook. Regarding our top line sales, we expect to see low to mid single digit percentage growth in sales for the full year. We also continue to expect adjusted EBITDA to be in a range of nine to nine and a half percent. This estimate includes cost pressures, which continue to be a headwind for vehicle control and engineering solution segments, and factory expenses of $48 to $50 million as sales were expected to be higher than last year. We also have some costs related to our new distribution center in Shawnee, Kansas. Thank you. We are eager to get NISAMS on board and begin working through the many opportunities to grow and improve our businesses together. As we do, we'll plan to present the NISAMS business as a new segment for S&P, and we'll share more information on our outlook for 2025 on our next quarterly call. To wrap up, we are very pleased with our sales growth in both the quarter and first nine months, as well as our earnings, which are now ahead of last year. I want to thank everyone at S&P for helping us achieve these results. Thank you for your attention. I'll turn the call back to Eric for some final comments.

All right. Thank you, Nathan. So to close, let me just spend a moment on how we're thinking about the future. There's obviously a great deal of external factors at play right now that can impact things in ways that are difficult to predict. Yet the markets that we are in have always demonstrated their resilience. The North American aftermarket has proven time and again that it does well both in good times and in bad, and during difficult economic times while discretionary products can come under pressure. Our products are largely nondiscretionary repair items that consumers must purchase to keep their vehicles operating safely. We recognize that certain engineered solutions and markets can demonstrate some volatility, yet we have demonstrated that our strength here is in gaining market share in this enormous global market, where new business awards can absorb temporary downturns. And as we have repeatedly said, while we can expect some lumpiness along the way, we believe the long-term trends to be very favorable. And lastly, we believe that NISSANs is truly a game changer for us for all the reasons described earlier. So again, while anything can happen quarter to quarter, the future is certainly bright. So that concludes our prepared remarks. At this point, we'll turn it over to the moderator and we'll open it up for your questions.

Thank you. At this time, if you would like to ask a question, please press the star and one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, that is star and one if you would like to ask a question. And we'll take our first question from Scott Stenberg with Roth MKM. Your line is now open.

Good morning, guys, and thanks for taking my questions.

Morning, Scott.

Within vehicle control, two of your bigger customers had been reporting sluggish, you know, DIFM or professional business. It's still up, but just the sluggish and you guys put up a really good number just trying to get a sense of what you're what you guys are seeing, what the POS was for the quarter in vehicle control and just in general, you know, how you're viewing the outlook there, you know, heading into the end of the year and into next year.

Sure. So, yes, some of the publicly traded customers have been speaking about what their market has looked like and they are tending to say that DIFM non-discretionary product is outperforming. And those are obviously the categories that we're in. They're seeing more pressure on front room product and retail and DIY. The POS that we've seen through the quarter has been pretty consistent with what we've seen for the year, which has been relatively flattish. So as we look at our sales exceeding that or their purchases from us exceeding that, what that really reflects is this kind of slow evolutionary expansion of their footprint, of their assortment as they look to have the best inventory forward deployed. So it's not necessarily a stocking change that they're doing. It's just evolutionary building out new stores and putting more inventory into each individual store. So that's that small delta between their sell through and their purchases from us.

Got it. And temperature control, if my memory serves me correctly, we had a longer than expected summer, which went into some of the fall months. So then you have some strong demand and inventories, I think, were in really good shape heading into the off season. How are we looking this year, inventories and temperature control?

So this year, we've actually come out of the, I assume you're referring to customer inventory or our inventory, customer inventory?

Customer inventory.

Sorry, you broke up the customer. Okay. Yeah. So what we see is actually last year, what happened was because it's the season started out slow and then they basically did their entire season's worth of sales in the third quarter. They came out of last year healthy, but a little bit light. This year, as that had been the trend coming into the quarter, both them and us were able to maintain that throughout the period. And so they ended, so sell in basically matched sell through and they came out in a pretty good position.

Okay. And then lastly, on engineer solutions, the commercial vehicle had a really strong quarter and it looks like some of the other areas were a little flattish to down. Maybe just talk about commercial vehicle and then your comments about things. It sounds like incrementally softening potentially in the fourth quarter.

Well, first in terms of the different end markets and as you look at our quarterly results across those four sub segments that we report in, there's a fair amount of movement among them. And so I would say that this quarter is just kind of more of the same as there's always going to be a little bit of lumpiness across these different end markets. And but the area where you are seeing probably a little bit more softness is in construction, agricultural equipment, and you know who some of the big players are and what they're reporting. So that's what you're seeing across the different sub segments. I wouldn't spend too much time worrying about what happens in any given quarter across them. Overall, what we're seeing is that their production schedules are continuing to be a little bit softer than historic and that can create a headwind for us and we're navigating through that. And as we've said, the long term, it tends to take care of itself. We're going up against a very strong comp of last year's fourth quarter.

Got it. If I could squeeze one more in here. Looking at the 25, I know you guys are not providing any guidance, but just a lot of moving pieces and even not including missions in the mix. So we have the interest rates are coming down a bit, which should help on the factory side. And you should have some carryover costs for the new D.C. So just trying to get a sense of the things we should maybe be thinking about for next year from a modeling perspective.

Yes, just got to your point. We're not providing any guidance on 25 at this point. I think in terms of items you're looking at, those are the right things to focus on. I would just point out on interest rates. We continue to follow that like everyone does. And while rates, I think, started to come down a bit in the middle of the third quarter, they went back up as expectations change. So we're still watching that 360 day rate to see what will happen in 12 to 15 months.

Got it. All right, that's all for me. Thank you.

Thank you.

And once again, that is start and one. If you would like to ask a question, we'll pause for just a moment to allow questions to queue. And it appears we have no further questions at this time. I'll turn the program back over to Toni Crisello for any additional. Oh, I apologize. We do have a question from Carolina Jolly with Gambeli. Your line is now open.

Hi, thank you for taking my question. Just wanted to talk. I know that there's been some conversations around some softening in Europe. Have you been able to work with a team as a deals closing to just to best work with that team and in that market?

Good morning, Carolina. So let me start with the caveat that we haven't closed this deal yet. And so any anything I can share with you is really going to be more directional than specific. But I think it's important to note in general, and you see it here with with everything we know about the North American aftermarket, that they're going to talk in generalities across a whole host of different product categories and across all the different countries in the region. And this is similar to SMP's business in that it is largely non discretionary, but it is a little bit over indexed towards temperature related product. And in Europe there, too, they had a very strong summer, which has favorable impact on their potential business. So, again, as as as you said, we're going to start sharing a lot more information with them once they are truly part of SMP, which we hope is soon. And so more to come on that.

Thank you for that information.

And we have no further questions on the queue at this time. I will turn the program back over to Tony Cristello for any additional or closing remarks.

OK, thank you. I want to thank everyone for participating in our call today. I understand there's 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 Web site. I hope everyone has a great day. Thank you.

Thank you. This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful day.