Earnings Call Transcript - SMP Q3 2024

Operator, Operator

Good day, everyone, and welcome to the Standard Motor Products' Third Quarter 2024 Earnings Call. Please note today's call will be recorded. It is now my pleasure to turn the conference over to Tony Cristello, Vice President of Investor Relations. Please go ahead.

Tony Cristello, Vice President of Investor Relations

Thank you, 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 for Q&A. Before we begin, 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 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.

Eric Sills, 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 their outstanding efforts in driving our company forward. They continue to do a fantastic job for us. Overall, we are very pleased with the quarter, posting a 3.3% increase over last year's record-setting quarter, putting us up almost 6% year-to-date. This included revenue gains in all three operating segments, which I'll discuss in greater detail. We are 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 nondiscretionary category. Turning to Temperature Control, we are pleased to see continued strong demand in the quarter. This year, it got hot earlier, and we were up 16% at the half. We knew the third quarter comparison would be difficult, so we are 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 now up 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 are therefore at the mercy of our customers' production schedules. Certain of these customers' end markets are beginning to show a slowdown, creating a headwind for us. However, we do expect some market softness to continue and face another tough comparison in the fourth quarter. Lastly, I want to spend a moment on a major acquisition announced in July. 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. 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 into three main buckets: first is growth, second is cost reduction, and the third area for synergies is in helping each other become better companies and thus better suppliers to our customers. We can see best practices across common functions, and we have been extremely impressed with the talent of the Nissens team. 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.

Nathan Iles, CFO

All right. Thank you, Eric, and good morning, everyone. As we go through the numbers, I'll first give some color on the results by segment and 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%, and for the first nine months are now up 2.8% with the increase driven by solid demand for our products and new business wins. Vehicle Control's adjusted EBITDA of 13.2% 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 Control's adjusted EBITDA of 11.4% for the first nine months is down from last year, mainly due to higher operating and factoring expenses. SG&A expenses increased mainly due to inflationary increases, which I'll touch more on later. Turning to Temperature Control, net sales in the quarter for that segment of $126 million were up 1.9%. And for the year so far, sales are now up 9.9% 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 Control's adjusted EBITDA increased in Q3 to 14.7% and for the first nine months increased to 11.7% as higher sales volumes led to higher gross margin rates and improved operating expenses as a percent of sales for both the quarter and year-to-date periods. Looking at Engineered Solutions, sales in that segment in the quarter were up 0.8%, and for the first nine months were up 3.8%. We were pleased to see our sales continue to increase in this segment as new business wins support growth here despite some slowing of production in certain end markets. Adjusted EBITDA for Engineered Solutions in the quarter of 11.9% 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 continued to see cost pressures and was partly offset by operating expenses that were lower as a percentage of sales. Turning to our consolidated numbers. The change in our net sales and gross margin for the quarter and first nine months versus last year was the result of the changes in our segments I just highlighted. Consolidated SG&A has shown increased expenses up for both the quarter and first nine months. We incurred a charge of $3 million related to a retirement program in Q3 and $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 were pleased to see a combination of sales growth, margin improvement, and operating expense leverage helped us achieve a 15% 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 compared to 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. Financing activities showed a 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. 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 0.9x. As we noted in July, we do expect our leverage ratio to increase to 3 to 3.5x on a pro forma basis once the acquisition of Nissens has closed, and we'll then use cash flows to work our debt balances down to lower levels. 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 9% to 9.5%. This estimate includes cost pressures that continue to be a headwind and factoring expenses of $48 million to $50 million. We are eager to get Nissens onboard and begin working through the many opportunities to grow and improve our businesses together.

Eric Sills, CEO

All right. Thank you, Nathan. So to close, let me just spend a moment on how we're thinking about the future. There's 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 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 recognized that certain Engineered Solutions end markets can demonstrate some volatility; yet we have demonstrated that our strength here is in gaining market share in this enormous global market where our new business awards can absorb temporary downturns. While we can expect some lumpiness along the way, we believe the long-term trends to be very favorable. And lastly, we believe that Nissens 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.

Operator, Operator

We'll take our first question from Scott Stember with ROTH MKM.

Scott Stember, Analyst

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

Eric Sills, CEO

Sure. Yes, some of the customers have been speaking about what their market has looked like. They are tending to say that DIFM nondiscretionary product is outperforming, and those are the categories that we're in. They are 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 flat. What that really reflects is this kind of slow evolutionary expansion of their footprint, as they look to have the best inventory forward deployed.

Scott Stember, Analyst

Got it. And Temperature Control, if my memory serves me correct, we had a longer-than-expected summer, which went into some of the fall months and you had some strong demand and inventories, I think we're in really good shape heading into the off-season. How are we looking at this year's inventories and Temperature Control?

Eric Sills, CEO

This year, we've actually come out of the customer inventory?

Scott Stember, Analyst

Customer Inventory.

Eric Sills, CEO

Sorry, you broke up. What we see is that last year, the season started out slow, and then they completed their entire season's worth of sales in the third quarter. They ended last year in a healthy but slightly light position. This year, following that trend into the quarter, both they and us were able to maintain sales throughout the period, so sell-in matched sell-through, and they came out in a good position.

Scott Stember, Analyst

Got it. And then lastly, on Engineered Solutions, the commercial vehicle had a really strong quarter. 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 that sound like incrementally softening potentially in the fourth quarter?

Eric Sills, CEO

Well, first, in terms of the different end markets. And as you look at our quarterly results across those four subsegments that we report in, there's a fair amount of movement among them. There will be a little bit of lumpiness across these different end markets, but the area where you are seeing probably more softness is in construction and agricultural equipment. Overall, what we're seeing is that their production schedules are continuing to be a little softer than historic, and that can create a headwind for us as we've said.

Scott Stember, Analyst

If I could just add one more question here. Looking ahead to 2025, I understand you are not offering any guidance, but there are many factors at play, even without considering Nissens. Interest rates are decreasing slightly, which should assist with factoring, and there will be some carryover costs for the new distribution center. I'm just trying to gauge what we should be keeping in mind for next year from a modeling standpoint.

Nathan Iles, CFO

Yes. Scott, 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. We continue to follow interest rates. While rates, I think, started to come down a bit, they went back up as expectations changed. So we’re still watching those rates to see what will happen in 12 to 15 months.

Operator, Operator

And it appears we have no further questions at this time. I'll turn the program back over to Tony Cristello for any additional or closing remarks.

Tony Cristello, Vice President of Investor Relations

Thank you. I want to thank everyone for participating in our call today. Our contact information is available on our press release or Investor Relations website. I hope everyone has a great day. Thank you.

Operator, Operator

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