Standard Motor Products, Inc. (NYSE:SMP) Q1 2024 Earnings Call Transcript

Standard Motor Products, Inc. (NYSE:SMP) Q1 2024 Earnings Call Transcript May 4, 2024

Standard Motor Products, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: [Call Starts Abruptly] Also, today’s call is being recorded, and I will be standing by if anyone should need any assist. Now at this time I will turn things over to Mr. Tony Cristello Vice President Investor Relations. Please go ahead, sir.

Tony Cristello: Thank you, Bo, and good morning, everyone. Thank you for joining us on Standard Motor Products first 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 up the call 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 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: Thank you, Tony, and good morning, everyone, and welcome to our first quarter earnings call. Let me open by thanking all of our employees around the world for their tireless efforts as we enter our 105th year. So it’s fair to say that our first quarter results were mixed. We’re pleased with our top line performance where we set a record for first quarter sales. However, as expected, our profitability continued to lag, demonstrating some of the challenges in keeping up with inflationary pressures. Let me get into the details best explained at the segment level, starting with Vehicle Control. After a soft fourth quarter, we are pleased to see a nice rebound in sales. We were up about 0.5 point over 2023, which was a challenging comp as Q1 of 2023 was very strong, up more than 4% over the previous year.

After a soft end to last year, we are pleased to see a return to more normal demand. Customer POS was soft in the quarter, though again, it’s being compared to a very strong sell-through last year. Turning to Temperature Control. As you well know, the first quarter is not indicative of how the year will turn out. This is the time of year that we ship customers their preseason orders and as those can ship in late Q1 or early Q2 and whiplash numbers around. Ultimately, this division will depend on the total season and its dynamics, when it gets hot, how hot it is and where and how long it stays that way. So let’s see how the year behaves. On to Engineered Solutions. The year is off to a strong start for sales, up 4.5%, hitting a single quarter record.

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Q&A Session

As discussed, this segment is highly fragmented, multiple end markets, multiple geographies and a highly diverse customer base with no account greater than 10% of sales. As such, you can see some volatility quarter-to-quarter in terms of customer and market channel mix. Overall, we’re very pleased with how we’re doing. As we’ve been saying over the last few years, we’ve been gaining real traction as we get known as a capable supplier of a broad array of products and technologies. As such, we’ve been being awarded new business and are continuously managing a very healthy pipeline of opportunities. It’s important to note that we need to keep the funnel of these opportunities full as items go through their life cycle much faster than the aftermarket.

But I believe we are demonstrating our ability to do that and grow this new segment. I’d like to spend a minute talking about our progress on a new state-of-the-art distribution center in Shawnee, Kansas. We’ve been discussing this for the last few quarters, but I’ll remind you of what we are building and why. About a year ago, we came to the decision to expand our distribution capacity as we’ve been operating out of our existing footprint for many years, while our volume and SKU count has grown. We leased a brand’s new 575,000 square foot facility, about 5 miles from our existing Edwardsville, Kansas location, giving us about 200,000 additional square feet. In time, this will replace our Edwardsville location as we move that operation in. But additionally, we plan to distribute the A and B movers currently single pointed out of our Virginia and Texas DCs, which will allow us to provide better service to our customers in the West and North.

And we’ll also provide risk mitigation for us as we will move from single point to multipoint distribution. We’re pleased to announce that we have started shipping Vehicle Control products to certain customers in April, and it’s going very well. We’ve begun with manual operations while we build out our automation, which will take place over the balance of the year. We then plan to move in stages over the course of 2025, and when complete, we will be able to sell our Edwardsville facility likely in 2026. In the near term, we are incurring additional expense and Nathan will provide details, but once complete, we will exit many of the duplicate costs and will be well positioned for the future. Lastly, let me discuss some of the issues we’ve been experiencing on the cost side that are causing continued pressure on profitability.

I’ll keep it at a high level, and Nathan will provide more details. Overall, as expected, our profitability is down from last year, though for different reasons in the aftermarket versus Engineered Solutions. In the aftermarket, we are pleased that we’ve been able to maintain our gross margins. The pressures have been on SG&A where we continue to experience elevated expenses tied to our receivables factoring programs as well as certain other areas. In Engineered Solutions, while operating expenses have remained stable, the downward pressure has been on our gross margins, which then dropped through to the bottom line. We have been experiencing product cost inflation, partly for material costs, but more so related to significant wage increases in Mexico and Europe, where a great deal of our Engineered Solutions volume is produced.

We’ve also seen a modest mix shift over the last two quarters, which can fluctuate based on normal ebbs and flows of demand and this too is impacting our margins. Also, to reiterate, we are experiencing a planned and temporary increase in spending on our new distribution center. Both here and in the aftermarket, we continue to work aggressively at cost reduction and pricing with teams in place looking at all of the levers and believe we will see incremental relief in the quarters to come. So with that, I’ll turn it over to Nathan, who will dive in deeper.

Nathan Iles: All right. Thank you, Eric. As was noted earlier, the first quarter of the year largely turned out as expected as sales, operating profit and earnings per share were in line with the expectations we laid out in our last call. 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 2024. First, looking at our Vehicle Control segment. You can see on the slide that net sales of $185.5 million in Q1 were up 0.5%, with the increase driven by solid demand for our products across all categories. Vehicle Control’s adjusted EBITDA was 10.4% of net sales for the quarter and down from last year.

Looking at the drivers of EBITDA for the quarter. The gross margin rate for Vehicle Control in Q1 was flat with last year as cost savings and pricing offset inflation and cost of goods sold. However, SG&A expenses increased in the quarter, mainly due to inflationary increases, I’ll touch more on later. And factoring expenses increased $0.9 million as a result of higher interest rates, and those increases resulted in lower adjusted EBITDA in the quarter. Turning to Temperature Control. Net sales in the quarter for that segment of $71.6 million, were down 1.1% as we saw a slight variation in preseason ordering patterns versus last year. But keep in mind that the first quarter is not indicative of the full year in the seasonal business. Temperature Controlled adjusted EBITDA in Q1 of 4.7%, was 0.1 points better than last year.

The improvement was driven by a higher gross margin rate that was helped by savings initiatives, partly offset by inflation and SG&A costs. Sales for Engineered Solutions segment in the quarter were up 4.5% as we were pleased to see our sales continue to increase as a result of strong demand and new business wins with both existing and new customers. Adjusted EBITDA for Engineered Solutions in the quarter was down from last year, primarily due to cost inflation, the drivers of which Eric noted before, and unfavorable customer sales mix in the quarter, which resulted in lower gross margin for the segment. We also saw some inflation in SG&A costs in this segment just as we saw in the aftermarket segments. Turning to our consolidated numbers. The change in our net sales and margin versus Q1 last year was the result of the changes in our segments as highlighted.

Regarding consolidated SG&A, expenses were up versus last year, and were 19.5% of net sales in the quarter. I noted our costs were up in our segment results, so let me give a little more color on the drivers of the consolidated level. You can see on the slide, the costs were up $4.2 million, and this included $1.1 million of start-up costs related to our new distribution center. Excluding these costs, expenses increased $3.1 million or about 5%. The increase included elevated distribution expenses across a number of costs, including higher lease expense in certain locations. As we look to offset some of the inflation headwinds on operating expenses, we’ll be reviewing levers to reduce our costs going forward. One final note on our consolidated results.