Standard Motor Products, Inc. (NYSE:SMP) Q4 2023 Earnings Call Transcript

Standard Motor Products, Inc. (NYSE:SMP) Q4 2023 Earnings Call Transcript February 22, 2024

Standard Motor Products, Inc. misses on earnings expectations. Reported EPS is $0.37 EPS, expectations were $0.62. SMP isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, everyone, and welcome to today’s Standard Motor Products Fourth Quarter 2023 earnings conference call. At this time all participants are in a listen only mode. Later you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] 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, and good morning, everyone, and we appreciate you joining us for our Standard Motor Products Fourth Quarter 2023 earnings conference call. With me today are Larry Sills, Chairman, Emeritus, Eric Sills, President and CEO, 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. Jim will provide update on our Shawnee DC and Nathan will discuss our financial results and our annual guidance. Eric will then provide some concluding remarks and we’ll 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 fourth quarter earnings call. I’d like to open by thanking all of the SMP employees globally, whose tireless commitment to SMP makes us who we are. Fourth quarter capital was a fairly challenging year for SMP. As noted in our release, we saw some different trajectories for our aftermarket business versus our Engineered Solutions business with nuances throughout. So let me get into it by segment starting with vehicle control. Entering the fourth quarter roughly flat to 2022’s record year, vehicle control demand softened as the fourth quarter progressed and we finished the year down 1.7%. As previously discussed, we were impacted throughout the year by two largely non-recurring events.

First off, we continued to see the impact of the previously announced customer bankruptcy. And to a lesser extent we saw less pipeline activity from some of our larger customers throughout the year. But beyond that, we saw general softness in the market in the fourth quarter as evidenced by our customer POS results, which declined as the quarter progressed. That said, we believe this is largely a temporary in nature as marketplace dynamics remain strong and we have seen a modest resurgence as 2024 gets underway. Next I’ll discuss our Temperature Control business. As you know since the majority of the business is tied to air conditioning, it’s subjected to more weather-related influences than the other parts of our business. Not only is it seasonal in nature, the timing of weather patterns throughout the year can impact the market.

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Q&A Session

It is important context to note that 2022 was an outsized year. It got hot early and set records all summer long feeding 2021 sales by over 8% making for a difficult comparison. 2023 behave quite differently. We had a slow start to the selling season and we’re well behind on sales entering third quarter. It finally did get hot much of the country and we were able to make up a fair amount of lost ground in the third quarter. Yet it was too little too late and we finished the year down 3.8%. The fourth quarter itself was very light but we caution people not to read too much into it. The fourth quarter is always our lowest period by a lot with customers making certain stocking decisions that can have big influence on a small quarter. And lastly, I would note that while it’s still early it appears that our preseason orders for 2024 are consistent with past years, so that sums up the aftermarket.

Meanwhile, we’re very pleased with our Engineered Solutions segment. Our business focused on global non-aftermarket sales into various end markets. We posted strong sales both in the quarter and for the full year, up 6.7% and 4.7% respectively with progress being made on multiple fronts. After several years of growing this business through both acquisitions and organic product development, we chose to split it out into its own segment at the beginning of 2023. Not only has just provided better clarity to various stakeholders, we also believe it has helped demonstrate to the customers in this space that we are genuinely committed with a tailored strategy, a broad product portfolio and dedicated resources. And this is truly opening doors. We are seeing gains with existing customers as well as new ones and while it often takes time between the business being awarded and when the sales actually begin, the pipeline is robust globally and we’re very excited about where it’s headed.

Turning to profitability. All year long, we have been facing stubbornly high inflation across a host of cost inputs. We furthermore our customer factoring expenses continue to present a headwind of $14 million as compared to 2022. I’m proud of the progress we made both with cost reduction initiatives and pricing actions, allowing us to retain our gross margins on a full year basis. But the headline is that soft sales caused deleveraging of our fixed costs which in turn hurt our bottom line. And Nathan will provide more details during his remarks. But first, let me turn it over to Jim, who will bring you up to date on our exciting new distribution center.

Jim Burke: Thank you, Eric and good morning. I’m happy to share an update on our distribution network strategy expansion plans. We previously announced our new Shawnee Kansas distribution center and our second quarter 2023 earnings release. To refresh your memory, our US distribution footprint excluding our forecast training distribution from Fort Lauderdale, Florida for vehicle control of temperature control products, currently ships from three primary distribution centers located in Disputanta, Virginia, Edwardsville, Kansas and Louisville, Texas. This combined footprint is approximately 1.2 million square feet. Our plan is to add our new Shawnee DC to replace our existing Edwardsville DC. The new 575,000 square foot Shawnee facility is within five miles of the existing Edwardsville facility which will add 211,000 incremental square feet for a new combined 1.4 million footprint.

We believe the Shawnee addition will offer us many benefits over our existing network strategy. Today, we are single point distribution for our products, from our existing three DCs. Our new strategy will be to add popular A and B high volume SKU into Shawnee that are also carried in Virginia and Louisville. Per vehicle control, Shawnee will ship the popular A and B SKUs to customers west of the Mississippi that previously were shipped from Virginia totally across the country. Slower moving SKUs will continue to ship from Virginia. At temperature-controlled, high volume SKU, Shawnee will ship the upper half of the US, while Louisville will ship the southern half of the states. There will — this will provide us many strategic benefits. Risk avoidance with multi-point distribution on popular SKUs reduce existing capacity constraints in Virginia and Louisville, faster turnaround time for pulling packing and shipping orders within our DCs, transportation cost savings, labor efficiency savings due to overcapacity and retaining 100% of our seasoned and experienced existing management team and associates from our Edwardsville facility and lastly incremental distribution capacity for future growth opportunities.

Our tradition — our transition plan is basically on schedule as initially disclosed. The Shawnee construction and interior build-out plan was essentially completed in January of this year. Our Phase one operational plan called for a soft launch in 2024 with racking and stall that are of RF manual picking continue commencing April of this year. Phase two will entail the installation of automated picking modules and automated consolidation completion scheduled for early 2025. By the end of ’25, we expect to be fully operational. Costs and savings from this distribution expansion will be incurred over multiple years. 2023 and 2024 will see added costs, while savings will be achieved in ’25 and ’26. Overall, from an expense standpoint, once fully implemented, we will be incurring incremental lease property and depreciation costs per year of approximately $7 million offset by efficiency and transportation savings of approximately $3 million for a net ongoing cost inclusive of incremental capacity of $4 million.

In addition, we expect to fully exit our owned Edwardsville facility body at the 2025 and anticipate cash proceeds from the sale of the land and building of $20 million plus in 2026. Most importantly, we will be in a much stronger position to better service our customers with added capacity for future growth. Thank you for your attention. I’ll now turn the call over to Nathan.