Good day, everyone and welcome to the Standard Motor Products First Quarter 2022 Earnings Call. [Operator Instructions] 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 Cristello. Please go ahead..

Thank you, Chloe. Good morning, everyone, and thank you for joining us on Standard Motor Products’ first quarter 2022 earnings call.

I'm Tony Cristello, Vice President of Investor Relations, and with me today are Larry Sills, Chairman of the Board; Eric Sills, President and CEO; Jim Burke, Chief Operating Officer; and Nathan Iles, Chief Financial Officer.

On our call today, Eric will provide an overview of our performance in the quarter, followed by Jim who will give an update on the operations and supply chain. Nathan will discuss our financial results and outlook, and Larry will offer some comments on recent Board changes. 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 Securities and Exchange Commission for a discussion of the risks and uncertainties that could cause actual results to differ from our forward-looking statements. I'll now turn the call over to Eric Sills, our CEO..

Thank you, Tony, and good morning, everybody, and welcome to our first quarter earnings call. I'd like to begin, as I always do, by thanking all of the SMP employees worldwide. We continue to operate in an environment of challenges and surprises, and I believe our employees have demonstrated their ability to overcome all that is thrown at them.

I could not be more proud of the team. Overall, we are very pleased with our performance as we have now posted our seventh consecutive record sales quarter. We are up nearly 17% versus last year, with both divisions showing gains. Let me review each segment, beginning with Engine Management.

Engine Management sales were up nearly 13% in the quarter, with various moving pieces behind the numbers. The majority of the growth is attributed to sales from acquisitions made in the last year. But in addition, we did see benefits of new business awards, ongoing market strength and a modest bump from pricing actions as we seek to address inflation.

Moving to Temperature Control, we experienced outsized performance surpassing last year’s sales by 30%. The strong ongoing demand we experienced all last year has continued, pre-season orders were strong. We enjoyed some new business from various customers. Here too, we saw the benefits of pricing.

All this being said, as we always caution, first quarter Temperature Control is a low period in this highly seasonal business. And while all indicators are favorable, it does tend to come down to how hot and how long the summer is. And we are going up against one of the longest hottest summers on record.

Let’s briefly discuss margins though Jim and Nathan will delve deeper. Along with the rest of the world, we have been experiencing elevated costs in just about every input, raw materials, labor, transportation, interest rates and so on. The industry has been receptive to passing it through but there is always a lag and the cost increases keep coming.

We have however, also made up some of this headwind through improved fixed cost leverage from elevated sales. So as you look to the bottom line, our earnings per share remain very strong. And while they are slightly off last year's numbers, those were an anomaly, as Nathan will explain. And we believe we're off to a solid start to the year.

So let me talk for a bit about what we've been seeing in the market, focusing on Engine Management as Temperature Control is still largely off season. POS was positive throughout the quarter and remains well ahead of historical levels. We're now up against very high comps as last year’s second quarter numbers were very strong.

And we are now starting to see some modest softening especially in wire and cable, which after two years of abnormal growth is now returning to its secular decline due to where it is in its life cycle. Meanwhile, our non-aftermarket businesses remain strong and we're very excited about the strategic thrust.

This business focuses on selling custom engineered products into niche end markets such as heavy duty, construction, agricultural equipment, power sports and others. As you recall, last year, we made three acquisitions with combined annualized volumes of $100 million.

And when added to our existing business in the space, we now enjoy about $300 million in sales. We're now in the process of amalgamating all the pieces so that we can begin to truly take advantage of the combined strength and pursue cross selling opportunities.

We're beginning to see some of the fruits in the form of new business wins, though it is important to note that these new contracts often take some time to show revenue. One area we are particularly excited about is our joint venture manufacturing electric compressors for electric vehicles.

We are now able to leverage the JV’s technologies along with the streams from elsewhere in the company, and aligning [ph] in contrast globally for electric vehicles. And while overall this business is still small, the growth trajectory is excellent. At this point, I'll hand it over to Jim to review our operations..

Okay, thank you, Eric. From an operations perspective, I will cover two common themes which are not new. First supply chain challenges, and second, the inflationary environment. Supply chain challenges have been persistent.

Sourcing materials, especially commodities such as semiconductor chips, plastic resins, silicon, metals, including copper, aluminum and steel have been on allocation or subjected to long lead times, in some cases 360 days or more.

To combat these challenges, we strategically increased component inventory safety stocks to minimize disruptions in our manufacturing facilities.

We also strategically increased our finished goods inventory levels as we aggressively pursued new business wins, reflecting our value proposition for in-stock inventories and quick turnaround times to satisfy our customer needs. One of our key strengths, meeting these customer needs has been the benefit of our North American footprint.

We feel our manufacturing operations in the US, Mexico and Canada provides us advantages over other suppliers. We are in a better position to react to spikes in customer demands, and at the same time avoid import tariffs from China. While impacted to a lesser degree, international logistics still poses many challenges.

Container shortages, vessel availability, port backlogs and lockdowns still persist. China's zero COVID tolerance programs have caused lockdowns in certain regions and ports such as Shanghai adding to the uncertainties. Fortunately, our JV’s in China have experienced minimal impacts from these lockdowns.

In addition, our direct ownership in these JVs provides us a level of control to prioritize SMP’s planning and scheduling. Balancing and managing all the supply chain challenges takes a tremendous effort by our internal teams, who have done a wonderful job assuring we have the right product in the right place to satisfy customer needs.

Our customers have been very complimentary, recognizing our efforts, and to that extent have awarded us new business wins and many prestigious supplier awards. The second topic I was going to address was inflationary headwinds. Prices are increasing across the board for materials, commodities, labor and transportation.

Our purchasing and engineering teams are engaged to find low cost alternatives and alternate efforts for in-house manufacturing. All of our facilities have robust continuous cost reduction projects to minimize the impact of these inflationary increases.

We feel our cost reduction efforts have delivered very good results to date, with further planned improvements for the balance of the year. In addition to our cost reduction efforts, we plan for further pricing in 2022 to pass through these inflationary cost increases.

I want to thank all of our SMP dedicated employees for their creative ideas and efforts to keep SMP the go-to-supplier in the industry. Thank you for your attention. And I'll now turn the call over to Nathan for financial highlights..

Okay, thank you, Jim. As Eric noted earlier, we had a very good first quarter of the year, as sales were higher than last year and margin and operating profits were in line with the expectations we laid out at the beginning of the year. As we go through the numbers I'll first give color on sales and margins for each division.

Then look at the consolidated results, cover some key balance sheet and cash flow metrics. And finally provide some color on our financial outlook for the year and 2022. First looking at Engine Management. You can see on the slides that net sales there in Q1 were $239.3 million, up $27.2 million or 12.8% versus the same quarter last year.

Excluding the impact of acquisitions and a reduction in sales from the loss of a customer, which we've now basically lapped, the increase would have been 6.2% and was driven by a combination of new business wins and higher pricing to offset inflation. Looking at the margin for Engine, the first quarter gross margin rate was 27.4%.

While down from last year, we said before that last year's gross margin enjoyed many non-recurring benefits from reopening after COVID while this year has been impacted by inflationary headwinds and elevated supply chain costs.

And while we did pass on higher prices to customers during the quarter, we expect to take more pricing actions throughout the year to offset the persistent inflation we're seeing in materials and supply chain costs.

Engine Management gross margin was also partially impacted by a sales mix shift to higher sales and our specialized non-aftermarket channels. But as I’ll mention again later, this margin reduction is offset by lower operating expenses in these channels.

Temperature Control net sales in Q1, 2022 were up $18.8 million or 30.2% with the increase mainly reflecting a fast start of pre-season ordering by our customers, but also business wins and higher pricing. Gross margin rate for temperature control in the quarter was 24.6%, a decrease of one point from 25.6% last year.

The decrease in margin during the quarter was for reasons similar to what I noted for Engine, mainly that last year's gross margin included non-recurring benefits from reopening after COVID, while this year was impacted by inflationary headwinds.

Also like engines, the lower margin percent was expected as the Temp Control division returns to a more traditional seasonal pattern in earnings. Turning to our consolidated results, our consolidated net sales reflected the growth we saw in each division with Q1, 2022, finishing up 16.7% versus last year.

Given the growth in consolidated sales, we did report higher gross margin dollars even though we did see lower margin rates for the quarter for the reasons discussed before. Moving to SG&A expenses, while our consolidated SG&A expenses increased by $8.4 million in the quarter, we saw our expenses as percentage of sales decline yet again.

Our expenses in the first quarter ended down 0.2 points at 19.5% of sales versus 19.7% in Q1 last year. The increase in expense dollars for the quarter resulted mainly from higher selling and distribution costs due to both higher sales levels and inflation in our costs, as well as some additional costs from acquired businesses.

The decline in SG&A, as a percentage of sales reflects improved leverage on higher sales volumes, helped by acquisitions in our specialized non-aftermarket channels which come with lower overall operating costs.

Looking at the bottom line, our consolidated operating income, as shown here on the slide was 8.3% of net sales, down 2.3 points from Q1 last year. As for diluted earnings per share, you can see our performance resulted in earnings of $0.92 per share versus $0.99 last year, while adjusted EBITDA of $35.4 million was roughly flat with Q1 last year.

The decrease in our operating profit and earnings per share for the quarter was mainly due to lower gross margin percent, partly offset by improved SG&A expense leverage.

But while profit as a percentage of sales and earnings per share declined in the quarter, I'd like to point out that our first quarter performance was much better than other first quarter periods in 2018 and 2019 periods prior to the unusual results produced by COVID induced volatility. This underscores two things.

First, while we do have lower gross margins stemming partly from a sales mix shift to more non-aftermarket channels, the lower operating costs here keep our overall profits right in line with historical profitability of the company as a whole.

And second, it shows the ability of our team to drive long term sustainable improvements in the business, even in the face of continued inflationary and supply chain headwinds.

Turning now to the balance sheet, accounts receivable of $225.3 million at the end of the quarter, were up $44.7 million from December 2021, with the increase mainly a result of higher sales during the quarter.

Inventory levels finished Q1 at $534.4 million, up $65.7 million from December 2021, with the increased result of higher sales levels this year, and a strategic investment in inventory to both make sure we meet our customers’ delivery expectations and a buffer against supply chain volatility.

Turning to cash flows, our cash flow statement reflects cash use in operations in the first quarter of $104 million as compared to $11.4 million last year with more cash used for accounts receivable stemming from management of our supply chain financing programs and more cash used for inventory for the reasons noted before.

Regarding capital expenditures, we continue to invest in our business and used $6.4 million of cash for CapEx during the quarter up from $5 million used last year. Financing activities included $5.9 million of dividends paid, and another $6.5 million paid for repurchases of our common stock.

Financing activities also included $120.3 million of borrowings on our revolving credit facilities, which were used mainly to fund our operation, seasonal working capital requirements and strategic investments. While borrowings were higher this year, we still finished the quarter with low total debt leverage of 1.4 times EBITDA.

Finally, I want to give an update on our sales and profit expectations for the full year of 2022. First, let me again it’s very difficult to forecast what will happen in this current environment where inflation is much higher than normal, and demand for our parts has significantly outpaced historical trends over the last year.

While our sales were higher in Q1 than last year, $25 million of increase was expected from acquisitions made last year, and much of the remaining increase came from our Temp Control business, where we have to keep a few things in mind. First, preseason ordering is not an indicator of how the year will play out.

Two, as we all know, sales in the summer months can be highly variable, and depend on weather patterns across the US which are largely unpredictable. And three, we're up against the summer season last year, that was one of the hottest on record.

As such, we reiterate here the expectations we put forward at the beginning of the year, which is to say that we expect full year sales growth for 2022 to be in the low to mid-single digits. We also affirm our prior expectations for full year margins and operating profits.

We expect the consolidated gross margin will be in the range of 28% to 29%, and our consolidated operating profit will be in the range of 9% to 10%.

While our gross margin will be slightly lower than it has historically, due to a mix shift of sales to our specialized non-aftermarket channels, we'll also see the continued benefit of leverage of SG&A expense in these channels, and our business as a whole.

This again is right in line with how we expect the margin profile of the overall business to change slightly, and even though we expect continued headwinds from inflation and higher interest rates and customer vectoring programs. Our bottom line results will remain in line with historic profit percentage levels.

Lastly, while we expect to continue to see very good leverage of operating expenses, remember, we incur these expenses evenly throughout the year at a rate of about $64 million to $68 million each quarter, even though sales and profits are earned in a more seasonal pattern.

As I wrap up my remarks, I would like to say again, how very pleased we are with our start in 2022. Our results reflect the effort of all of our dedicated employees. And I thank them again for helping us turn in another solid financial performance. Thank you for your attention. I'll now turn the call over to Larry..

Okay, good morning, everybody.

I assume you can hear me, right?.

Yes..

Good. Okay, so before we close, we'd like to review some recently announced changes to our Board of Directors. First, Dick Ward will be retiring in May. Dick has been on our Board for 18 years, 16 of which he served as Chairman of the Governance Committee.

Dick has been a tremendous contributor to our company, and we wish him a long happy and healthy retirement. Second, we have announced the appointment of two new Directors. First is Pam Puryear, who has had a very -- who has a very strong background in human resources.

She's held the top HR positions in several major companies, including Walgreens Boots Alliance, which has thousands of stores, Pfizer Corporation, and others. Like many other companies, one of our major goals is to improve ourselves in the areas of ESG and diversity.

And we believe that Pam's experience and advice will be a major help to us as we look to improve in these important areas. Second, is Alejandro Capparelli, who has a long and successful career with Rockwell Automation. He's currently the Vice President of Global Commercial Lifetime Services for Rockwell.

Alejandro has tremendous experience in the fields of automation, operations in general, and international business. And we look forward to his advice and guidance in these and other critical areas. That's our new Board. And with that, I turn it over to Eric to conclude, and then we'll open for questions. Thank you..

Thank you Larry, and I would just like to spend a few minutes talking about our efforts towards being a good corporate citizen. There's nothing new about this for SMP. Through our 100 plus year history we have focused on being good to the environment, to our people, and to the communities in which we operate.

But we are aware that we need to be more deliberate in our actions and been more transparent in our disclosures.

We're proud to have just published our second Annual Corporate Responsibility and Sustainability Report, which is leaps and bounds ahead of our inaugural report in terms of concrete quantitative disclosures, addressing all pillars of the environmental, social and governance framework.

We demonstrate how our overall business strategy is focused on promoting a greener carpark from emissions controls to products for next generation alternative energy vehicles. Importantly, we address our own carbon footprint and set forth our ambition to be net zero emissions by 2050 with interim targets to get us there.

We share details on our employee and Board demographics and demonstrate the progress we are making to increase diversity. We take our responsibility seriously and encourage you to read the report. So in closing, let me reiterate that we are pleased with our quarter and with the momentum we are seeing.

We surely acknowledge that there are many headwinds including cost increases, supply chain issues and the lingering impact of the pandemic, and understand that we are going up against very difficult comps.

We also recognize many favorable structural trends including an aging vehicle fleet, increasing miles traveled, and ongoing difficulties in purchasing new vehicles, which leads motorists to maintain the vehicles they have.

Specific to SMP, we continue to have wonderful relationships with our customers, as evidenced by ongoing supplier awards from multiple channel partners.

We believe that our value proposition of being a full line full service supplier continue to resonate with our customers, as does our favorable manufacturing footprint, based largely in North America and Europe, which has led to our above average shipping performance when compared to many others in the industry.

We have been aggressive in M&A, expanding into new markets, and have been judicious in our preparation for changing vehicle technologies. And importantly, we have what I believe to be the best most dedicated employees in the industry. And as such, I am very excited about the future.

And with that, I will turn it over to the moderator who will open it up for Q&A..

Hi, guys. Thanks for taking our question. This is Joe Enderlin on for Daniel..

Good morning. .

So yeah, just wondering, with plans for the further price increases, wondering if you're seeing a demand destruction or pushback on price from a potentially weakening consumer or inflationary headwinds? And if you could give an estimate of how many SKUs are more discretionary and how those have performed?.

Well, thank you for the question, Joe. And actually the way you package the end of your question, that is an important part of the answer, which is that the vast majority of our products are non-discretionary, and are professionally installed.

And so while we believe that the elevated prices does make its way all the way to the consumer, it does not destroy any of the demand because ultimately the people need their vehicles repaired. The purchasing decision is made by the technician who still wants that premium product to be put on the vehicle to make sure that there are no comebacks.

So we believe that while potentially certain product categories that may be more discretionary, in nature could be impacted by inflation at the counter, our products are largely immune to that..

Thank you. That's super helpful. As a follow-up, just wondering about, noting some European exposure, if you've seen any disruption with the European operations from the conflict in Eastern Europe..

Again, a very good and important question. Because you're correct, we do have a presence in the region. We have a plant in Poland and another one in Hungary, both countries that share a border with Ukraine. First and foremost, our people there are all safe and doing well. And that's the most important thing to us for sure.

We have, as you imagine taken a hard look at our supply chain to try to identify any potential for disruption. We're pleased to say that we do not have any suppliers in the affected region nor do we have any customers there. So we feel that we are reasonably insulated from the issues. Of course we're watching it very closely.

But as of now, we feel as though we are in good shape..

Got it? That's super helpful. Thank you. That's all for me..

Thank you, Joe. .

And we go next to Bret Jordan with Jefferies. Please go ahead. .

Hey, good morning, guys..

Good morning Bret..

Just talk about how you see Temperature Control inventory at your customers now going into the season versus last year?.

Sure. Our customers’ inventories are actually quite healthy, as Nathan, and I guess, I did as well said in our prepared remarks, preseason orders were robust, came in a little bit earlier this year. And so they are in good shape roughly where they were this time last year..

Okay, so roughly equal to last year. All right. .

That's correct. .

And then you made a comment about modest softening in Engine Management POS? Is that because the comp is getting harder? Are you actually seeing sort of a comp-adjusted basis, some sequential downturn in the space?.

I think it's a combination of the two, Bret. We, the second quarter of last year was really through the roof. And so that's what we're going up against. But I do believe that week to week, anything can happen. We try not to read too much into it. But there has been just a modest absolute softening in the last few weeks.

But again, too early to draw any conclusions from it. .

Go ahead..

No, I'm sorry. That's it. .

Okay.

And then, I guess, on the comment around inflation, and maybe taking more inflation going forward, have you fully offset your higher costs, inbound costs, whether it's freight or materials or labor? I guess, as you look at sort of the cadence of inflation, obviously hard to predict, but how do you see, maybe, price inflation, on the shelf, or your aftermarket product, going through the year? Are we going to go materially higher than we've seen in the first quarter before it starts lapping a higher bar in the second half? Or do we -- is there nowhere to go but up?.

Well, what we've seen is that in over the last several quarters, inflation has continued. We've been successful in being able to pass it along, in addition to all of our cost reduction activities, and the combination of the two roughly covers it, but in a lagging way. And inflation continues. We hope it's going to start to level out.

But as Nathan said in his remarks, we do have more pricing actions planned over the balance of the year. And we believe that there's receptivity out there in the marketplace to be able to pass through all these costs. So it's a moving target. It's hard to know where it's going to end. But we're keeping on top of it..

Right, thank you. .

Thank you. .

[Operator Instructions] And we'll move next to Robert Smith with the Center for Performance Investing. Please go ahead..

Thanks, good morning, and thanks for taking my question.

So I was wondering, of the incremental increase in inventory, how much would be due to the build in inventory from supply chain concerns?.

Robert, this is Jim Burke, the tail end of that question, could you repeat it, please?.

Yeah, how much of the build is due to supply chain concerns?.

Oh, virtually all of it is part that we build, as we're seasonal in nature, as we increase the Temperature Control, and to some degree, a slight bit in Engine Management. But we were cautious throughout the beginning of the year, really a carryover from last year, as we were anticipating our sales efforts to gain new business wins.

So we purposely increased the forecast demand that we would have and build the inventory..

My question was more specific to the difficulties and concerns about the supply chain, in particular.

I mean, so is there any way to look at that?.

Well, at the same time -- well I say we're building for new business wins and the supply chain, we've increased the safety stocks. I can't break down the dollars that say was at 50-50 or that, therefore how we accounted for how much we strategically increased it, for instance, safety stocks.

But the intent was to protect our manufacturing environment so that we weren't disrupted for component parts and not being able to finish the production..

I understand that. Thanks.

And is there any way to look at how much is sourced from China with the difficulties in Shanghai? And what's happening over there now?.

Well, we have, -- the benefit is really our North American footprint. And in addition to North America, also Poland. Our joint ventures, we have a control, we have an interest in those JVs. So we feel very comfortable that we can coordinate with them.

And while we do still source from Asia, it's far less than our competitors or others, and we don't quantify or disclose that amount..

Okay, thanks. And then, looking at your long term growth targets and plan, I assume you have a five year plan or something like. Looking at non-aftermarket, you have some kind of a target for where you want to shoot for as a percentage of the business.

I know that much of the acquisitions are opportunistic in nature but I was wondering if you have sort of a long term plan in that respect..

Thank you for the question, Robert. And what I'd say is that these are early days for this business. I mean, we've been involved in it for quite a while, but really, in the last couple years is when it's hit that hockey stick growth trajectory.

And what we are seeing is that it is highly diverse, global, fragmented market that touches multiple end markets with multiple different product categories, all of which present opportunities for us. And so while we don't have a specific dollarized target to announce, what I would say is that, that in many ways, the sky's the limit.

We need to figure out where our priorities are to put our focus. But we are starting from such a small market share base in such a diverse, almost amorphous market, that we think that the opportunities are tremendous.

That said, I'm always very careful to remind everybody that our primary business, our North American aftermarket business is a wonderful space. And we do terrific in it. And we are by no means turning our back on it.

We continue to place tremendous emphasis in it, in growing it and seeking opportunities to expand whether it's through business wins, helping our customers at the street gain market share, or any M&A opportunities that may present themselves within the North American aftermarket. So our objective is to grow both..

So you're looking at the 23% currently, is it fair to say. And over the five years that you'd be looking at, say, a third of the business due to that, and I assume that looking at new business opportunities, you have the electric car more in prominence on the suite..

Again, we're seeking to grow both. And so we're staying away from providing any sort of ratio because that we're not running our business that way. We think we have excellent initiatives in both markets, and we expect to grow both..

Fair enough. Thanks so much..

Thank you, sir..

[Operator Instructions] It does appear there are no further questions at this time. This does conclude Q&A. I'll turn it back to Tony Cristello for further remarks..

Thank you. We want to thank everyone for participating in our call today. If you have any further questions, our contact information is available on the press release or our IR website. And we hope everyone has a great rest of the day..

Thank you. .

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