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Standard Motor Products (SMP 0.09%)
Q1Â 2019 Earnings Call
April 30, 2019, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, everyone, and welcome to today's Standard Motor Products First Quarter Earnings Release Conference. At this time, all participants are in a listen-only mode. (Operator Instructions) Pleas note this call maybe recorded. (Operator Instructions)
And it's now my pleasure to turn the conference over to Mr. Larry Sills, Executive Chairman with Standard Motor Products Incorporated. Please go ahead.
Lawrence I. Sills -- Executive Chairman
Okay. Thank you, and good morning, everyone. And welcome to Standard Motor Products first quarter conference call, and we thank you all for attending. Here for the Company are Eric Sills, President and CEO; Jim Burke, Chief Operating Officer and myself Larry Sills, Executive Chairman. Our agenda for today, Jim will review the first quarter results, Eric will then highlight and go into detail on a few key topics and then we'll open for questions.
So with that, Jim let's go.
James J. Burke -- Chief Operating Officer and Chief Financial Officer
Okay, and thank you Larry. Good morning. As a preliminary note, I would like to point out that some of the material we will 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.
Beginning with our P&L. Consolidated net sales for the first quarter of '19 were $283.8 million, up $21.9 million or 8.4%. By segment, Engine Management net sales, excluding wire and cable in the first quarter '19 were $176.1 million, up $15 million or 9.3%. Driving the high single-digit sales increase were, customer pipeline orders not present in Q1 2018, tariff pricing to pass-through incurred costs and higher OES channel sales. We caution looking at single quarter results and excluding acquisitions continue to forecast Engine Management organic growth, excluding wire in the low to mid-single digits.
Wire and cable net sales in the first quarter '19 were $37.1 million, down $1.3 million or 3.3%. As previously stated, wire and cable will continue in general decline and anticipate 6% to 7% annual decreases. Temperature Control net sales in Q1 '19 were $68.9 million, up $8.7 million or 14.4%. As discussed in our fourth quarter 2018 earnings call, we anticipated strong 2019 pre-season orders. Again, we caution against looking at single quarterly results, as the temp season will ultimately depend on how warmer summer we get.
Consolidated gross margin was 27.5% versus 27.7%, down 0.2 points. By segment, Engine Management gross margin was 28% versus 28.3%, down 0.3 points. Our Engine Management gross margin percentage was dampened 0.3 points due to pass-through tariff costs. In addition, as discussed on our fourth quarter 2018 earnings call, it was noted that Engine Management margins would be suppressed in the first quarter 2019 due to the timing of customer returns. For the remainder of the year, we anticipate Engine Management gross margins in the 29% to 30% range. Temperature Control gross margin was 23.5% versus 22.7%, up 0.8 points. Similar to Engine Management, pass-through tariff cost dampened the gross margin percentage. We continue to forecast Temperature Control gross margins in the 25% to 26% range for 2019.
Consolidated SG&A expenses were $60 million versus $57.7 million, up $2.3 million, but lower as a percentage of net sales at 21.1% versus 22% percent last year. In our last earnings call, we anticipated SG&A spend in the $59 million to $62 million per quarter in 2019. Q2 and Q3 will be at the high-end of the range due to seasonality. This also excludes additional SG&A costs from our recent Pollak acquisition. Consolidated operating income before restructuring and integration expenses and other income expense net in Q1 '19 was $18 million, 6.3% of net sales versus $14.9 million, 5.7% of net sales last year. Excluding non-operational gains and losses, our diluted earnings per share from continuing operations in the first quarter '19 were $0.57 versus $0.46 in Q1 of '18.
Turning to the balance sheet. Accounts receivable increased $16.6 million from December '18 levels and $13.6 million from March '18 levels. Our strong first quarter sales over the fourth quarter and Q1 of 2018 support the receivables increase. Inventories increased $15.4 million from December and $35.5 million from March 2018. These increases are due to our seasonal business and we expect year-over-year flat inventory levels, excluding any impact from acquisitions.
Operating leases recorded on the balance sheet this year reflected right-of-use assets of $37.3 million offset by current and non-current liabilities of roughly $38 million. We funded these working capital increases with our bank revolver. Total debt at March 31 was $83.9 million, an increase of $34.5 million from December and total debt compared to March 2018 levels was $12 million lower. Our cash flow statement reflects a $26.7 million use of cash in the first quarter '19 from operations, as compared to a $6 million use of cash last year. Our seasonal working capital needs drives the use of cash from operations early in the year, followed by positive cash flows from operations at the balance of the year.
Investing activities reflected $3.1 million spend for capital expenditures offset by $4.8 million cash received from the sale of our Grapevine, Texas facility in December last year. Financing activities included $5.2 million dividends paid reflecting a 9.5% increase in our quarterly dividend from $0.21 to $0.23. Financing activities also included $5.8 million repurchase of our common stock. At this point, we still have $4.4 million open authorization against the previous $20 million authorization limit. And financing activities also included roughly $35 million increased borrowings to fund our working capital needs.
Lastly, on April 1st, we announced the acquisition of Pollak business from Stoneridge, Inc. for approximately $40 million. We funded this acquisition under our $250 million revolver and remain very comfortable with our existing debt leverage on the business. We are pleased with the opportunities Pollock brings to SMP and Eric will discuss this further in his comments. In summary, we are very pleased with the start to 2019 and look forward to delivering continued improvements over the prior year and the balance of 2019.
Thank you for your attention. I'll turn the call over to Eric.
Eric P. Sills -- Director, Chief Executive Officer and President
Well, thank you, Jim. And good morning, everybody, and welcome to our call. We appreciate you taking the time. I want to open by recognizing that a week and a half ago SMP achieved a major milestone. April 19th marked the 100th anniversary of our founding. We attribute this longevity to many things, but foremost among them is to the thousands of
employees past and present who have devoted their time and energy into making us who we are and we thank them for it.
And on to the quarters performance, and Jim went through the numbers. So I'll only add a bit of color on a few pieces and then provide an update on our recent acquisition. Overal,l we're pleased with the quarter. Some of the positive momentum that we saw in the second half of last year continued as we saw gains in both divisions and a nice improvement in our earnings. I'll start with Engine Management. The division sales were up nearly 7% for the quarter and excluding wire and cable, we were up more than 9% and several elements were behind this. First, as previously discussed, we have begun passing along tariffs to our customers.
Second, as this often the case, we experienced some pipeline orders from certain customers as they updated their assortments. This type of sales activity is quite common but was largely absent last year. Thirdly, we enjoyed a nice uptick in OE sales, especially with our compressed natural gas injectors being sold into heavy-duty systems in Asia. This is proving to be a nice business for us but can be somewhat erratic in demand. And finally, we believe that the base business was healthy. Customers sell-through which tends to be a good indicator of things to come, started the quarter sluggish but improved month-over-month throughout. And as we always state, customer purchase patterns can be somewhat lumpy quarter-to-quarter, but balance out over time and we continue to project longer term growth in the low to mid single-digits.
Operationally, we're pretty pleased to say that our wire and cable assembly plant in Mexico, which has been causing us excess costs for the last several years has begun operating at normal efficiencies. As you were aware, we have been integrating the General Cable acquisition into this plant, which required hiring and training hundreds of employees. And while it was a long journey, we have now arrived, and I thank all of our people who worked so hard on it.
Turning to Temperature Control, sales for the quarter was strong as compared to 2018, but this was expected and articulated on our last call. Last year's selling season was robust and our customers entered the year light on inventory. They therefore ordered heavily this year to replenish their shelves. But it is very important to note, that this is merely pre-season orders in preparation for the summer and it's not a predictor of what the full year will look like. So let's all hope it gets hot. Operationally, as you recall, last summer we experienced elevated distribution costs due to a combination of the implementation of new automation that was not yet optimized and the strong surge of volume causing major increases in labor. We anticipate that this year will be much better for two reasons.
First, by encouraging heavier pre-season orders reflected in a strong Q1 sales. Our customers are better prepared for the season and this should smooth out the demand. Secondly, we have worked diligently over the last two quarters fine tuning our processes and are optimistic about our readiness.
I'd like to now spend a few minutes talking about (Technical Difficulty) on April 1st, we acquired the Pollock business from Stone Ridge, which will be folded into our Engine Management division. The acquired business manufactures various switches, sensors and connectors and generates about $45 million in annual revenue, 75% of this business is OE, selling to both commercial vehicle and light vehicle markets, while the other 25% is aftermarket, mostly selling under the Pollock brand into the heavy-duty channel. We are very excited about this deal. It's a perfect fit to our overall acquisition strategy.
To remind you we seek targets within our two major product lines that have a readily achievable synergies, but that also get us into something a bit out of our core to grow upon. Pollak is just that. The products are quite similar to what we already make and sell and we'll be able to achieve cost savings through integration into our low cost plants. But it also helps us to diversify our portfolio by growing our relatively small footprint in the commercial vehicle space. Pollak founded a 110 year ago, remains a well respected name in this space, and we are hopeful that we can leverage the combination of their brand and our core competencies and grow the business.
As for the integration, we acquired their production lines but not their plants or people. Stoneridge will continue to manufacture on our behalf until we are able to relocate. Most of the production is in Canton, Massachusetts with the balance in Juarez, Mexico. There is also a small distribution center in El Paso, servicing the aftermarket accounts. We will be relocating all of it to existing SMP locations. We plan to move the majority of it to our Engine Management facility in Reynosa.
It is worth noting that this is a much simpler than the move of the general cable operation into our wire plant. General Cable is many times the number of new employees and required a 75, 000 square foot facility expansion, while this will fit into our existing footprint. We're currently working on our detailed schedules but expect to have the moves complete within a year and achieve run rate efficiencies sometime in 2020.
So in closing, we're excited about all that's going on. The industry is healthy and we continue to enjoy a prominent place in it. Our operational issues of the last few years are largely in our rear view mirror. These were all designed to make us a stronger Company, Integration of acquisitions, plant moves to improve our footprint and investments in systems to make us more efficient. We can now reap the benefits of these initiatives. We're diversifying our business in new and exciting arenas, commercial vehicles with the Pollak acquisition and our natural gas injectors. The Chinese market with our two joint ventures and growth into new technologies out of our Poland operation. And our people are energized as we begin our next 100 years.
So that concludes my prepared remarks. At this point, I'll turn it back over to the moderator and we'll open it up for questions.
Questions and Answers:
Operator
Okay, thank you. (Operator instructions) We'll take our first question from Scott Stember from CL King. Please go ahead, your line is open.
Scott Lewis Stember -- CL King and Associates -- Analyst
Good morning, and thanks for taking my questions.
James J. Burke -- Chief Operating Officer and Chief Financial Officer
Good morning, Scott.
Scott Lewis Stember -- CL King and Associates -- Analyst
Just honing in on the margins here a little bit. I know you said that returns and you definitely telegraphed that heading into the quarter but returns had an impact on the Engine Management gross margin. Is it fair to assume that the delta between the 28% and your goals or the run rate of 29 plus percent was related to returns in the quarter?
James J. Burke -- Chief Operating Officer and Chief Financial Officer
That's a major piece of it Scott that's there. And also as we kick-off in the beginning of the year, we always have a pipeline of the improvements that we're working on moving product to low cost areas and achieving make first buy and low cost sourcing. So returns would be the largest component of it just because of the timing of it and other savings that we have for the balance of the year.
Scott Lewis Stember -- CL King and Associates -- Analyst
And on Temperature Control, could you tell us what the tariff impact was to gross margin?
James J. Burke -- Chief Operating Officer and Chief Financial Officer
We predicted that again, within the first quarter, it's a smaller piece that isolated. We said that we are in the 0.7% to 0.8% range on an annual basis.
Scott Lewis Stember -- CL King and Associates -- Analyst
Got it. And just moving over to Pollock real quick, and then I'll get back to the queue. Maybe just talk about your expectations for the growth profile here. You know, our understanding that it's, I guess sounds like it's a low single-digit grower. How do you expect that to fit into your model? And how -- maybe just talk about the margin profile and how we would expect that to fold into the expectations of the 29% to 30% for Engine Management?
Eric P. Sills -- Director, Chief Executive Officer and President
Sure. In terms of the growth profile, it's actually, what we acquired is a bit more mature, and so if we were to just leave it as is, it would be not slow growth but it would be more flat to potentially a little bit down as some of the OE contracts start to near end of life. But it's very stable product, most of this going into when I say commercial vehicles, some of it is over the road heavy-duty type vehicles. But it is also going into industrial, marine, material handling type equipment which technology is really, it's very stable and the vehicles stay on the road for a very long time. So there's not a need for continuous pipeline of new technologies coming in.
All that being said, we did not acquire this to just leave it alone. We acquired it because we see that there are good opportunities to capitalize on their footprint but also by putting behind it the breadth of our coverage. We have a lot of similar products that they did not have in the line but work well into that space and to be able to capitalize on their brand in the aftermarket space and the customer relationships in the OE space. Our objective -- and it's hard to put a number on this because we're really just getting started. But our objective is to grow and build on this business.
Scott Lewis Stember -- CL King and Associates -- Analyst
Okay, that's all I have now. Thanks.
Eric P. Sills -- Director, Chief Executive Officer and President
Thank you, Scott.
Operator
Thank you. (Operator Instructions) Meanwhile, we'll move to Bret Jordan with Jefferies. Please go ahead, your line is open.
Bret David Jordan -- Jefferies -- Analyst
Hey, good morning, guys.
James J. Burke -- Chief Operating Officer and Chief Financial Officer
Good morning, Bret.
Bret David Jordan -- Jefferies -- Analyst
On the top line in Engine Management, a little over 9% ex wire, could you sort of give us a break out of what the tariff and the pipeline still contributed to that number?
James Burke -- Executive Vice President-Finance and Chief Financial Officer
Yeah, Bret. Hi, this is Jim Burke. Okay, the tariffs, we don't break out the exact amount of the tariff that's in there. It's to ourselves, it's a lesser degree again as we're focused in North America manufacturing and then being with Mexico to U.S. and our Polish oration there. So we don't identified specifically that amount. The impact on the on the margin percent we broke out, which was 0.3%.(ph)
Eric P. Sills -- Director, Chief Executive Officer and President
If you look at the components, Bret of that 9% growth, the pipeline would be the biggest portion of it.
Bret David Jordan -- Jefferies -- Analyst
Okay. All right. And then on Pollak, I guess, as it stand-alone, it's not growth, but you're talking about adjacencies and being able to grow it. What -- is there any kind of technology exchange where you can take their product and expand your own Engine Management sensor business. And I guess, as you shifted to Reynosa, how do you see their returns improving on the $45 million in revenue that it's doing now?
Eric P. Sills -- Director, Chief Executive Officer and President
From a technology standpoint, it is largely older technology. So I don't see it helping us with technology, I see us helping it. Again, it's got plenty of runway left because a lot of the applications, they just don't change, they're not -- especially when you start looking an industrial type applications, they're not necessarily chasing new technology which typically comes at an increased cost. They're looking at a tried and true robust types of switching and sensing. But we believe that, you put this into our breadth of coverage, we will have the ability to entertain replacement technologies with the customer base. And I would say, I don't believe I mentioned this in my response to Scott, that the majority of the customers -- certainly the majority of where the volume is, our customers that we already do business with. So we're familiar to them and have a dialogue and a relationship. And so this now positions us with them to be able to say, OK, is what Pollock was providing for you, we want to be there as we start talking about newer technologies.
Bret David Jordan -- Jefferies -- Analyst
Okay, and then I guess, as far as improving the return. I guess, you paid close to one time sales for flat top line. Is there a fair amount of margin potential in this as you shift its production?
James Burke -- Executive Vice President-Finance and Chief Financial Officer
Yes, Bret, this is Jim Burke. Again, yes, we feel there's a benefit on there significantly. We are going to move it to our low cost areas out of there. So we think this is a very good opportunity for SMP. A, to grow to top line and B for the the margins that we're going to pull from this business.
Bret David Jordan -- Jefferies -- Analyst
Okay, great. Thank you.
Operator
(Operator Instructions) And we do have a follow up from Scott with CL King. Please go ahead, your line is open.
Scott Lewis Stember -- CL King and Associates -- Analyst
Yeah. I appreciate what you were saying about how this acquisition will definitely have far less integration issues than the general cable did. But could you just maybe walk us through the timing of when you expect to be self-sufficient and actually producing the product yourself? And will there be any in-between inefficiencies that we have to think about as -- I mean obviously as you're moving all the tooling and the machinery down from Canton down to Reynosa? I imagine there's going to be some inefficiencies and some redundancies. But just trying to get a sense of what we could expect and what we should be modeling at least at some point this year?
Eric P. Sills -- Director, Chief Executive Officer and President
I will provide very broad brush stroke, Scott, but the ink is still wet on this deal. We're just now developing our move plans in conjunction with the Stoneridge folks. So we do not yet have the detailed timeline in preparation for moves. We have bridge builds to make, we have discussions with customers regarding approval processes and so on. So it's really premature to start painting to clear picture of timelines. But you're right. There will be prior to being at full efficiency, we'll step backwards a little bit as we incur some of the duplication costs and efficiencies, training, travel, rigging expense, et cetera, which is going to take us really over the course of the next 12 months, I would say.
Scott Lewis Stember -- CL King and Associates -- Analyst
Okay, and just one final question, I'm not sure if I heard the answer to it, but on a stand-alone basis, how will the margins stand up for the Engine Management segment for Standard versus Pollak?
James J. Burke -- Chief Operating Officer and Chief Financial Officer
Yeah, this is Jim Burke, Scott. Once we have it fully integrated, we believe that the margins will be moving. Again 75% of this is OE. We believe they'll be moving close to the top line gross margins. But on the operating profit, it comes with very little SG&A excluding the amortization that we'll have once we finally do the full valuation between intangibles and goodwill, cash SG&A, they will be much lower. So the operating margins on this business will be very good.
Scott Lewis Stember -- CL King and Associates -- Analyst
Okay. That's all I have. Thanks.
Eric P. Sills -- Director, Chief Executive Officer and President
Okay, thank you.
Operator
(Operator Instructions) Meanwhile, we'll move to Robert Smith with Center for Performance Investing. Please go ahead, your line is open.
Robert Smith -- Center for Performance Investing -- Analyst
Hi, good morning.
James J. Burke -- Chief Operating Officer and Chief Financial Officer
Hello, Bob.
Robert Smith -- Center for Performance Investing -- Analyst
Hi. So first, are there other Pollaks out there and could you just tell us what the possibilities are in moving into more into OE emphasis?
Eric P. Sills -- Director, Chief Executive Officer and President
Good morning, Bob. And yes, there are -- this is a space that we have been dabbling in. We got -- going back a few years, when we acquired Annex manufacturing on the Temperature Control side of our business, that was more in this commercial vehicle space and then some of our own organic growth. We have been growing quietly this portion of our business. We see it as an attractive area. It's first of all because we're starting from a relatively low base, there's a lot of growth potential but it's a it's a nice stable market with reasonable margin potential. And an area where we think we have some competence. So we will continue to look to build not just on our existing business. But sure absolutely as we look at potential emanate pipeline, this is a category among all the others that we've historically been looking at that's on our list.
Robert Smith -- Center for Performance Investing -- Analyst
Okay. And as far as the labor category in general and supply training costs in Reynosa in particular with the Pollak integration?
Eric P. Sills -- Director, Chief Executive Officer and President
Well, it's -- the labor market down there continues to be somewhat tight as it is really everywhere at this point. But as I stated in my opening remarks, it's important to note that the headcount related to this business is really pretty reasonable, it represents as a percentage not a huge amount of growth over what we already have in that plant as opposed to the General Cable deal where we're trying to double a plant. This is adding a fraction of what's already in the building. So we don't see it as an insurmountable issue at all.
Robert Smith -- Center for Performance Investing -- Analyst
Okay. And no raw material costs, your ability to fund costs and what's happening in the transportation scene so to speak with cost?
James J. Burke -- Chief Operating Officer and Chief Financial Officer
Yes. Hi, Robert, this is Jim Burke. Yes, we're incurring those same similar costs as our peers that are there, where we feel love very comfortable with the pricing environment that we're -- the ability to pass those costs on through to channel.
Robert Smith -- Center for Performance Investing -- Analyst
And you mentioned the new technologies in the Poland operations. Could you give us a little more color on that?
Eric P. Sills -- Director, Chief Executive Officer and President
Sure. Well, it's a plant that has a large engineering group. It's our single biggest engineering group. We have over 50 degreed engineers in the building and they have been working beyond just more traditional technologies. They've been doing well into some advanced emission sensing products more on the OE side and that area exhaust -- high temperature exhaust gas temp sensing, getting into some other technologies for the aftermarket such as variable valve timing and a little bit on the safety and ADAS side with parking sensors with parking sensors. So they have been able to really tackle just about anything we've thrown at them. And with the types of new technologies coming on the market, we see them as our center of excellence to be able to bring this type of product in-house.
Robert Smith -- Center for Performance Investing -- Analyst
That sounds promising, so I assume that you're going to expand that operation?
Eric P. Sills -- Director, Chief Executive Officer and President
That is our plan. We've been doing that since we acquired it in 2006 and there were only 50 people in the entire building. We now have over 700 in the building. And as I mentioned over 50 technical people, there's engineering universities in the city that we operate in. And so it's -- they're readily available to us. And yes absolutely, we plan to continue to grow that operation. Surely, It's really it's a great combination. I should say not just from a technical standpoint and the ability to hire engineers but also from a cost a manufacturing standpoint, where being in the Eastern part of Poland, our cost structure there is comparable if not better than being in Mexico. So it really creates a terrific combination of technical skills and low cost manufacturing and we plan to build on it.
Robert Smith -- Center for Performance Investing -- Analyst
That's it for me and congratulations and all the best on the second hundred.
Eric P. Sills -- Director, Chief Executive Officer and President
Thank you, sir.
James J. Burke -- Chief Operating Officer and Chief Financial Officer
Thank, Bob.
Operator
Thank you. And it appears we have no further questions at this time.
Lawrence I. Sills -- Executive Chairman
Okay. Thank you all. But before we close, I just want to take this opportunity to thank and congratulate our employees around the world for achieving this 100 year in business milestone. It's really a singular achievement and thank them and congratulate them. And with that, this concludes our first quarter conference call. Thank you all for attending.
James J. Burke -- Chief Operating Officer and Chief Financial Officer
All right. Thank you and good bye.
Operator
Thank you. This does conclude today's conference. You may disconnect and have a great day.
Duration: 32 minutes
Call participants:
Lawrence I. Sills -- Executive Chairman
James J. Burke -- Chief Operating Officer and Chief Financial Officer
Eric P. Sills -- Director, Chief Executive Officer and President
Scott Lewis Stember -- CL King and Associates -- Analyst
Bret David Jordan -- Jefferies -- Analyst
James Burke -- Executive Vice President-Finance and Chief Financial Officer
Robert Smith -- Center for Performance Investing -- Analyst
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