Eric Sills; President, Chief Executive Officer, Director; Standard Motor Products Inc
Nathan Iles; Chief Financial Officer; Standard Motor Products Inc
James Burke; Chief Operating Officer; Standard Motor Products Inc
Operator
Good day everyone, and welcome to the Standard Motor Products fourth quarter 2024 earnings 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 Instruction)
Please note this call is being 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, Vice President of Investor Relations. Please go ahead.
Thanks, Nikki, and good morning, everyone, and thank you for joining us on Standard Motor Products 4th 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 Is, 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 up for Q and 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
Well, thank you, Tony, and good morning, everyone, and welcome to our fourth quarter earnings call. It’s good to be with you today. But overall, we are pleased with our performance in the quarter, making for a solid finish to a strong year.
Top line showed growth overall, not including the contribution of our new acquisition, which I’ll discuss shortly. And we saw the trend of an improving bottom line continue with adjusted diluted earnings per share of 27% in the quarter and 8.6% for the full year.
Let me discuss each segment separately as each has its own story. Our vehicle control business in the quarter increased by 4.9% over last year, allowing us to post a 3.3% increase on the full year setting a high watermark for the segment. We believe we benefited from a product offering that’s largely nondiscretionary in nature as these types of categories tend to outperform in difficult economic conditions.
And as our products are mostly professionally installed, we believe that our reputation for high quality has technicians seeking them out in the marketplace. Lastly, we are seeing an incremental ongoing investment in inventory by the larger distributors as they add locations and increase store assortments, recognizing that the best forward deployed inventory wins in the marketplace and we expect this trend to continue.
Our Temperature Control division continued the strong trend it has been enjoying all year. Sales were up 30% in the quarter, though the fourth quarter is always the smallest in the seasonal category. But for the full year, we were up 12.5%, far and away the best year for the segment.
In addition to the non-discretionary nature of the products discussed in vehicle control, this category is also highly weather dependent and 2024 set all records. It got hot across the country early and stayed that way all year.
With such outsized demand, we are very pleased with our distribution and operation folks who are able to keep up throughout, and we thank them. Within our engineered solutions segment, although our full year sales were up slightly over the prior year, we did experience softness in the quarter.
As the segment provides parts to new vehicle and equipment production across various and markets. As we discussed in our third quarter call, certain of our customers began to slow their production schedules as their demand softened, which in turn dampened their purchases from their suppliers like us.
It's important to note that our volume reduction is solely due to these slowdowns. We have not lost any business. And as we have always said, this segment could be more volatile than the aftermarket, but still has great potential and a long-term trajectory of growth.
We are a small player in a vast global marketplace, and as we are getting known as a capable player, we are gaining new business awards. As such, we remain very bullish on the segment and truly believe that while it can be temporarily impacted by the cyclical nature of the market, it has a tremendous future.
Lastly, I'll speak about our newest piece, Nissan's Automotive.
Having cleared all regulatory hurdles, we consummated the deal on November 1, and for the two months that it was part of S&P, it performed as expected, recognizing that these are typically low months for a business that's semi-seasonal.
First, let me remind you a bit about the business. Nissan's is a leading aftermarket player in Europe and go to market with similar strategy as S&P with overlapping product categories and complementary strains. They are largely in thermal management systems, both air conditioning and power train cooling, and in the last few years have made strong inroads and categories that fall within our vehicle control portfolio.
They have a strong record of growth, both through market share gains and expansion of their offerings and generate mid-teens EBITDA.
We're now heavily engaged in integrating the business, seeking the benefits that the combination of our two companies provides. On the cost reduction front, we have teams working closely together to seek best cost across a host of inputs.
The biggest areas for savings is product cost, identifying supplier consolidation and leverage, make first buy opportunities, and so on. But there are many other areas of savings as well.
As we stated at the time of the acquisition, we are targeting $8million to $12 million in run rate cost reduction synergies within 24 months and remain very confident in that number. As we look to help each other, these improvements will be reflected across all segments, not just this.
From a product offering standpoint, we've begun fleshing out each other's catalogs. In addition to filling holes in common product groups, we are identifying complementary product categories to add on either side of the ocean.
And lastly, from a commercial standpoint, we've begun discussions with each other's accounts to identify potential opportunities, and these discussions are going quite well.
We're still in the early days, but are more bullish than ever. The two teams are well aligned, partnering to make both companies stronger, and the enthusiasm is contagious. So we look forward to keeping you abreast of our success.
So with that, I will turn it over to Nathan, who will provide more details.
Nathan Iles
All right, thank you, Eric, and good morning everyone. As we go through the numbers, I'll first give some color on the results for the quarter by segment and then summarize results for the full year at a consolidated level. I'll cover some key balance sheet and cash flow metrics and finish with an update on our financial outlook for the full year of 2025.
First, looking at our vehicle control segment, you can see on the slide that net sales of $187.4 million in Q4, were up 4.9%, with the increase driven by solid demand for our products.
Vehicle controls adjusted EBITDA in the fourth quarter was down from last year, driven by a lower gross margin rate, but partly offset by better leverage of operating expenses. The gross margin rate was impacted by higher cost inputs, as well as some differing product mix, but given higher sales, our gross margin dollars increased over Q4 last year.
The improved operating expense leverage was also the result of higher sales volume, and we were pleased to see factoring costs decline as a percent of sales as interest rates are slightly lower than last year.
Turning to temperature control, net sales in the quarter for that segment of $58 million were up 30%. The fourth quarter benefited from another year of favorable weather patterns that started early in the season and continued through the summer, with man staying elevated into the fourth quarter.
Temperature controls adjusted EBITDA increased in Q4 to 9.5% as higher sales volumes led to higher gross margin rates and improved operating expenses as percent of sales for the quarter.
Sales for our engineered solutions segment in the quarter were down 7.9% and we're impacted by slowing customer production schedules as they react to softness across various markets. We've noted the markets we serve can cause lumpiness in our sales in a given quarter, but we were pleased to see our sales for the full year increase 1% as new business wins with both existing and new customers offset some of the market's softness.
Adjusted EBITDA for engineered solutions in the quarter of 8.5% was up from last year, as we saw a better mix of products sold, which improved the gross margin rate and operating expenses remained well under control. Last but not least for operating segments, let me talk about Nissan's automotive.
We closed on the acquisition of the business on November 1, as Eric noted, and have included two months of sales of sales and profit in our results. Nissans added $35.7 million of net sales in the quarter and $3.2 million of adjusted EBITDA.
The business is performing as expected, but I should point out that it does have a seasonality aspect to it, similar to our temp control segment, given the nature of certain products. As you know from being familiar with the seasonal business, the fourth quarter can be and usually is different from a full year. So, timing of our acquisition coincided with the slowest months of the year in November and December.
We expect sales volume and EBITDA to pick up as we go through 2025 in line with prior expectations, which is that Nissan is about a $260 million business in sales annually with mid-team EBITDA.
One other point regarding Nissan's gross margin and SG&A expenses, you'll notice a different profit profile than our other segments. As this is more of a distribution business and manufacturing, we'll see higher gross margins, but also some higher distribution expenses in SG&A that when combined will result in an adjusted even in the mid-teens range for the full year, as I noted.
Putting the results all together across the four segments for Q4, consolidated sales increased 18.1% and adjusted even to increase to 8.4% of net sales, while non-gap diluted earnings per share were up 27% versus last year. Turning to our full year consolidated results, you'll see we turned into a solid overall performance.
Net sales were up 7.8% and when excluding Nissan's, we're up 5.1%, with sales up across all segments. Our gross margin rate increased to 29.1% on the strength of our temp control business and the addition of Nissans.
While consolidated SG&A expenses, excluding factoring were up for the year. The year contained additional costs related to the Nissan business and startup of our new distribution center. Excluding $14.2 million of Nissan's SG&A and $4.6 million of DC startup costs. SG&A's percent of sales would have been 18%, showing improved performance on higher sales volume.
On the bottom line, sales growth, marginal improvement, and well controlled operating expenses helped us achieve an 8.6% increase in non-gap diluted earnings per share for the year.
Turning now to the balance sheet, accounts receivable were $210.7 million at the end of the year, higher than last year due to the addition of Nissan's receivables of about $38 million and higher Q4 sales for the legacy business.
Inventory levels finished the year at $624.9 million, up from last year. Mainly due to the addition of Nissan's inventory of $92 million and also higher levels needed to satisfy increased sales lines.
Our cash flow statement reflects cash generated in operations for the year of $76.7 million as compared to cash generated of $144.3 million last year. Please note the cash generated in operations last year was aided by a reduction in inventory balances that did not recur this year after we brought inventory levels back down to normal.
Our investing activity show capital expenditures increasing this year to $44 million, but that includes $20.6 million of investment related to our Shawnee distribution Center. Financing activity show payment of $25.3 million of dividends and $10.4 million of share repurchases, as well as borrowing for the year of $392.6 million which were used primarily to fund our acquisition of Nissan.
Our net debt of $517.9 million at the end of Q4 was higher than last year after borrowing funds for the acquisition. We finished Q4 with a leverage ratio of 3.7 times even, but keep in mind this includes just two months of results from Nissan's, and pro forma for 12 months would mean leverage was actually under three times.
While we may see a slight uptick in leverage in the first half of 2025 due to seasonal working capital needs, we expect our leverage ratio to improve as we add EBITDA from Nissan into the ratio and pay down debt in 2025. We continue to target leverage of less than two times EBITDA by the end of 2026.
Before I finish, I want to give an update on our sales and profit expectations for the full year of 2025.
Regarding our top line sales, we expect to see percentage growth in the mid-teens for the full year, which reflects growth from the addition of Nissan's automotive and continuing favorable North American aftermarket dynamics.
But also a slight headwind from the sale of our ACI product line, which was about 50 basis points of consolidated 2024 sales, and sales and engineering solutions which are currently soft as end markets remain lower and customers reduce production to work through inventory.
We expect to adjust to EEA for 2025 to be in a range of 10 to 11%, and that includes growth from Nissan's automotive as we'll have 12 months of results versus two months in 2024.
In connection with our adjusted even outlook, we expect interest expense on outstanding debts to be about $32 million for the full year, our income tax rate to be 27%, and depreciation amortization to increase to $40million to $45 million as we amortize Nissan’s intangibles and place distribution center investments in service.
Regarding operating expenses, keep in mind these expenses are incurred more rapidly across the year, but do have some variability with sales, and as such will fluctuate the seasonality in the business. We anticipate total operating expenses, inclusive of factoring and additional missions expenses will be approximately $97 million to $103 million each quarter in 2025.
Finally, please note that our 2025 outlook does not include any impact from the recently announced and potential tariff actions. The US government continues to announce potential actions, but things change constantly, creating uncertainty in the market. Whatever the impact is on our business, we plan to address higher costs by passing them through in price dollar for dollar.
To wrap up, we were very pleased with our sales growth in both the quarter and full year of 2024, as well as our earnings growth. Given our results, we were pleased to raise our quarterly dividend to $0.31 per share, an increase of almost 7%, continuing a trend of increases over many years. We're also happy to have the Nissan's team on board and are looking forward to working together, creating exciting opportunities for 2025 and beyond.
Thank you for your attention. I'll turn the call back to Eric for some final comments.
Eric Sills
Oh, thank you, Nathan. So the close, let me just spend a minute on how we're thinking about the future. Needless to say, we are in complex times, making things difficult to predict, but overall, we believe that our business largely resides in the same harbor.
The aftermarket, which represents over 80% of our business, tends to be highly resilient in times of instability. As people across the globe feel a sense of uncertainty, they tend to resist major purchases. The car park tends to age during these cycles, and motorists have no choice but to make the necessary repairs to keep their cars operational.
We've seen this to be the case here in North America, and with our exposure in Europe with Nissan's, we expect similar dynamics.
We're also headed into a period of uncertainty related to tariffs. Only time will tell which get implemented and to what extent. And as such, as Nathan said, we have not accounted for them in our 2025 outlook. But with history as our guide, we anticipate the ability to pass these through at cost, and as we are largely sell non-discretionary repair items, we would not expect any destruction of demand.
Meanwhile, if tariffs increase the cost of new cars, we would expect that to dampen new car sales and thus benefit the aftermarket further.
Our engineered solutions business can experience different trends. Certain end markets and customers will perform well, while others may see temporary contraction. And while we are experiencing some near-term headwinds, we expect the long-term trend for us to be favorable as our new business awards take shape.
Meanwhile, we continue to implement many initiatives to make us a stronger and more diversified global company, and we have the best group of people to make it all happen. And so we do feel very good about the future.
That concludes our prepared remarks. At this point, we will open it up for your questions.
Operator
(Operating Instructions)
We'll take our first question from Brett Jordan with Jefferies. Please go ahead. Your line is open.
Hey, good morning, guys.
Eric Sills
Good morning, Brett.
Could you talk about I guess how you see the Nissan's contribution to your guided growth for 25, are there synergies in the North American business from adding that product to the portfolio?
Nathan Iles
Yeah, Brett, thanks for the question. So, as we look at 2025, and I think we've said some of this before, when we signed the deal last summer, we expect some of the cost synergies to roll through, in terms of just looking at product cost across the different portfolios, but in terms of revenue synergies, it will probably take a bit longer to come. And that would be further out, and I guess just remind you, Eric mentioned the synergy target that we were looking at, that was more around the product costs, than the revenue synergies themselves.
Eric Sills
So just to add to that is right, and to add to that because it is largely about product cost reductions there can be a timing lagged before it hits the P&L as you have. Vendor lead times and it has to go through the balance sheet and so on. So while we're getting a lot of the decisions made and making nice progress, there is an offsetting timing, so we don't expect a tremendous amount of it to hit, certainly not in the near term, but we hopefully we'll see some towards the end of the year.
Okay, and can you talk about the sort of POS data at the customer level versus your sell in, obviously a very strong temperature control is that product is, could you talk about customer inventory levels there and do you see any of that me being purchasing ahead of potential tariffs just given a lot of that product comes from Mexico or is it really sort of aligned with what the underlying demand is.
Eric Sills
Right? So, just to be clear, you're obviously asking about the North American aftermarket business and what we've seen with POS and related inventory. I'll talk about the two divisions separately, vehicle control, what we saw in the quarter was basically flat POS.
From the big guys, and so as you saw our sell in being slightly higher than that was really what I was referring to as kind of this ongoing. Inventory expansion as they're adding hundreds of stores and broadening their assortments and again those those trends we would expect to continue on the temperature control side. What we saw strong POS in the 4th quarter, but not quite as big as as the 30% growth we saw in sell in.
That was a bit of a of a rebuild of their inventory because it had been such a strong selling season throughout that that was, Beginnings of them preparing for 2025 and as we look at at the preseason orders continuing right now, we see it as roughly comparable to the last few years as it relates to whether there is a pull forward of any purchases ahead of the potential impact of tariffs. We're not seeing that per se. We think that it's that that the purchasing is still pretty rational. Okay.
And then one last question I guess how do you see inflation ex tariffs, what would you sort of think same skew inflation looks like in 25 versus 24?
Nathan Iles
Yeah, let me take it from the cost I read, I guess we see inflation, across the markets just as everyone else is seeing, expect to offset that price where we can, but I think the inflationary environment is largely back to normal, stands tariffs.
Okay, I mean, most of your customers have been talking about 1% is their expectation is that sort of aligned with where you're thinking?
Eric Sills
So that's reasonable to be in that very low single digit range.
Nathan Iles
Okay great thank you.
Operator
Thank you. Our next question comes from Scott Stember with Roth MKM. Please go ahead. Your line is open.
Good morning, guys.
Eric Sills
Hi Scott.
Regarding, tariffs, I know this is, obviously a hot topic, and nobody knows what's going to happen, but could you just remind us. Where your exposure, versus all the regions are versus Mexico, Canada, China, and Europe, just so we have an idea of how things could unfold if things accelerate on that front.
Eric Sills
Sure, I'm not going to get into specific details, but we are, as we're a global company, we have manufacturing across multiple continents, here in North America as well as a significant amount in Europe and in Asia, as well as the supply base that is global.
So as we think about Both the announced and potential future tariffs, we see exposure throughout, but not necessarily overly concentrated in any particular area and even then, a lot of the details have been, are still being developed in terms of how tariffs are even going to be, accounted for, in places like Mexico. So, we're staying nimble on it while we pay very close attention to the announcement.
That are being made and as we said in the prepared remarks, the intent will be to pass them through. There may be a bit of a timing offset as the tariffs get announced and we then have to, work it through our inventory, but the plan is, as we did in 2018, to accommodate it, we'll work with our suppliers as well to say how can we share in some of the pain but to largely pass it through. Basically that.
Got it, that's helpful. And then, with the new edition of Nissan's maybe just go through the three individual segments air conditioning, engine cooling, and energy efficiency just remind us of at each one is doing and how each is performing, I guess from a sales perspective. I know that.
This is the first quarter but just give us a sense of how each segment is performing on a year-to-year basis if you could.
Eric Sills
So, first, in terms of the split between the three the three categories, engine cooling is the largest of the three, and it has various product types in it, but the single biggest needle mover within it is radiators, which is very big and healthy business over in Europe.
Air conditioning being the second biggest category, roughly 1/3 of the volume, that's very much of a similar offering as our temperature control division, and the last being what they call engine efficiency. It's what we would call vehicle control.
This is a newer business for them. And so, it's one that they have been adding as opposed to going wide like our vehicle control. It's subcategory by subcategory began with turbos where they've done very well. After that they lost EGR valves and now we're getting to electronic throttle bodies, so. They're looking really subcategory by subcategory where they believe they have something to sell and where they believe that the market has an opening for them. And it's really been very impressive to us, their ability to launch these and gain scale in that.
A subsegment where really they were unheard of not more than 55 years ago. All three of the categories are performing well, performing as expected. The temperature controls the air conditioning one being the most seasonal of the three. So right now, it's in the offseason.
But there's every expectation that it'll perform as ours does, rise and fall to a degree with the weather, but they are a significant market share player in Europe and are doing very well with their legacy categories and are now seeming to do very well with their engine efficiency as well.
Got it very helpful and then last question just give an update on the new facility and movements over in in Kansas.
James Burke
Okay. we're progressing very well there. The automation, we're doing the installation there as a recall for everybody, we're expanding our capacity.
We're within a few miles of our existing Edwardsville, Kansas distribution center there, but we're putting product in from both vehicle control, temperature control, and then moving the wire from our Edwardsville facility, which gives us much more.
A risk avoidance that we have in there. The automation is going in, we believe by the end of 25 we'll be prepared to move the final pieces in there and then we'll be scheduled to put the existing facility in Edwardsville, Kansas, which we own on the market, and then we plan to exit that hopefully early 2026.
Got it, that's all for me. Thank you.
Eric Sills
Thanks, Scott.
Operator
Thank you. And as a reminder, it is start and one on your telephone keypad if you would like to join the queue.
We will move next with Carolina Jolly with Gabelli. Please go ahead. Your line is open.
Oh, good morning thanks for taking my call just to going to just to start with your guidance of mid teen growth, obviously we were to exclude the con contribution from Nanthan. Can you talk a little about maybe some of the puts and takes of the growth there and are you expecting growth in in your underlying Vehicle control business.
Eric Sills
Good morning, Caroline, it's Eric. We'll give you some flavor, but we typically don't give guidance at the segment level, but yeah, so Nissin's obviously being the majority of that mid-team's growth, just in that it's new business for us.
And as we look at the basic market trends within our other three segments. We see on vehicle control side, we had a good year last year, trends, its early days, but as of now, trends seem to be continuing along those lines, and the market remains healthy for this non-discretionary category on the temperature control side.
What we see is, as Nathan mentioned, we're starting, with the absence of that, the ACI business, the window lift business that we sold last year, which is, a few percentage points backwards just to start with and going up against a very strong season we have expectations it'll get hot again, but as you know as well as we do, it's going to rise and fall a little bit depending on when it gets hot and how hot it gets.
Engineered solutions is starting the year as it ended last year, so you could really say all three of these segments are kind of the trends have continued coming out of the fourth quarter, but it can be very, it can be lumpier and so we hope that that we'll see, some bounce back of certain in markets. It's difficult to predict, but we're assuming that we can see some level of softness as the markets continue. As their end markets continue on their trajectory.
So, I realized that's out of a long-winded answer that says that we see different puts and takes. It's not even the end of February yet, so we'll see how the year rolls out. But overall we think that our our legacy business continues to be healthy as a whole.
Perfect, thanks. And then just a quick follow up on the guidance, I just want to make sure this is right within the 10% to 11% EBITDA forecast, there are some costs that are will be attributed to Shawnee that aren't going to necessarily be adjusted out, but you would expect to.
To, I would, I guess improve in 2026 once there's no duplicate of costs that is that kind of correct to think about?
Nathan Iles
Yeah, hi, it's Nathan. That's correct. We continue to have some of those startup type costs in the numbers, and we're not going to adjust them out, but we think it's still a couple million dollars in 2025, and then this this will come out in 2026.
Operator
Great, thank you.
Thank you. Our next question comes from Robert Smith with the Center for Performance Investing. Please go ahead, your line is open.
Thanks. Good morning, thanks for taking my questions.
Nathan Iles
Morning.
Eric Sills
Morning.
I know you're opportunistic, but is it fair to say that, at this point in time that you would. Not be too interested or aggressive in further acquisitions until you pay down some of your debt.
James Burke
Hi Robert, this is James Burke. Yeah, that's a fair assessment. While we're our plans are and the capital allocation, our intent is to pay down the debt levels. I think Nathan may have talked where on a pro forma basis. We're the 3X today and by the end of '26 we expect to get down to 20 but with that said, we always stay abreast of what's in the market of nothing to announce, nor do we have any initial plans. Our immediate, intent there is to pay down the debt, maintain our dividend.
Yeah, and by the way, thanks for the dividend increase, could you describe. Yeah, can you describe how you're examining the potential efficiencies from artificial intelligence and perhaps, who you're working with or, I know it's early stage, but how are you how are you approaching this?
Eric Sills
Well, I think that we are looking at where the potential applications can be, whether it makes us a more efficient company or it makes us helps us with our product offering or our future, so I think we're looking at it similar to a lot of other companies in the space. What are the, one of the different tools at our disposal that can that be relatively easy to easily be deployed to seek a benefit.
We have a handful that are underway. Some of them, for example, within our demand planning, which frankly we never used to call it artificial intelligence, but that's basically what it was. It was predictive analytics. It's now gotten much more sophisticated in its algorithms, and so we continue to deploy that sort of artificial intelligence to make us a better company.
So, a lot of different small pieces, no giant advancements, but we're working on that which makes sense for us.
So are you working in it with any particular company or program at the present time.
Eric Sills
We work with various third parties, but none that I would feel comfortable advertising.
Okay, and I understood. Alright, thanks so much. Good luck.
Eric Sills
Thank you, Robert.
Operator
Thank you. And there appear to be no further questions at this time. I will turn the call back to our presenters for any closing or additional remarks.
Thanks, Nikki, and we want to thank everyone for participating in our conference call today. We understand there's a lot of information presented, and we'll be happy to answer any follow up questions you may have. Our contact information is available on our press release or investor relations website.
I hope you have a great day. Thank you.
Operator
And this does conclude today's program. Thank you for your participation. You may disconnect at any time.
