Standard Motor Products Inc (SMP) 2001 Q4 法說會逐字稿

I'd like to announce all locations on hold once again, that we are still checking in participants for today's Standard Motor Products fourth quarter earnings call. We should be getting started here momentarily.

Thank you.

Please standby, the conference is about to begin.

Good day. All sites are not on the conference line, in listen-only mode.

At this time, I'd like to turn over to your speaker, Mr. Jim Burke. Go ahead, please.

Thank you. Good morning, and welcome to Standard Motor Product's fourth quarter 2001 conference call.

In attendance, from the company, are Larry Sills, chief executive officer and myself, Jim Burke, chief financial officer.

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 assumption made by us, and we cannot assure you that they will prove correct. You should not rely on anything in these forward-looking statements as a promise of representation as to our future results. You should also read our filings with the Securities & Exchange Commission.

Now, Larry will discuss the highlights from the recent quarter and then we will open the conference to questions.

OK. Good morning, everybody. I believe you've all seen the release and it's, for the most part, self explanatory. But I would like to go into detail and expand on what I think are a few of the key elements in the release, then, of course, we'll have our questions.

OK, first about the year just past, about 2001, I would like to cover three things: I'd like to cover the fourth quarter sales, the inventory reduction and the effect on gross margin, which is, I believe, the key to the year and cash flow. And then we will talk a little bit about what 2002 looks like at this early point. OK. That's the heading.

Our first -- the fourth quarter sales, as you see, it shows a, roughly, $15 million drop from the prior year, which is certainly a large number. Let me try to explain it. Really three reasons for it. First, just because of the way the calendar falls and our various accounting cut off, we had five fewer shipping days than in the year 2000. Now, that's a slow time of year, especially in four seasons, obviously. So, it's less than our average daily shipping. But we estimate at this point that that five-day reduction cost about $6 million, $7 million in sales, something like that.

Second issue in the fourth quarter of 2000 is when we had the opening pipeline orders for Napa. As you recall, we started selling them their second line then. We were up against that pipeline and we didn't have it this year, obviously. And we estimated that was a cost of about $2 million to $3 million in sales. The balance, roughly $5 million, was, I would say, a general softness in the purchases from our customers. I think you've heard that from other manufacturers, where their sales were pretty good. But they took this opportunity, and I'm imagining at that point somewhat concerned about the economy, to reduce their purchases. So, we saw a pretty good kickback reduction in customer purchases over the last part of the year. Actually, that should come out and help us this year, because they did run their inventories down. So those three things are the major cause of the $15 million. And if you have more questions about it, we'll come back later.

All right, the biggest issue in my mind, and the key to the whole year was what we did with inventory, and how that affected the gross margin. All right, I think we announced at various times during the year that we had set ourselves a target of a $40 million inventory reduction. We blew well past that. We actually achieved $57 million reduction, roughly a 20 percent reduction in inventory, year-over-year, which was huge; something we'd never come anywhere close to doing before, and all the while, we shipped at a good level. So operationally, this was an excellent achievement. We obviously now have a far healthier balance sheet than before, but it really hurt the gross margin. As you see, our gross margin was down slightly over 3 points, year-over-year, from roughly 31 to roughly 28. And I would say that this was almost entirely caused by the slowdown in production, which is how you got the inventory down, and the reduction in factory overhead absorption.

That was far and away the largest cause of this. But, if you look a little deeper, you'll also see that 2000 was not a normal year; 2000 was a year in which we built inventory. So trying to normalize this is a little tricky, and it has some estimates in it. But our best estimate is that a normalized effect on gross margin, looking forward, on a normal -- if there is such a thing -- normal production year, would be in the neighborhood of 1.5 to 2 points. So that's roughly $9 million to $12 million. Somewhere in that range on a normal production year. So that, to me was the heart of the whole year and to explain it versus prior years in history, in future, and so forth.

Now, and again, I want to emphasize this was an excellent, excellent achievement on the part of the company, even though it hurt our profits last year.

All right -- it had an excellent effect on cash flow and on debt reduction, so I'd like to pass it over to Jim, for a second, to give you those numbers.

OK. Just from a cash flow standpoint, the positive cash flow, from operations, was approximately 40 million. If we exclude capital expenditures and cash flow, from operations, less cap ex, it would have been positive 27 million. On a debt reduction, from December year end, to December 2000, we reduced debt approximately 22 million. Further achievements have been made, so far this year, and as of yesterday, when we go from March to March '01, debt has been reduced, as we stand now at about 32 to 34 million.

OK. Lets talk a minute about 2002, and then we'll open it for questions. It's obviously very early in the year, it's just two months down, but so far we are reasonably optimistic. I see three things to be optimistic about. One, as we said, we're back to normal production level. Two, we see a healthy pricing environment, healthier than we've seen in prior years, and we are estimating -- again, it's a fairly crude number, because of there's lots of lines, lots of divisions and different timing, but roughly three percent, which is better than historic.

And, we have received new business, from two major accounts, to the tune of about $25 million, annually. We will begin shipping those pipelines, for those new accounts, in the second quarter of the year. So, those are three good things that we see, as we look forward to this year. Sales -- the beginning of the year are running OK, with one exception, and the exception is the preseason orders for Four Seasons, which are behind the year before. A couple of reasons for that -- one, a year ago we had the pipeline order, which was significant for

, if you remember, we got them back as an account for Four Seasons -- big retailer. That was in the first quarter of 2001, so we don't have that this year. That shows a negative.

We're a little slower than historic in getting out the preseason program of -- first, it's a little less lucrative than the past, which is by design. And secondly, we had a price sheet and we couldn't get this out until the price sheet was done. 8So, we sent it out a little later than normal. So we anticipate that even through March we will be somewhat behind in preseason orders for Four Seasons. But, frankly, that doesn't mean a heck of a lot. What really matters is now how hot it gets because it's all you're selling now is they're putting on the shelf. And to remind everybody, we've had three cool summers in a row. Any break in the weather will blow right past that.

So that's a very brief summary of what we see in last year and how this year looks to us. And we now open it to questions, OK? Fire away.

What do we do now? Hello? Hello?

If you would like to register for a question, please press the number one on your touch-tone phone at this time. We'll take our first question from

from Titan Capital Management. Go ahead, please.

For whomever.

Hi, Walter.

I guess some expected questions, first of which is in respect to the new business you're getting there is or is not lift associated with it?

I was expecting that question, Walter. It's not zero, but it's low. The reason is that this is what we call the second line short lines or retail lines, which tend to be less SKUs, more turnover, more re-boxing, and, yes, there will be a stock lift. But the stock lifts will be relatively small.

Let me take this opportunity to talk about stock lifts generally. Last year was a big year. It was a big year because of

, which was large, We anticipate even with this new business, a lesser year for stock lifts. However, the first quarter isn't going to show that. And the reason for that is if we pull the way we do the accounting we spread it -- we spread the net loss of a stock lift in the new accounting expense over 12 months. We got

roughly in March or so of last year. So, the expense was something like seven or eight months last year and about three, four months this year. So what you're going to see in the first quarter is a carryover stocked with for

against nothing last year. It's actually going to look worse, but as the year rolls on, we anticipate a lower stock expense than last year, even with this new business.

On -- just as a philosophical discussion, you had

.

Yes.

left, because they thought they could cut a better deal in temp somewhere else.

Right.

discovered they couldn't get the service or the product they needed someplace else and out of the goodness of their heart, came back to the company that has the dominant position in the marketplace.

Right, right. Yes.

OK. Why, when someone comes back under those terms, do you not say to them, remember lift? We did it the first time we took you on. We're not doing it again. And, you know, I realize you did price it possibly slightly better, but why do you have to keep eating lift when someone leaves you and discovers that you're the only game in town?

Well, …

I mean, what good is being number one, if it's now going to take you a year or two to get the money back from the lift?

The word "lift" is -- I mean, it sounds like we bribed them to come back. What you have no choice but to do -- yes, and it's an unnecessary and lousy fact of our industry …

Well, it's a lousy fact, Larry, because you …

It is -- let me finish. He has an inventory. In order for him to buy from you, that inventory has to become symmetrical with your inventory. The only cost -- it's the cost of doing that, is what the cost is. It's the cost -- mostly is just taking it out of the other person's box, and putting it in your box. We call that re-boxing. There is some non-interchangeable stuff, there's labor, there's transportation, and it adds up to a number. If someone will tell me a way to do that, to change an account without the physical work of physically changing them to your product, because he has to use your catalog now.

And once he uses your catalog, he can't have the other person's product, because it's different. It is, to some extent, the bane of the industry. We keep figuring out how to do it less expensively. We don't really lift anymore. That's a misnomer. But basically, it's just the cost of getting it from that configuration to our configuration, is what we stock lift. So there was no incentives involved, it was just that. But why don't we cover that -- that's a philosophical question,

.

Well, OK, it's the same philosophical question -- and I'll go on, but I'll get my 2 cents in about if you have the dominant position in one business by far, and an oligopoly and the other, and can't generate a positive return on capital of anything resembling the costs of capital over many years, then maybe the business should be run slightly differently. And one way to do it differently is when someone leaves you, and decides your best guy, to come back, you say fine. There's a charge of X-percent to come back. And if they want to stay with somebody else, they won't be competitive in the marketplace. But it's not my business, it's your business, and you know it better than me, and have even been involved even longer than I have. So I'll let that one pass.

OK .

Second, could you discuss the impact in the fourth quarter and last year on -- of returns -- and sort of where -- what played out last year?

Yes, yes, OK, Jim will answer that one.

OK, on customer returns, I want to separate it between warranty and overstock returns. And the area that we're addressing is within temperature control. On the engine management side, that tends to run fairly stable. On warranty returns for temp business, the traditional market where it has open returns, and that's where we implemented the policy change, we reduced credits issued to the customer approximately $7 million. On the retail side of the business, where we had the significant growth in our retailers, that works off of a fixed percent; they're capped. So we had an increase of approximately five million in that area, for a net savings of about $2 million in warranty returns. On overstock returns, we've also been putting a little more pressure on the program to control returns. And we've seen approximately a $6 million reduction in overstock returns within temperature control.

However, offsetting that, we have recovery on those returns that come back, and also on process returns. And our recovery was down approximately seven to $8 million. And that reduction was really a cleanup of working through all of the inventory, and our tight controls as far as the rules we put in place that will put it stock or scrap it. And those rules being if we have already an 18 month supply of inventory. So the overstock returns had a net unfavorable of about two, against a favorable warranty of two and-a-half. So combined, we had about a $500,000 in favorable returns for temperature control.

And therefore, this year, if on the overstock returns if you do not have a significant -- my term -- clean-up on the stuff that comes back, you would expect to have a positive variance?

I would expect the impact on overstock returns to be favorable to 2001, whereas the impact of cleaning up what was spilled from 2000 and into 2001 that we would hopefully -- and it's all dependent on what comes back in the age on the customer shelves and our rules. But I would expect that we would get back to a better recovery rate.

Just in part by the mere fact -- and I realize the year isn't over -- that your overall inventory levels are sharply reduced, you would not have, hopefully, a lot of stuff where you have too much in inventory that you would have to take a write off as it comes back.

That's true, but what comes back is typically the really, really, really slow stuff, which is harder to take a cut in. Walter>). <Sync time="00:00:47"/)

And my last question and I'll let someone from Gabelli on, let them ask a question. In respect to the 3 percent price increase, your guess as to your raw material and labor costs as a percentage are likely to be?

On material costs for the last couple of years, we've recognized either zero or slight deflation. We have no reason to move off of that position for going forward. And on the labor costs, there's nothing out of the ordinary, it's with the economy.

OK. Thank you.

You're welcome.

We'll take our next question from

from Gabelli & Company. Go ahead, please.

Good morning.

Morning, David.

Now, when you say historical levels of gross margin, is that one-and-a-half to two points off of this year's 28 percent? 3Is that what you're implying?

Yes.

OK. So, about 30 percent gross margins is what we can expect?

Or all else being equal. <Sync time="00:01:54"/>

OK.

There's other variables, but yes, all else being equal.

OK. And you mentioned four seasons being down. How much is that? so that a couple percent or more than that?

You're talking about for the quarter?

Year-to-date 2002.

It's -- I don't know yet because we don't know what's going to come in in the next week and what we'll be able to ship out in the quarter. You want to try to make a guess there?

No. Well, we don't put out guidance and we don't want to initiate that now. What we're doing is offering just early indications on it that we tightened the incentive on the programs. So, we're seeing that that's being pulled back a little bit. And Larry mentioned earlier the key will be really our business, if it moves off our customer shelves and what happens in the second and third quarters, where the bulk of our volume will be.

Yeah. That's the point I want to make. It's not terribly meaningful in terms of what happens for the year. The biggest variable for what happens to the year is how high it's going to be. So, and again, we've had three cool summers in a row. The summer before that was very, very high. We haven't approached those volume figures yet from four years ago. So we're probably going to be behind, I don't know by how much at this point. We will be behind, but it's not as meaningful as to see how much we will sell during the year.

OK.

That's the key, because it's what they sell, and that depends on how hot it is.

Right, and just some questions on the further quarter. I think on the third quarter call you had indicated that production was starting to pick up, and maybe you could see inventory kind of go down further. It looks like it was flat sequentially. Was there anything exceptional in the further quarter that also impacted the gross margin, or inventory?

Well, in first the norm -- and it's hard to go back to normal, but we usually build inventory in the temp business starting in the fourth quarter. You'd seen that we were able to basically hold inventory for our fourth quarter, which impacted margins. We didn't get any benefit from production. We did, within the fourth quarter, have a couple of items that may have impacted the gross margin, where we had cost related to our European business, where we're having facility closures and impairment on equipment that we're being able to go to more favorable material costs. So yes, I'd say maybe that accounted for about a half a point.

OK. And the SG&A year-over-year was pretty flat in the fourth quarter. Maybe you saved 500,000 or so. There was a 15 million drop in sales, however. What's going on there?

Well, again, Larry mentioned about the amortization of our stock lift costs. That would roll in, versus what we may have had for the fourth quarter of 2000. But overall for the year, as we have all adjustments in, we're down $3 million in that area, and we had stock lift costs, or new customer acquisition costs, that were higher for the year. So excluding those, SG&A would have been down further.

OK. And the last question on the other income, what was in there that wasn't in there last year?

OK, other income, the adjustment I believe it was the end of April, where we had our new facility in place, our new 225 million facility. So the AR -- accounts receivable -- securitization program was eliminated for eight months of the year. And we also had a benefit from the sale of some securities in there also. So those two items make up the difference.

OK, thank you very much.

You're welcome.

We'll take our next question from

from Jefferies & Company. Go ahead, please.

Yes, I'm sorry for jumping on the call a bit late. I don't know if you went over the amount drawn on the line of credit? And then two other questions. Depreciation and amortization for the quarter, and any other non-cash items that were expensed? And also the cap spending plans?

OK, on -- against our 225 million facility, we're currently drawing 128 million against that. And our excess availability is running about 22 million. Oh, OK, well, we had pointed it out -- I don't know if you were on there -- from December to December, we were down in debt reduction about 22 million. And as of yesterday, our debt reduction through March of last year was down 32 million. Your other question was on 2001?

Hello?

Yes?

OK, on your question for the depreciation and amortization for 2001, it was 18.9 million. And that included -- the breakdown of that was about three and-a-half million, 3.6 million, for goodwill, which would not be amortized next year. And depreciation of about 15.3 million. Cap ex will be, for 2001, was about 13 and-a-half million. And I expect about that same number for next year.

Do you just happen to have the fourth quarter -- I can do the subtraction if I get back to my desk -- but the fourth quarter levels of D&A and non-cash charges?

I don't have that available.

OK, and you said 128 million drawn on the 225?

Yes.

Is that a -- that's the current figure, or that's the year-end figure?

No, that's the current figure.

OK. OK, great, thank you.

You're welcome.

We'll take our next question from

, from

. Go ahead, please.

Yes, two questions. One is with the new business, would you expect to have to provide any incremental SG&A expenses to service that business?

Minimal.

Minimal?

Minimal. There's no sales force here. There's minimal expenses here.

OK. And then secondly, maybe it's my confusion, when you talk about being down 22 percent in debt, year-over-year, or reducing debt 22 million, excuse me Is that just the revolver you're talking about? Because ...

No, it's total debt and ...

If you add up all the ...

... there were things added on. So, Jim will explain that.

OK.

OK. That's total debt we're talking consolidated.

OK. <Sync time="00:00:23"/> OK. That is exactly what I'm missing. Thanks.

OK. You're welcome.

We will go ahead to our next question from Robert J. Smith from Centers for Performance. Go ahead, please.

Good morning. Most of my questions have really been answered. But perhaps, Larry, you can briefly discuss the competitive environment over the various spaces that you're operating in.

OK. I can talk for two hours or two minutes. We have competitors in both lines. I appreciate

saying how dominant we are, but sometimes we don't feel that dominant. The -- in the engine management business, we have, I would say, four or five at the OE level who are basically our toughest competitors. We have Delco. We have Delphi. We have

Ford. That's at the OE -- we have Bosche.

Yeah. Basically, I'm just asking about how you view this situation at the moment and any particular changes that have happened in the last, say, six months or so.

Well, in the last six months I wouldn't say there's any dramatic changes over six months. A year ago I'd say the one thing that's changed over two years is that

became very aggressive in the air conditioning business and they decided that as an independent company, now that they were split off from Ford, they wanted to make some impact in the after market. And they selected air conditioning as the vehicle for that. And they have been pretty aggressive, especially in the pricing of their compressors -- of their new compressors. We've had to match that or get close to it, which has had a hurt on the gross margin. But we're there. We're with them. I'd say that is the main change. Everything else is roughly the way it was before.

Thank you. Good luck. operator: Once again, if you'd like to register for a question, please press the number one on your touch-tone phone. We will go to

from

Capital. Go ahead, please.

Good morning.

Good morning.

Larry, you mentioned the $25 million new business picked up going into fiscal '02.

Right.

I just wondered if there were any meaningful pieces of business that we lost going into the year -- customers, product lines, that sort of thing?

OK, yes. We've actually lost two. Well, we lost one last year, and we've lost one this year, both for the same reason. The retailers have become increasingly aggressive, and very difficult to deal with. And you may have heard that from other manufacturers. We made a calculated decision that we're going to draw a line in the sand, and not do things which would hurt the company. And we're willing to trade off some business for that. A year ago, Pep Boys demanded a huge, huge return. We said no;

said yes, and they went to

. That was about -- it could have been about a $10 million hit. But it was all right, the return was -- made many millions of dollars, and we said it was a bad deal.

This year, more or less the same happened to another one, CFK, which is kind of a -- again, they're a West Coast retailer. And they essentially asked for the same thing. And again we said no. They're much smaller than Pep. And here we lost them to a very small account. This is more like the

issue of two years ago. A very small competitor. We think that, a) their demands are going to be brutal; and b) the competitors not going to be able to take care of them. This is somewhat analogous to

. And if a year from now they ask to come back,

, I will listen to all the things you just said, all right?

If you get a trend, it's that the -- we're not willing to give away the store to sell the retailer. We feel that the best part of our business, the most profitable part of our business, the one with really the best long-term growth, is the traditional distributor, where we're very, very strong. So that's where we're going to continue to put our emphasis.

The CSK business was temperature-controlled business?

Yes.

I see. And last question, could you comment briefly on the inventory levels that you see throughout the system in both lines of business, both segments, of the company?

You mean our customers' inventories?

Customer -- whatever's in the pipeline, from customer all the way to you.

OK, well, we do keep track of our customers' inventory, especially in the temp line, because that's a big issue. So we get reports from them. For customers like our seven or eight customers, which is probably half our business, would say that two-thirds of them, their inventories are in pretty good shape, even though the seasons haven't been good. They've been watching it very carefully. And one or two of them, their inventories I would say are high. That would be the temp control. On the engine management business, which is a smoother, more predictable line, again, we get reports from our big accounts, and there they're doing a very good job. There's no inventory issues there. I think, as I mentioned, their inventories came down last year, because their sales to their customers were greater than their purchases from us. So -- and our inventory's what we've told you about. So does that answer your question?

It does, it does. Thank you, and good luck in fiscal '02.

Thank you.

We will take our next question from

from Morgan Stanley. Go ahead, sir.

Good morning, hi, it's

for

.

Hi.

A couple questions. One, just to follow-up on the last point you made on the inventory levels. On the temp side, when you said inventory levels are high at a few accounts out of the top seven or eight, would those be some of the larger of those, or would it be two at the smaller end of those?

Well, all the ones I mentioned are big. I only looked at big accounts, so they're all up there. They tend to be the retailers who frankly don't manage the inventory as well as the distributors, the WDs are very, very good at inventory.

OK, and on the pricing, when you talked about three percent, is that pretty uniform, or are there some pockets that are higher and some areas that are lower?

It's all over the place. It's hard to spread it out, but that's our average.

Right.

And it's hitting every area. It is hitting every area.

Thank you.

OK.

We have no further questions at this time, so I'd like to turn it back over to the speakers.

OK, I want to thank everyone for joining our conference call today.

OK, thank you, everybody.

Thank you.

The conference has ended. You may disconnect your lines at this time.