Standard Motor Products Inc (SMP) 2003 Q3 法說會逐字稿

Good morning. All sites are now on the conference line in a listen-only mode. My name is Kevin and I will be your conference coordinate for the the duration of this conference. If anyone needs any assistance at all during the conference, please do not hesitate to press the star 0 on your touchtone phone, and a coordinator will return to assist you. I now would like to turn the conference over to your moderator, Mr. Jim Burke. Go ahead, please.

Okay, thank you. Good morning and welcome to Standard Motor Products third quarter 2003 conference call. In attendance from the company are Lawrence Sills, Chief Executive Officer; and myself, Jim Burke, CFO. 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. Now, I will review the financial highlights of the recent quarter and then Larry with update us on the Dana integration.

As I walk through the financial highlights, I will first addrest our core business, and then address the Dana Engine Management business. First looking at net sales for the quarter and year-to-date, they were below the prior year, primarily due to temperature control sales. We were down approximately $21 million for the quarter and $34 million year-to-date.

This was, as previously announced, due to the loss of AutoZone business at the beginning of the season and a very cool summer season. Our Engine Management business was down $7.9 million for the quarter and $3.8 million year-to-date. This equates to 1.6% on a year-to-date basis, which was all within units as we did not implement any price increases in 2003, which normally offsets this reduction.

This unit reduction is well within our forecasts. Europe was up $4.7 million on a year-to-date basis and up $1 million for the quarter. Looking at Dana Engine Management business for the quarter, sales were slightly below our estimate at $58.3 million. In the 58 million, we reclassed $3.2 million from SG&A expenses to net sales to conform to SMP's reporting format.

This has no impact on operating profit. It's strictly a reclass of what the -- in 2002 the Dana business classified in SG&A as opposed to our format. Going forward, we are estimating $250 million to $260 million on an annualized basis for this business. Now let me walk you through our Dana sales estimate. The '02 volume was $284 million.

The annualized reclass -- as I just pointed out, we are estimating at about $16 million, which would reduce that volume to $268 million. In our Engine Management forecast we estimate 1-2% unit drop per year, offset by at least that amount in price increases. Again, in the Dana business, we had no price increases either. So that would drop the number to about $260 million where we are estimating the business to be. This is entirely consistent with our predictions when we announced the deal.

Looking at gross margins, SMP Engine Management gross margin for the quarter was 29.5%, and on a year-to-date basis was 29.2%. This is also within our estimates of 28-30%. Again, without any benefit of a price increase in 2003. Temperature control gross margin was 26% for the quarter and 22.1% year-to-date. The year-to-date number reflects a 0.3 point improvement despite the considerable reduction in sales volume.

Let me point out, where did we achieve that savings? At the end of 2002 we had the closure of two facilities and consolidated into our Texas operations. We also had significant overhead reductions, specifically with people and spending costs.

Turning to Europe, their gross margin improved 2.2 points year-to-date. Overall, excluding Dana Engine Management now, we approved 0.5 points for the quarter, and 0.4 points year to date. Out of Dana business. Dana was a 24.3% gross margin for the quarter. This is almost five points below our existing Engine Management business, and where we believe this volume will reach when fully integrated.

Quickly looking at SG&A expenses, excluding Dana, decreased $1.7 million for the quarter and $1.8 million year-to-date. This was primarily a function of lower sales. Inclusive in that number in 2003 were restructuring expenses for $1 million and $600,000 in 2002.

Those expenses were primarily within the temperature control in Europe area. Look at Dana's Engine Management business, SG&A was $17.9 million for the quarter. This also included $900,000 of restructuring expense,.

The remaining significant variance I'll point out on the P&L pertains to other income. In the third quarter, we sold a small business in Europe and incurred a $800,000 charge. Also in this area, we had a foreign currency variance, which was a contributor to the quarter by $100,000, and $900,000 year-to-date. Turning to the balance sheet. Let me address our revolving credit facility. Under the Sarbanes-Oxley act the PCAOB was established to review public accounting firms. PCAOB is the Public Company Accounting Oversight Board.

While reviewing KPMG, the PCAOB reviewed SMP and our existing credit facility. The technical interpretation of standard terms in our facility may cause us to reclassify this debt to short term. We believe SM is at the front of the queue due to this interpretation, and we believe that many other companies with ABL asset-based lending facilities have a similar situation.

We thought it was prudent to make disclosure at this time, even though it is not yet finalized. Finally, with regard to this issue, we have an excellent relationship with our bank group. We recently increased the facility from $225 million to $305 million, when we concluded the acquisition. Presently, we have borrowings against that facility of approximately $115 million, and have $100 million of excess availability against that line. The decision to reclass will have no effect on our liquidity, cash flows, debt amortization, profits or other terms in any of our debt facilities.

Just pointing out on the cash flow statement, for the quarter and year-to-date, depreciation and amortization was $4.6 million for the quarter, $12.6 million year-to-date; and Cap Ex spending was $2.6 million for the quarter, $6.2 million year-to-date. In summary, the quarter and year-to-date have been primarily impacted by the volume decrease in temperature control.

Two, the improved gross margins in our core business and the Dana third quarter operations, which were slightly ahead of our plan. Dana had an operating loss of $2.8 million for the quarter, which excludes the $900,000 restructuring expense. This is slightly better than our original projections. At this point, I will turn it over to Larry to review the integration.

Okay. Good morning.

Okay, I would like to bring you up to date on how the Dana integration is going . In one sentence, I will say that it is going very, very well. To refresh everyone's memory, we had four goals when we announced this deal. One, to maintain the customer base.

Two, to close seven of nine Dana facilities, transferring all operations to existing standard locations, and to complete this in 12-18 months from when we took over the company -- which would be between June and December of 2004. Third, to accomplish this transition at a one-time cost of $30-35 million.

And fourth, to generate annual savings of $55 million. Those were our goals. How are we doing? We have owned the company for approximately four months. And we are happy to say that at this point, all the assumptions look good and we have uncovered no negative surprises.

Regarding the first goal, thus far we have retained every single major account, and as Jim has said, we are forecasting an ongoing volume rate of 250-260 and we are comfortable with that. Number two, the transition is proceeding on schedule and within budget.

I'll give you a few details updates. We have already transferred a few product lines to standard locations and have reduced Dana salary head count by somewhat over 100 people so far. In December, we are closing a small manufacturing facility in New Jersey that manufactured fuel injectors, and moving the production to our location in Greenville South Carolina, and we are happy to say that about a third of their employees are coming with us to South Carolina. That is very good.

Also in December, we will begin moving distribution. They essentially have three brands, and we are moving the first of them, a brand called Nehoff [PHONETIC], from the Dana location to our distribution center in Reno, Nevada. And we have a schedule for the other two brands to follow.

Finally, the numbers at this stage look fine. We are very comfortable with the $30-35 million integration cost and the $55 million in annual savings. So all in all, we are very, very satisfied with how this integration process is moving.

I guess that is the end of our prepared remarks, and we open it for questions. Thank you.

Very good, at this time if you would like to register your site for a question, you may do so by pressing the star one on your touchtone phone. To withdraw your question from the queue at any time, you may press the pound key. And we will take our first question from the site of David Sino with Gabelli & Company, go ahead, please.

Hey, good morning.

Good morning, David.

JIm, I got some of the numbers jumbled. The operating income by the four segments was what?

I didn't run through each of the individual ones. I gave you the percents. But on the -- it was $2.8 million for the Dana Engine Management business. And we will have --

Loss?

Yeah, loss.

Loss.

Okay.

Excluding the restructuring charge.

Okay. And Standard's traditional Engine Management -- are you releasing that or that will come in the Q?

That will come in the Q -- versus --

Okay. And the tax rate going forward, we should use 40-41%?

Tax rate, again, during this period for 2003 is going to be -- is very difficult as we are incurring the losses here. I think it is more looking forward once the integration -- and I think at that point we with be looking out towards the 35% range. Again, we have benefits from our overseas operations, which are in Puerto Rico and Hong Kong.

Okay. And can you just give us an idea of what the balance sheet looked like maybe ex-Dana, if you can break it out?

Okay. I can give you -- let's see. If I -- okay, if I look against the major items in there as comparisons, if you look at accounts receivable net for the Dana business, approximately $63 million.

Okay.

The inventories for Dana, about $90 million. Let's see. Property plant and equipment net, about $17 million for the Dana business. The good will increase of $63 million was all Dana. Let see what else we have.

Payables. Okay, payables about $26 million in there.

I guess the accruals look like -- the accruals for return --

Accruals and all that are in line with what we had previously on that Again, the restructuring accrual that we have on the books for Dana is about $34 million at September 30, and that is between current and long term.

And I guess the last thing on the balance sheet, just the asbestos looks like it has come down a little bit. Is that anything to get excited about? Only a couple hundred thousand, but.

No, nothing in that area there. Let me point out on the asbestos, we put it in the accounting policy that what we would do is update that actuarial study on a quarterly basis.

Annual basis.

Annual basis in the third quarter. We did, and there is no change required. It came in as the same estimate for the indemnification as in the prior year, so there will be no change in our asbestos liability.

Okay, thank you.

Okay, you're welcome.

Our next question is from the site of Greg Faye with Morgan Stanley. Go ahead, please.

Good morning.

Good morning, Greg.

Just a quick question here on the temp side, I'm trying to understand, was more of the decline driven here by the AutoZone lost contract or more driven by the cool weather? I mean, could you sort of quantify both?

I would say the majority was the AutoZone. The weather was brutally cold, I'm sure you have seen those maps; but we had some actual increases, so it is a net of three. A net of loss of AutoZone, terrible weather in the eastern part of the country, and some positives on a few retailers, and that is what made the number. But the biggest single factor was the AutoZone.

What kind of a price increase were you guys able to put through?

Are you referring to temp?

Yeah, in temp.

I think about 2-3.

2-3%? Okay. And the Engine Management decline, was that driven by draw-down in the inventory that you guys saw?

Yeah, you got to look at the year-to-date because -- and in a quarter you can have a fair amount of fluctuation as customers increase and decrease their inventory. So the year-to-date number is to me more meaningful and again, some what between 1-2% down. All our forecasts say that that is what the business will be and we just didn't get a price increase which, by the way, we do intend to get early next year in all of our lines.

Okay. And then a quick question here for Jim on the credit facility. So this is just purely driven by a reclassification, it's nothing to be concerned about in terms of any sort of ability to borrow against this?

No, we have been -- no issue at all. It is strictly just an accounting treatment on it. It is a very technical issue. We're still working on it.

As it is being interpreted by the PCAOB, our accounting firm and our lenders we hope to have this finalized by the time we file our Q, but there is no change with our lenders, our borrowing availability; and I will point out that we have $100 million in excess availability, which far exceeds with our estimates were, so no liquidity issues at all.

Okay. Thank you.

You're welcome.

Your next question comes from the site of Chris Hussey with Goldman Sachs, go ahead, please.

Thanks, hi guys.

Good morning, Chris.

Good morning,. On the Dana Engine Management group revenue contribution, the $58 million, if you can just walk us through that. If you annualize that it looks like it is at a 232 pace, and how do you reconcile -- so the $260 million outlook is --

Let me take a crack at that. I think to just take one quarter and multiply it by four for the reason I just said, in a quarter, you have customers raising and dropping inventories so we think it was lighter than average. So that is number one.

Certainly the drop that these customers had in the third quarter -- just similar to standard actually -- was greater than what -- was worse than their perform performance for tore the year-to-date; so again, we think the year-to-date number is more meaningful and therefore the quarter is kind of an aberration low. That is number one. Number two, we will be having price increase early next year.

They hadn't had one in over two years, so we think we can get sort of a better than average price increase on the Dana lines. And there is some new business that has been committed to us, but we haven't actually done any orders out of it yet, but we are expecting them; so add all those three together and I would say we are very comfortable with the 250-260.

Do you have what the year-to-date Dana Engine Management group would have been year-over-year? Are you giving that out?

No, I don't have that worked out. That would be -- we'll break that out in our Q for pro forma result.

That might be helpful just , you know, lending to your point, Larry, that you know, year to date probably not operating too differently. And on the charge you took, I just want to make sure we understand the charges. You indicated you had out of the Dana Engine Management group itself -- the total charge was how much again?

$900,000 for the Dana Engine Management business. And in addition to that, we had $1 million on a year-to-date basis within our core business.

Right.

Against the prior year in our core business on a year-to-date, it would have been $600,000.

What was the charge in the core business in the quarter?

Hold on one second. $200,000.

Jim, why only a $900,000 charge from Dana Engine Management?

Not that I'm complaining. Just curious as to why you didn't -- as you go into it suddenly just started writing off some stuff and taking the charges here?

Well, a number of the expenses that we have are going to be over the --

I'm sorry, go ahead?

Yeah, okay. A number of the charges -- again, within the first 60 days, because we are in late October now and more are coming forward -- but within the first 60 days, we were almost at a standstill without being able to take any charges. The -- as we were keeping full employment. The items that are really going to be going towards the P&L relate to relocation of personnel, state bonuses, inventory move costs, exit of facility type costs. Those items are going to be more in the latter part of the 18 month period.

So for the fourth quarter what should we think of for charges that could hit?

Yeah, I don't want to make up a number. But we said over the -- over the third -- if I -- let's see. It is going to be less than -- well, let me not pick a number very quickly out. We said 30-35 is the spending. Two-thirds of that is going to go against the restructuring reserve and the balance of it is to the P&L.

Okay. And the $34 million restructuring liability you have in there eventually goes through your income statement as a restructuring charge, is that correct?

No, no, the accounting treatment of the that, about -- eventually about $10 million -- will be going through -- will be going through the P&L.

Okay. So we should only look for a total of the next 18 months of $10 million of charges?

Yes.

Okay. And but, all right.

And the balance, the other $20 million, Chris, will be going against the restructuring reserve.

All right. Looking for only $10 million in charges through your uncome statement. And um...okay. Just a thought, when you report, you might want to throw it in your press release just what the charge was just to help us out over the [INAUDIBLE] oh.

Okay.

But thanks very much, appreciate it.

Okay, you're welcome.

Our next question comes from the site of Derek Winger with Jeffries & Company. Go ahead, please.

Yes, hi, thank you. So of that $10 million that is going to go against the P&L a million one was taken in the third quarter and how do we kind of radically --

The number, Derek, was $900,000 in the third quarter.

Okay, and then $200,000 was restructuring at S&P operations?

Yes.

Is that ongoing as well?

There will be -- in Europe, we'll have some ongoing costs as we are restructuring the Europe operations. Some of the other expenses earlier in the quarter were related to temperature control.

Okay. When did this -- So how will the balance of that $10 million radically go over the next 12-18 months, roughly speaking.

Sounds like this is the second question, so I'm being forced to give a little bit better look at this. I would say -- I would say that -- and again, I was conservative on my estimates. I think in 2003, I would be looking at $3 million and $7 million in 2004. So with that, we would be looking at another $2 million in the fourth quarter and then $7 million in the -- in 2004.

And the next question is, when in 2004? And I would say you're going to be -- that will be more towards the. More in the first six months.

I think -- I think -- assume beginning more in the second quarter, second-third quarter.

Okay. And the original $30-35 million restructuring reserve, when did that flow through?

Well, that was what was the valuation of the business at day one, and it was set up in good will, and then a restructuring reserve was established.

Right, okay. And the amount that you have due to Dana, what is that amount?

When you -- from the financing?

Yes.

Yes. They -- the note is roughly $15.1 million, and that is a five and a half year note balloon at the end, quarterly interest. They are also holding $15 million in SMP equity, which was financing that we received and there was a two and a half year lockup period on that. So total combined, a little over $30 million.

Right. And then there is about -- if I added up all the pieces correctly, there is about another $10 million of long-term debt that is not the revolver or public pieces or Dana?

Yes, just prior to our June closing on this, we were able to improve our liquidity by financing our Long Island City facility for $10 million to add to our liquidity -- which we used that money pay down our revolver, adding more liquidity.

Excellent. So the borrowing base is around $215 million right now?

Yes.

Okay. Thank you very much.

You're welcome.

Our next question comes from the site of Greg McKinley with Dougherty and Company. Go ahead, please.

Yeah, hi.

Hello, Greg.

How are you?

Good.

On the $34 million restructuring accrual on your balance sheet, it looks to me, you know, two-thirds of that goes against the 30-35 million for the Dana integration. What is the other, you know, $10-14 million of that restructuring accrual on your balance sheet related to?

Okay, that is related to long-term lease commitments, that will be after the 18 month period that we have set up there. So -- and that would be phased out over a -- a period of about a million and a half per year on just a cash flow basis. It is not a big lump sum. That is our estimate as to -- if we are not able to exit those facilities.

Okay. The choice or the fact that you guys had a flat ASP in the -- in the Engine Management group, can you -- help me understand why that is the case?

What is ASP, that is the first question?

Average selling price, I'm sorry, and why you didn't increase the price on the average.

It's just that there was so much going [INAUDIBLE] on between getting the, you know, neglect negotiating it, getting Federal Trade Commission approval, implementing it -- we just decided that it was best to delay until everything was settled and the customers were happy. The customers are happy, and now we can proceed with what is just a normal price increase.

Okay. Okay. In terms of the temperature control division, can you help me understand, regionally, is there a concentration geographically of customers that you sell these products into in the end market?

It is a southern business, obviously.

Yeah.

And the two biggest markets -- I'm looking here at map that The New York Times printed -- the two biggest markets by far are the southeast and sort of the Texas, Oklahoma, New Orleans segment. I'll hazard a guess that is at least two-thirds of our business, from those two geographical markets. On this weather map I'm looking at they ranked the last 110 years, the southeast was 104th coldest.

Okay.

And the Texas one -- was probably our single biggest -- was the 82nd coldest; so it really -- the weather was really a factor in our two biggest markets.

Okay. Very good, thank you.

Thank you. Our next question comes from the site of Walter Sheeninger with Season Capital Management.

Good morning.

Hi, Walter.

Hi, Walter.

A couple of hopefully fairly short questions. Your sense as to customer in Venice, were inventories in [INAUDIBLE], is it much of an overhang going into next year?

It's roughly flat as best we can tell. They have done a better job of managing them. They didn't put a lot in at the start of the year. Ordered conservatively, and so as a result they didn't get hurt and I don't think we will baldly either by the fact that it was a poor season.

Okay. Secondly, do you have any -- and I guess maybe I next week I can ask them directly -- but do you have any sense as to, maybe with help, by the temperature over the summer and how well AutoZone was serviced in that business over this past year?

Anything I give you would be speculative. I mean, we weren't in it exactly, and if I hear our sales guys talk it was terrible, but I don't want it -- I don't know.

Okay.

Depends on who you talk to. We don't have first information, Walter so I would rather not try to speculate.

You do other business with AutoZone?

Oh, yes, not a huge amount, but we sell them some Engine Management.

Okay. And you are not -- you have not changed the terms on which you sell that, since you know, one of things in the press has been the --

No. If you're asking about the point of sale, POS, which I'm sure is on many people's minds, we have not signed up for it and frankly, I'm not aware of any majors who have.

Okay. In respect to the anticipated $55 million in savings from the consolidation, could you just review again now that you have had it for awhile -- I guess the term of this has been rateably -- how that rateably plays out over the next couple of years, in rough terms in.

Well, again in --

I'm not sure I understand your question.

I have it. He is asking -- by 2003 -- and again, the savings will -- we're expect the to have the integration in the middle of 2004 for the facility closures on that, and the savings in product will roll through the balance sheet, so we're saying it will not materialize on the P&L which is what we are quoting here, until the beginning of 2005.

Roughly half of it by 2004 will be achieved and however, it will be rolling through the balance sheet. So that is the only key issue that I have there. But we are expecting the full benefit to be able to materialize in the P&L for all of 2005.

Okay. That was -- you got the right answer, but I don't know if that was the question I was asking.

Okay.

And lastly, on price increases, a number of metals-type items from a core standpoint have been rising. I'm not exactly sure, if since you probably use a lot more plastics now than metals, but relative to your raw material increases, are you seeing acceleration in a number of them? And if so, will you need more than the historic couple percent price increase to get you back to where you would like to be, given than you didn't raise prices last year?

Okay, on the -- we measured this very closely, Walter, in the product cost reductions, and a large part of our products are raw materials for manufacturing and then a lot of resale type items. I'm pleased we continue to be able to achieve 1.5-2% deflation in our material costs, and no particular category or commodity is causing us any concern.

Okay. I thank you.

Very good, thanks.

Our next question comes from the site of Greg Mocosco with Lord Abbott. Go ahead, please.

Yes, thank you. I would just like to understand from an overall basis, if I look at SMP, temperature control, I think I heard you say it was down 3% with the 2.3% -- 2 to 3% price increase. Is that for the year-to-date basis? Is that right?

No, let me go over the numbers again. Temperature control sales were down significantly this year. They were down roughly $21 million for the quarter and $34 million year-to-date. The year-to-date is equivalent to 15%.

But on an ongoing basis. I was excluding the AutoZone.

Excluding the AutoZone.

Yeah.

You're looking for a forecast going forward or the --

Sort of year to date, to understand what the core business did without the AutoZone loss of, you know, you lost that business, I understand that -- but just to get an idea.

Well, out of the $34 million, approximately a little less than $25 million relates to AutoZone, let's call it another $10 million for all other temp business down related to the season. And that again, as Larry pointed out, was up for a few retailers and down for the -- for the balance of the customer base.

But that includes a 2-3% increase in pricing?

Yes, yes.

I see, and that was because of weather, okay, so we looked at that. If we look at the Engine Management business for SMP, that was down 1.6 on a core basis for the quarter and year-to-date -- one to two down?

1.6 is for the year.

For the year to date, okay.

Right, yes.

And if I look at Dana Engine Management on a pro forma basis, it is 250 to 260 you said, on an annualized basis?

Yes, that is what we estimate.

Versus -- that is after the taking out of some specials there, too?

Right, right, that is to make them the same way -- we put them on an apples to apples basis with Standard.

But what I'm hearing, just sort of across the businesses you acquired plus the existing businesses -- what we are saying is, kind of on a core basis, we are kind of at best flat before any price increases is that kind of what --

That's correct. And that is our forecast and that -- that is the business that we are in. So, now, we hope to grow it beyond that through some different markets. Primarily OES, and we have a fair amount of prospects there -- but I just can't announce any of them yet. But the core business -- I think it is fair to say that the core Engine Management business is flat and all of our forecasts are based on that.

And OEF meaning dealers, auto dealers?

Original equipment supply; so that would be selling the car companies, but not for what goes on the new vehicle but for the replacement.

With the dealer business.

Right. And that we see as a huge potential market that we have barely scratched the surface of. Again, we have many, many interesting prospects out there but I can't say -- I have closed much of them at this point. But that is a good growth area beyond the flat. But I think it is fair to put in your forecast that the core aftermarket business is flat. That's what we see.

Okay, thank you.

Our next question comes from the site of Chris Cook with [INAUDIBLE], go ahead, please.

Hi, thanks for taking my question. Just real quickly, you've had Dana now for a quarter. I was just curious as to your expectations for capital spending. I guess Cap Ex was $2.6 million in Q3. Do you see it continuing at that quarterly rate?

No. Again, we continue hold the spending very tight in the Cap Ex area. The important thing to note on Cap Ex spending with this almost doubling our Engine Management business, is that the incremental spending for Cap Ex will be very small, because as we go, roughly 75%, 80% of our Cap Ex spending is in the cost reduction area, putting in machining centers to manufacture what we previously were purchasing. And we will have to expend very little incremental in that area to run roughly double the volume through there; so we are estimating going forward that Cap Ex spending for the company would be maybe upwards to $13 million per year.

Okay. Great, thank.

You're welcome.

Our next question comes from the site of Robert Smith with the Center for Performance Investing, go ahead, please.

Hi, good morning.

Hey, Bob.

Good morning.

Looking at the two business spaces, would you say in general that the future of the business is being driven to the low cost producer?

No, I -- I don't think you can say that. Certainly not in what is our biggest business, Engine Management. There is, without question, a desire on the installer -- which still represents the great bulk of the business. He views this as a tricky, highly sophisticated part and he is not looking to get the cheapest one he can. And a reasonable proof of that is that many companies have second lines.

We do also. And they're slightly different and they're not quite the same quality and they sell at pretty good discounts, up to 30% below the regular price. We see it universally across the board -- those parts hardly sell at all. They represent far less than 10% of the volume. So in the Engine Management end of the business, which would be two-thirds of our total, it is not a raise to the bottom and we are very gratified about that.

And secondly, looking at the restructuring categories, which do you feel is most critical or one that you might be most wary of?

In terms that will hit our cost budget?

Yes.

I don't want to say arrogant, but I'm not worried about them.

I guess I'm worried about a few things.

Right. Well, one crosses over from both sides. It is employee related, and there is a head count reductions that we are taking out as we bring the businesses together. The important point here is that we are closing the bulk of the facilities there, so we have a very good handle on what we believe to be the number of reductions. That by far is going to be a large chunk of the spending costs -- and also the savings side, so we feel very comfortable with that. Probably the one area -- and I think we are very conservative on it -- will be the long-term lease commitments that we is have.

I agree.

And when we exit those facilities, I hope that to be a slight favorable. But those are, I mentioned, about a million and a half a year for long-term commitments on facilities that we acquire.

Okay. Thank you, good luck.

Thank you.

We have a follow-up question from the site of David Sino with Gabelli & Company. Go ahead, please.

Larry, anything new surrounding the strategic thinking around the temp business? I mean, you have one fairly predictable business in the temp -- I mean you --

Well, there is no question that temp has been disappointing for the last three years. Again, we've had three lousy weather years. No, we still think it is a business that we can grow and do well in. Our -- we have a variety of competitors, most of them much smaller than us --in this business, anyways -- and my sense is that the -- I am not sure how well some of them are doing.

And my sense is that -- that the competitive situation will improve over the years, at least that is what was in our strategic thinking; and therefore, the pricing in the business should improve. So, no, we have no strategic plan, if that is what you're thinking, except to hope it gets really hot next year.

And presumably, you've thought of everything you could do on the fixed cost side?

Well, we keep working. The guys did a very good job this year. They've taken -- the loss of AutoZone is a pretty big hit. We knew it around February, I guess, and they took very dramatic moves. We closed down locations and eliminated a fair amount of overhead, and that the' we you see even with the drop in volume -- which was substantial -- we improved the gross margin. The guys did a good job. Yeah, we keep working in that area.

Another positive development in temp is the move to new compressors. And -- from rebuilt. And that is something that I think A, we can excel in; B, has hoe potentially better margins; so I view that as a positive. There's positive things. We, frankly, have been hurt by a bunch of things in the last few years. Decent hot weather, we could make a fair amount of money in that business.

Sure. Okay, and then the second, I guess every retailer out there that is reported is dramatically raising their payables and their terms. I mean, could you talk about the long-term cash flow impact from your perspective and if this continues to be the case?

Well, the again, the retailers are maybe 20-30% of our total business. So that is -- I mean it is a long way from all of our business. We are working with them and the trick is to hold where you are and be good enough not to get killed on receivables. And we are battling -- at this moment, we seem to be holding our own.

Are you participating in any of the factoring programs that some of them have set up?

David, Jim. We are looking at them and I guess this is primarily to retailers as, there is a wave of those. We don't feel that we are being hurt. We are going to consider all of them for whatever our customers bring to us.

Some of them have benefits in there with, you know, their -- their ability in borrowing costs. So from a cash flow standpoint, it -- it actually benefits some small manufacturers, but could also benefit Standard Motor Products and it will be a function of possibly pricing points in there related to any of those discounts.

So you could get incremental pricing as kind of an offset to --?

Well, everything is going be a balance, but you have to separate. If you are looking at cash flow, the manufacturer can actually be benefited and they are going to have to discount it slightly, but then it is going to be a function of pricing.

Right, okay. That was helpful, thanks very much.

You're welcome.

At this time, there are no further questions. Now I would like to turn it back over to your moderator, Jim Burke, for any concluding comments.

Okay, just, I would like to thank everyone for participating in our conference call and we will continue to keep you briefed on our progress as we work through this integration. Thank you very much.

This does conclude today's conference call. You may disconnect at any time.