Standard Motor Products Inc (SMP) 2003 Q4 法說會逐字稿

I would like to turn the call over to your moderator, Mr. Jim Burke.

Good morning and welcome to Standard Motor Products' fourth-quarter 2003 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 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. With that I will begin with a recap of the financial results and then turn it over to Larry Sills. As I walk through the financial highlights I will address our core business and then discuss Dana's Engine Management business. To begin our net sales for the quarter were down slightly and on a year-to-date basis down primarily due to our Temperature Control segment. Temp sales for the quarter were down 1.2 million and down 35.5 million year-to-date.

As previously announced this was due to the loss of the AutoZone business at the beginning of the season and a very cool summer season. Our engine management business was basically flat for the quarter and down 4.2 million year-to-date which equates to 1.4 percent. This was a modest decrease - was the result of no price increases in 2003. Our Europe segment was down 500,000 for the quarter, however, up 4.1 million year-to-date. On a consolidated basis excluding Dana's business we were 2.6 million down for the quarter and down 35.1 million year-to-date, again this was primarily our Temperature Control segment.

Now looking at Dana's business, actual sales for the period fourth-quarter were 57.2 million and the second half was 115.5 million. We continue to estimate the Dana volume at 250 million. When we look at our core Engine Management business the fourth-quarter runs only at 23 percent of annual volume. Why the 23 percent? Two points we point out is fewer selling days in the quarter and we believe our customers tend to lower orders in an effort to minimize year-end inventory levels. Looking at gross margins, Temperature Control gross margin was 18.3 percent for the quarter and 21.6 percent year-to-date.

Excluding the additional 2 million inventory provision gross margin was 25.4 percent for the quarter and 22.5 percent year-to-date versus 21.9 percent for the year-to-date in 2002. This would reflect 0.6 percentage point improvement despite a 35 million decrease in sales volume. Our Europe gross margin was 19 percent for the quarter and 19.9 percent year-to-date versus 9.3 percent year-to-date in 2002. Europe made significant strides in 2003 as we continue to right size this business. Our combined Engine Management gross margin percent was 23.9 percent for the quarter and 26.9 percent year-to-date.

The Engine Management gross margins were negatively impacted due to the reduced absorption at the Dana Engine Management locations, cost redundancies as we've prepped the SMP locations to amalgamate the production, startup costs for training and product qualification, and lastly, 2003 excluded the benefit from any price increases. SG&A expenses excluding Dana's Engine Management business were 126.4 million in 2003 year-to-date as opposed to 132.5 in 2002. Restructuring costs in both periods, excluding Dana, were 2 million in '03 and 2.3 million in '02. In addition, we incurred a 3.3 million goodwill impairment in 2002. If you net the restructuring and the goodwill impairment SG&A expenses would be 124.4 million in '03 versus 126.9 million in '02 for a 2.5 million favorable improvement.

Looking at Dana's SG&A expenses, for the full year 2003 they were 31.8 million. Inclusive in that number was restructuring of 2.8 million for a net 29 million or 25 percent of net sales as opposed to our 16 percent SG&A run rate in our core Engine Management business. This transition to our 16 percent level will occur throughout 2004. Earnings from continuing operations were 224,000 or 1 cent per share. Adjusting for the restructuring cost of 4.8 million at a 40 percent tax rate would add back 2.9 million. On a pro forma basis, continuing operations without restructuring were 3.1 million or 20 cents per share for the full year.

Our P&L performance was on target considering four specific items. The Dana $1 million EBITDA loss per month that we inherited, the incremental borrowing costs of the Dana business from July 1, 2003, the increased average number of shares outstanding for the second half, and lastly the 35 million reduction in temp net sales. Looking at the balance sheets all of the significant increases relate to the Dana acquisition. For instance, the net accounts receivable of 57.5 million and the net inventory of 80 million increases all coincide with the increases for Dana.

We have broken out on the balance sheet our restructuring liabilities and in the short-term liability we have 16 million which is primarily employee related. Long-term section we have 15.6 million for long-term leases for a total of 31.6 million. In addition we will be incurring approximately 8 to 10 million in P&L restructuring charges for the Dana business in 2004, primarily related to employee costs, equipment and inventory move costs and other integration spending.

Finally from our cash flow our D&A depreciation and amortization for the quarter was 4.5 million, year-to-date 17.1 million. CAPEX spending was 2.7 million in the quarter and 8.9 million year-to-date. I will now turn it over to Larry to discuss the Dana integration.

After I'm done with this, we will open it to questions. I think the major story on everybody's mind is how are we progressing with the Dana integration and I would like to update you on that. We have now owned this division for eight months beginning in July of 2003, and as we stated in the release all of our goals are on target. Let me go over some of them and then you can ask more questions as you wish. The first one had to do with customers. Our goal was to maintain all of the accounts and I'm happy to say that we have maintained all of the accounts and thus far they seem pleased with our progress.

We had a goal of a onetime integration expense of between $30 and $35 million. We are well on our toward completing it and that number still looks good. The physical move itself, we said we wanted to complete it in 12 to 18 months. Let me bring you up to date on where we are eight months into the game. First, in manufacturing, we had planned to close three manufacturing facilities; a relatively small one in New Jersey which manufactured fuel injectors was closed by the end of last year. The jobs and operations transferred to our fuel injection operation in South Carolina. It is up and running and fully operational.

The two larger facilities, one in Connecticut and one in Indiana, the moves are taking place as we speak and thus far all are on schedule. Distribution, roughly a third of the volume has been transferred to SMP distribution centers. The third that has moved is running smoothly. The systems seem to be working. The shipping levels are sufficient. So far, so good. A critical path for the remaining two-thirds is the time it is taking to build up an adequate bridge inventory. We want to have essentially six weeks of everything before we begin. This is to cover our customers needs during a close down when we shift from one location to another and our customers needs are paramount, and we are waiting for that to happen, but it is essentially on schedule and we see no reason for it not to happen.

The administrative functions, our finance, MIS, marketing are all taking place and all running smoothly. In terms of people, our plans were for a net reduction of roughly 600 people and we are on target for that. We announced a few weeks ago that we had acquired Dana's Canadian operation. We will be taking over the sales, the marketing and the distribution in Canada. We will actually do the physical move into our Toronto distribution center in June, and again that should be a very straightforward move.

So a lot of work going on. It is a huge, huge amount of work and I want to now publicly compliment both the Standard employees and the Dana employees who have been putting in untold hours to making this happen. It was a very complex task but we are very, very pleased with how it is progressing and again I would like to compliment all of our people. Okay, that is the five-minute summary. The floor is yours. We are open for questions.

(OPERATOR INSTRUCTIONS). Bill Gedzelman (ph) from Davidson Investment.

First of all, the inventories were up $3 million sequentially on lower sales. Is the implication that you are in process or is this an indicator that you are in process of building that inventory that was referenced to get up to that six-week level?

Yes, twofold. One for the Dana business and also as we begin our Temperature Control volume also builds up a little bit.

Relative to goodwill, that declined by $11 million or so, sequentially, fourth-quarter versus third. Would you walk us through the dynamics of that please?

At this point I don't have the full details to walk through that but the goodwill number will be adjusted throughout the period for our 12 months as we go through and secure valuations on the business. So per the rules, you have within 12 months for the adjustments, so we are just fine-tuning all of the fair market value for the assets.

So those adjustments have not been completed and it sounds like will continue to be ongoing.

Yes, yes. So if we incur less spending cost than what we have set up in the restructuring liabilities, we will be able to reduce those goodwill charges also.

Relative to the $2 million inventory reserve that you took, are we doing the math correct that it is about a 7 cent negative impact to earnings? Would it also be correct that that number flowed through the SG&A line?

It would have went through cost of goods sold on there. The seven cents would be approximately correct.

Thank you. One additional question before we turn it over. The Temperature Control business that you had lost, any update in terms of renewed opportunities to expand the sales of that business?

I have no news to report on getting AutoZone back, but we are always looking for sales opportunities. But at this point I have nothing to report.

Thank you.

Chris Hussey from Goldman Sachs.

The run rate on Dana's Engine Management, $115.5 million in the second half of '03, how did that compare with the second half of '02 from Dana when it was part of Dana?

I don't have those numbers available to me Chris at the moment. The other thing that I have to point out was that we did do restatement from SG&A expenses to net sales and there was an accounting change EITF where you had to recognize certain customer costs as a reduction in net sales. I think what is important, if you look back at our core Engine Management business and you look at which is what I have done, our Engine Management sales in the fourth-quarter tend to drop-off a little bit, and actually runs 23 percent. You extrapolate that on the fourth-quarter for Dana you will come back to the 250 million level.

The restatement actually, I think is a precursor to my next question which is we saw a really marked decline in your SG&A, $10 million from the third quarter levels. Was that an EITF 46 thing? What was going on there?

No, in total for SG&A we are reducing with the sales volume that is coming down significantly. So we have distribution costs that are in there, marketing costs that we have reduced down. A large part of that is bunched together in the second and third quarters as they are related to sales also.

So there wasn't any major restatement coming out of SG&A to net out of net sales?

No.

But you did mention in the explanation for why Dana's Engine Management group was down was that there was a little bit of a restatement there.

That was from the beginning of the year what we would have looked at which took place for us only from July forward. When we originally explained where the sales level was from the 285 million to the 250, 260 million level. I think we walk that step down there. It was somewhere in the neighborhood of 16 million approximately to 20 million of costs that were previously classified in SG&A.

When we think about the $250 million run rate for Dana's Engine Management group, let's call it $63 million a quarter, should we -- is that a first-quarter event that you get it up to that level or a second-quarter event? What should we be thinking?

Again, Chris, we are on an annual basis. The fourth-quarter is a little less. You can do the arithmetic there. We don't provide specifics or guidance on quarter by quarter or even on the annual basis.

Let me ask you a second question. When you look at some of the retailers, the auto parts retailers, they had a pretty strong fourth-quarter. How are you guys seeing your business sort of adding up to what the retailers are doing? Are the retailers getting price where you are not getting price and you think you can get that price next year?

I will just say this Chris, I have been hearing positive things from the customers both the retailers and the traditional. There is a lag time between how they do and how we do. But I would say our sales so far through the first quarter are essentially on target.

Any price increases, Larry, planned for this year in the Engine Management group?

Yes, they are coming in stages. Some we have already implemented, some we hope to implement shortly and I guess for your forecasting and our forecasting, we are assuming roughly 2 percent for the year.

Do you expect that 2 percent will cover the increased costs of your business or should we see any margin expansion from that price increase?

That alone won't be -- the margin improvement should come through some cost reduction. I'm not sure we are giving forecast for that.

We are not providing forecast. Again we feel that on the pricing, that will be a net improvement and then if there is any impact on any other costs if it was material, inflation or anything, we feel that we would have pricing power with that throughout the year.

The number of employees you have got from the 600 target, how many have you taken out so far?

We are a goodly way there. I would say it is fair to say we're halfway there at this point.

The Temperature Control business, how did returns shape up here in the fourth quarter? I know this fourth quarter is typically a quarter where you take a fair number of returns in the Temperature Control business. Was it better than expected, in line? How would you describe it?

I would say overall it was as expected to slightly favorable. Again we continue to make improvements in our warranty rate program within Temperature Control and the customers pressed up against their limits for what they could as overstock returns because of the cool season. But the good news, and as we continue forward is, that we continue to make improvements on the warranty levels within Temperature Control.

Thank you very much, guys.

Derrick Winger (ph) with Jefferies & Co.

What is the capital expenditure outlook for this year, calendar year '04?

Levels being on the high-end, around 12 million. Call it 12, 13 million.

Just in terms of the 4.8 million restructuring costs that you had there in the quarter, I should just tax those at the -- tax affect those at the 33.5 percent rate that you had in the fourth-quarter?

We plan -- our tax rate gets distorted because it was a very low pretax earnings number and different jurisdictions and different tax rates. But I would treat it at a 40 percent rate for adjusting it.

For the fourth-quarter, okay. Thank you.

Walter Schenker from Titan Capital Management.

I think it was Larry, indicated that you expect another $8 to $10 million P&L impact from the Dana integration in 2004. That will largely be in the first half or that flows through inventory and so it will take a long time to work through?

That was myself, Walter. No, that will be period expenses that we will be charging to the P&L as incurred. Again it will be related to any employment costs that we had there for ongoing employees and equipment move, inventory move. It will not be going through inventory.

And therefore it should be largely in the first half if you remain on schedule?

No, it will be -- the bulk of it will be over the first three quarters but some of it is staged as it is paid out, so it is not all being paid out, the cash impact at once.

Okay. When Larry went through the points on the restructuring he did not address Point D, I'm using your Point D, which is achieve 50, 55 million in savings and (indiscernible) reiterated anyway, and the 40 to 45 million in operating profit. To make sure I understand, and I think I do, you are currently losing one million a month if you say 50 to 55 million. Fifty to 55 minus 12 gets you 40 to 45? Am I looking at it correctly?

I apologize, I did not put that in my remarks. But yes, we still stand by those numbers.

Okay. Therefore we should see -- I'm making you reiterate what you said already, we should see that in 2000 -- the full impact of that pretty much in 2005?

Yes.

Okay. You addressed price increases in temp. You are not going to take much -- Engine Management.

Those were Engine Management numbers I gave you.

I even corrected myself. The question was going to be, are you going to get any, given the softness last year and the inventory (indiscernible), are you going to be able to get any price increase in Temp this year or?

Some. Maybe less than two, but some. It will be positive.

Okay, thank you.

Amy Norfis (ph) with Pilot Advisers.

Can you give the absolute revenue numbers for the Engine Management and the temperature businesses and then the operating profits in both?

The absolute numbers for '03

Quarter (technical difficulty) of '03, would be great.

Let me give you the full year and then you can go back and do it. The Engine Management including Dana, the net sales are 414.4, operating profit of 31.9 and Temp 219.6 in net sales, operating profit of 4.7.

And then the operating profit of Engine Management, the 31.9, can you break that out between the Dana and the Standard Motor's business?

What we lose track of Amy is really on the gross margins now because we have costs on both sides as we're moving it between them. So we cannot really break out the operating profit.

The improvement should be sequential going forward to record or should be better than a quarter prior for the integration of the Dana business?

Just thinking if there was any impact there. Yes, I will stick to those numbers. Yes, dependent upon sales and everything else we should be taking continuous costs out as we proceed forward.

And no customers were lost on either Engine Management or Temperature Control businesses?

Well, you know we lost the AutoZone?

Aside from the $30 million AutoZone business.

Right, that's it. Everything else is fine.

What was the operating profit on the European business?

Negative 2.8 million and sales of 40.1 million.

Perfect, thank you.

Robert Smith from Center for Performance Investing.

The receivables kicked up because of the acquisition but the reserve increase was very modest. Is that clean?

Yes, we were able to -- the reserves that we have on Accounts Receivable we have a formula there for reserve and receivables over 90 days and we have netted some (indiscernible) receivables against the gross receivables balance and we are comfortable as we have gone through there and reviewed our customers, the 5 million is complete.

Anything occur in the asbestos area for the last 90 days?

No, there has basically been no change. It is manageable. We don't love it but it is manageable and the last 90 days there has been essentially no change from the prior year and a half, two years.

Thanks a lot.

(OPERATOR INSTRUCTIONS). Chris Cook (ph) with Zazoo (ph).

I was wondering if you guys could outline what cash restructuring costs were in '03 and what you expect them to be in '04 and '05 as you work off those accruals?

Okay, in '03 the spending level was 4.5 million and in '04 we would incur on the P&L the roughly 8 to 10 million that I talked about which would hit the P&L and the current portion on the balance sheet which would be the 16 million.

And the eight to ten you think that those would also -- not only hit the P&L but also the cash costs in '04?

Yes.

So, 25 to 26 million in total?

Yes.

Including the workdown of the accruals? Okay. I guess the balance then would be 5 million or so in '05, if you're going to get to 35 million.

The balance there will be 50 million and that is really over long-term leases facilities dependent upon how we do, being able to unload some of those. So it really is staged out somewhere near one million, a little bit more maybe per year on that.

Thank you very much.

David Siino from Gabilli & Company.

Tax rate for 2004?

To give you guidance I would say that as our earnings improved there, I would look in the -- it will the shortly when we come out and project our first-quarter numbers. But until then I think maybe you would look in the 30 percent range.

Okay. Larry, are you one of these customers at AutoZone that they reference in their hundreds of millionths of inventory that is now on pay on scan?

, No. That's easy. I hardly sell them anything.

Okay, good enough.

We are not on that list.

Okay, thank you.

You're welcome.

It appears we have no further questions.

I want to thank everyone for joining our conference call today. Thank you. Bye.

This concludes today's call. You may now disconnect your lines.