Standard Motor Products Inc (SMP) 2004 Q1 法說會逐字稿

Good day. All sites are now on the conference line in a listen-only mode. At this time I'd like to turn the call over to Mr. Jim Burke. Go ahead, please.

Okay, thank you. Good morning, and welcome to Standard Motor Products first quarter 2004 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.

I will begin with a financial highlights review, and then turn it over the Larry Sills.

Starting with our statement of operations, our consolidated net sales were up across all segments. Consolidated net sales, including the Dana business, for the first quarter were up 69.1 million. Dana's net sales were approximately 60 million in the quarter. Looking now at consolidated without Dana, we were up 9.1 million or 6.7 percent. Our core Engine Management Business without Dana sales were up 2.9 million or 3.6 percent.

Temperature Control was up 5.4 million or 11.9 percent. However, at this point it is still early in the season to make any judgments on the Temp business. Europe was up 1 million; excluding the sales volume from a small divestiture in July of 2003, those sales were 1.3 million.

Turning to gross margins by segment, our Engine Management Business, including the Dana business, was 27.1 percent as opposed to 29.2 percent in the first quarter of '03. The lower margins are the impact of the Dana integration, causing under-absorption of manufacturing overhead, overhead redundancies. However, looking back over the second half of 2003, we progressively are making headway with improvements in combined gross margins and Engine Management.

Temperature Control in the first quarter gross margin was 15.2 percent, as opposed to 17.6 percent in '03. Margins were lower in this quarter due to customer mix and higher manufacturing costs rolled forward into the first quarter of '04 versus the first quarter of '03. This is due to periods of lower production in our fourth quarter of each year. The impact of these lower margins are expensed by the end of the first quarter.

Looking at Europe, gross margin was 20.8 as opposed to 18.6 percent the prior year, and that's from the benefits of restructuring efforts initiated in 2003. Consolidated, including the Dana business, our gross margins were 24.9 percent as opposed to 25.4 percent last year. Again, 0.5-point decrease that we were able to recover in SG&A leverage.

Turning to SG&A expenses, first quarter '04, expenses were 47.3 million or 23.1 percent of sales as opposed to 32 million or 23.6 percent of sales. This reflects the benefit of integration cost reductions and economies of scale. Due to the transition of Dana into our core Engine Management Business, it is no longer possible to isolate the Dana SG&A stand-alone expenses.

Operating income, excluding restructuring expenses, increased 1.1 million during the period.

Now let's look at the restructuring expenses. Restructuring and integration spending on Dana in the first quarter '04, charges taken to the P&L were 1 million -- 1.4 million. This was primarily in employee-related expenses and equipment and inventory move costs. Cumulative to-date over the nine months, we have spent and charged to the P&L 4.2 million.

Charges to the balance sheet against our restructuring reserve were 2.2 million for the period. Again, the majority of it was employee-related and a lease on a vacated facility. Cumulative over the nine months charges against restructuring were 4.3 million. Total spending for P&L and charges to the balance sheet cumulative for the three quarters now are 8.5 million. Recall, our estimate was 30 to 35 million and we are well within this estimate.

Looking at the balance sheet, highlighting only the significant items, accounts receivable increased 35 million from December of '03. This reflects the seasonal nature of our Temperature Control business. And if you look at the first quarter 2004 sales volume of 205 million, as opposed to the fourth quarter sales of 162 million, reflecting the increase in accounts receivable. Also moving in the same direction would be the notes payable, which increased 27 million from December '03 due to the Company's working capital needs which will continue throughout the first half. At March month-end, we had borrowings of 123 million against that 305 million revolver with 90 million in excess availability.

Quickly looking at cash flow items, CapEx spending within the first quarter was 2 million as opposed to 1.7 million in '03. And depreciation and amortization for the first quarter '04 was 4.6 million as opposed to 4 million in the comparable period. To summarize, net sales were up across all segments, integration spending and savings are tracking to plan, and we continue to stand by our 40 to 45 million operating profit goal from the acquisition.

At this point, I'll turn it back to Larry to review further the integration.

Good morning. I'll just give you a little more flavor on where we are on the integration, and the one-word answer is that we are on schedule. I'll break it down into manufacturing, distribution and administration.

In manufacturing, our plan was to close three of their five manufacturing facilities. Of those three, one that manufactured fuel ejectors has been closed. The other two, one in Branford, Connecticut and one in Indiana, the manufacturing has been mostly moved and re-set-up in standard locations, and we intend to be complete with this by the end of the second quarter.

Distribution -- roughly 50 percent of Dana's business has now been transferred to SMP distribution centers, and we expect the balance to be completed by the middle of the third quarter.

The administration -- there are two offices, and they are basically there for the distribution, and so they will be closed at essentially the same time that the distribution is moved. In conclusion, we are on schedule.

In conclusion for the entire business, we are quite satisfied with the results in the first quarter. We are on target, and I want to publicly thank all of our people who are putting in huge amounts of effort, not only in Engine Management, but in our Temperature Control and European business as well, which are all showing improvement.

So with that, we open the floor to questions.

David Siino, Gabelli & Co.

Good morning. Jim, can you give the usual segment numbers -- operating profit?

Yes, hold on one second.

Maybe in the interim, Larry, did you get the anticipated price increases in the quarter?

Yes, we are on target. Our estimate was 2 percent for the year. Some are in place and some will be implemented by the end of the second quarter. But I would say the 2 percent weighted average is a reasonable expectation at this time.

That is for Temp and Engine Management?

That's the whole company all added together.

Okay.

On the operating profit numbers -- Engine Management combined, 9.1 million for the quarter. Temperature Control, a loss of 1.2 million. And Europe, a loss of 200,000.

Okay.

Consolidated.

Last item, the gross margin in Temperature Control, did it climb -- was any of that due to higher steel or other raw material prices, copper or what not?

No. With the impact of all the commodity prices, Standard Motor is really not dominated by any single commodity. It is strictly the impact of the fourth quarter rolled forward when we go into lower production levels within our Temperature Control business.

But presumably that happened last year as well?

It did, and what we were doing as we go into the fourth quarter of '03, we were ratcheting down even further because of the loss of AutoZone business, which we would not have going into the first quarter of '04 as we would have been looking at in first quarter of '03.

Okay. Any progress on winning some of that business back?

No.

Okay. Good enough. Thank you.

Walter Shenker (ph), Titan Capital Management.

Good morning. We're trying to get a refund on our Yankee tickets.

-- you swept us in four games.

That's right. Unfortunately, we may have the same experience before the playoffs are over. I'm sorry, you just started with David, and I still do understand, and having been involved for a long time, I am surprised I don't. I don't understand the Temp gross margin roll-forward which would cause gross margins to be lower in the first quarter and not the fourth quarter. Are you just saying that we have less production in the first quarter because we're reducing inventories and that's why gross margins are lower?

What happens, Walter, is that we're looking at -- because the variances that are incurred in manufacturing goes into the inventory valuation. So, whatever variances are incurred in the fourth quarter of each year, that is the inventory that you primarily sold in the first quarter. So, the manufacturing variances, the roll-forward that would have carried over from December '02 into the first quarter of '03, were less than the impact at the end of December '03 into the first quarter of '04. And it's just the impact of rolling manufacturing and valuing inventory.

Under LIFO, if you go into a quarter you produce very few units. And therefore, in the next quarter, if you don't sell a lot of units, those high-cost units are the first ones sold, at very low gross margin because of the bad variances during low production periods. It that effectively --

You just mentioned LIFO. I don't know if you meant to. We are on the FIFO, so we --

Why would something you manufactured in the fourth quarter affect the first quarter if you are under FIFO?

Because we put that into inventory, and we're going to sell that inventory in the first quarter of '04. It is a valuation of inventory.

I'll do this off-line, because --

Okay

I'm not going to force everyone else to try and help me understand. Why aren't you experiencing -- and David started on some of this -- more severe cost increases. A lot of other companies are referring to freight costs which are going up fairly sharply, and lots of other raw materials. I know you have a broad basket, but I'm just trying to understand why you're not experiencing more -- hopefully, not going to be surprised by -- more significant cost increases, and why 2 percent will be enough to offset those increases.

Well it is somewhat of a simplistic answer to say we don't have one raw material that is dominant. That is certainly true on the Engine side. It's a little -- part of our -- the Hagen (ph) business got a lot of steel in it, but we have not seen it. We really have not. So, at this point, we think -- there will obviously be some affect. I don't want to say there will be zero effect, but we are comfortable with our estimates for cost inflation for the balance of the year.

Okay. And just one other question, as probably people on the call are aware, and I briefly asked you about this -- Genuine had a very strong first quarter and it -- or the NAPA system (ph) had a very strong first quarter. I know on a number of your accounts you get to see through how their sales are going on your products. Does it appear as if your customer sales are stronger than the sales you're experiencing at this point, which would have a beneficial impact for it to continue?

I would say it's maybe a little more than we are getting from our sales to them. But I can't say that it's a dramatic change. I know you quoted they were up 10 percent.

Right.

They are not up 10 percent on Engine Management. But, the sales are basically healthy.

Okay. Okay, thank you.

Derek Winger (ph), Jefferies & Company.

Yes, just a few financial questions. I thought I heard the depreciation and amortization number -- could you give that again?

D&A was 4.6 million.

Okay. And capital expenditures for the quarter -- I have several questions -- capital expenditures for the quarter and the outlook for the year?

2 million for the quarter, and previously I had set guidance as high as 15. I think still being conservative, 12 to 15 would be a range that I would put.

Okay. And what was the restructuring expense net of tax?

Restructuring expense on our P&L?

Yes.

Our tax rate -- let me talk to that for a second -- was 25 percent. However, that is a blended mix of our foreign operations. You could take a 40 percent tax rates on the -- 1367, so -- it would be down roughly 800,000 on the plant move expenses, or the restructuring expenses for the quarter.

Okay, and then the borrowing base -- is that 215 million on the line of credit?

The borrowing base, we are at -- hold on one second -- for the quarter -- we were, at month-end, we were 123 -- we were about 210, was our borrowing base. We were 90 million favorable at the end of the quarter.

123 drawn, right?

123, drawn. Yes.

210 base, 305 total facility.

Right.

Okay. Okay. Excellent. Thank you very much.

Bill Dezellem, Davidson Investment.

Thank you. I also have a group of questions. First of all, relative to the Temperature Control business, why are you not willing to say that the strength that you saw in the first quarter is either meaningful or the beginning of a trend. You expressed some caution relative to that success. And then, second -- go ahead.

Go ahead and finish, I'm sorry.

And then, the second question was, relative to the restructuring charge that came through the P&L this quarter -- a very simple question -- why is it that that went through the P&L, whereas some of the other restructuring expenses were simply charged through the reserve that had previously been set?

All right, I will answer the first and Mr. Burke will do the second. The reason we play down the first quarter is that it isn't really meaningful. What you are getting in the first quarter are people who are stocking ahead of the season and they're making a forecast of how hot they think the season will be. And so we really do not -- we can't really generalize from that. It really depends on how hot the season will be. If anything, we were pleasantly surprised because last year was such a terrible year, even excluding AutoZone. It was so cold in much of the country that we anticipated that the first-quarter sales might be quite low. But they held up reasonably well. But you still cannot forecast from the first quarter. Now people have just -- it's what they put into their inventories, and now we'll have to see how much they sell and how much they will reorder.

So, in essence, the success here in the quarter is more an indication that inventories were not excessive in some places, rather than anything telling about the future? It is more of a rearview mirror perspective --

That's a very good analysis.

Okay. Thank you.

Bill, turning to the restructuring spending between the P&L charge versus the reserve set up on the balance sheet, the charges going to the P&L reflect costs that are going to be benefiting the going concern business. So primarily employee-related costs, or stay bonuses for employees that are staying with the business, our relocation costs, and also equipment and inventory move costs. The significant items hitting the balance sheet are severance costs in the employee-related area, related to employees as we vacate facilities. And the other predominant expense would be leases as we vacate those facilities.

All right. Thank you for the accounting lesson. I appreciate that. And then my final question is, relative to inventories, we have talked in past calls and off-line about keeping higher inventories to assure that the transition is successful. At one point, now that you have the window into the remaining part of the consolidation, will you, in your minds, begin to reduce the excess inventories that you're holding for the consolidation?

Very good question. I would say this exercise will begin -- I'm guessing around the fourth quarter.

And will last how long?

Oh, I don't want to forecast that. I'm hoping to take a whole bunch out. I do want to forecast that.

All right. Thank you.

Chris Hussey, Goldman Sachs.

Hi, guys. This is actually Lindsay McGurney (ph) with Goldman. Just a few questions. The first is -- I know that you said you could not break out SG&A at Dana, Engine Management. I'm just wondering -- I know that last quarter you were tracking a little bit ahead of our expectations, above breakeven. I'm just wondering if you could comment, if that's still the case now?

Again, as we've combined the SG&A, end even on the combined manufacturing, I would say I am comfortable that we are at that breakeven level for the business. But again, as we've started to combine facilities and merge manufacturing and the SG&A, you can no longer isolate and identify just for the -- it really becomes brands that we're selling now.

Right. Secondly, I know last time you'd guided on your tax rate to that 30 percent through 2004 -- is that still the right way to think about it?

Well, again, because we are moving off of a small base, and while an improvement for 2004, we are projecting, at this point now, 25 percent for the full year. Again, this has a number of different assumptions in there, but going forward, we're looking at 25 percent. I would say on the high end of the range, you could look at 30 percent, maybe.

Last question, of that 1.4 million restructuring, how is that spread across your segments?

That's all related to the Engine Management Business, for the Dana business.

Thank you.

Robert J. Smith, Center for Performance (ph).

Hi, good morning. Looking at energy costs, how does that divide as far as the energy inputs go? What do you guys use?

It is not a big factor for us.

Okay, so, no matter what happens, you're not going to be affected materially?

It's not a gigantic number for that --

How about strategy going forward, and looking at possible further commodity price increases to you. How do you approach this as the year unfolds? You've got a certain estimate, I guess, company-wide as to what you need to offset, and if that moves away from you, do you essentially go to a customer and say "we need more?"

Again yes, that is conceivable -- some other product lines; not ours, which were heavy users of steel -- have done that. Again, we are not dependent on any one or two commodities. But if something were to really go up way beyond our forecast, yes, that avenue is possible open, because the customers are getting to understand that need. But at this point, it is not necessary, and we'll just have to see what happens. But again, we are not anticipating anything.

The 2 percent increase that you were able to get across the board. Is there any way to look at this in a finer breakout as far as Temperature Control goes? Or it is just Engine Management?

Um --

Were you able to get any price increases in Temp?

Yes, we were. We are able to get some.

Finally, in one of the prior calls -- if I'm not mistaken, and I could be -- there was some reference to the OEM. Am I correct or not correct?

Yes, well, the jargon for us is more OES, and the difference is "original equipment service" versus "original equipment manufacturing." OEM is what goes into car production, OES is the repair business. It's the second that's really a -- we think that's our potential. We are getting very close to some. I don't think it will have much impact this year. We really can't announce anything at this time, but we hope that if what we're talking to comes through, it will have some impact in 2005.

Okay. How do you view the market potential? What is -- what are we talking about in your reference as far as size target?

For the OES business?

Yes.

It's a very large market. Our percentage is very low. So there's a lot to be had there. You now, if we were to get a bigger share. But the potential is large. I can't say that we've got it yet, but the potential is large.

And what are the so-called major determinants of going --

You mean how do you get this business?

Right.

It's just like any other, you've got to convince them that you can do better for them than who they are currently getting it from. It's a slow process. It's even slower with them because they are very large companies and they're very careful; they move slowly; they study you 19 different ways. But once you get them, you tend to have them. So, it is a long slow process, but a good healthy one. And we are optimistic about the future. But I would not forecast any major increases for the year 2004.

Okay. And finally, this asbestos mess seems just intractable as far as what -- what's happening in the Congress --

We didn't get the vote last week. But we didn't expect to get the vote last week. I think it is still on the table, and who knows? I doubt anything will happen this year. Meanwhile, from our internal point of view, it keeps moving along. It doesn't really get more; it doesn't really get less; it just hangs in there. And it is in our estimates and so --

No surprises, then?

No.

Okay. Thanks so much. Good luck.

Jerry Haffernen (ph), Lord Abbott.

Good morning, gentlemen. A couple of things. I got on a little late, so if you answered these already, I apologize. Could you just go through, save me a little math here, what is your current receivable DSOs?

I don't have those calculated in front of me, but they approximate the high '90s to 100.

And so, that is a big step-up from the fourth quarter.

Our receivable mix that we have going into the first quarter now includes Temperature Control, which comes in with some spring orders. And we did say that that volume was up, but you cannot really make predictions. We are fairly stable, no -- also, it has been no significant changes in our business segments for accounts receivable dating.

Okay, days inventory?

Days inventory -- that varies. We're probably -- I don't have a calculator in front of me -- consolidated, we're probably around 2.5 trailing. Twelve months, if we average it.

Okay. That is the turns? Okay.

Yes.

Okay. In the fourth quarter, you had $40 million worth of accrued customer returns. That was an issue for the fourth-quarter call. Could you just review what customer returns were for the first quarter?

Okay. Customer returns for the -- and again, the first quarter, we are accruing a good bit also related to returns that are coming in for Temperature Control. First-quarter customer returns were -- I have it -- net number after recoveries that we would receive, where we are able to recover inventory and salvage it, was about $18.5 million.

The gross number would be about 40.

That was for the first quarter.

How does that compare with the conversation we had in the fourth quarter where we were discussing 40 million in accrued customer returns. Was that a net number or a gross number there?

I am at a loss to recall the number. But what happens -- and it will even accrue more in the second quarter when the Temp sales really began, the second and third quarter. The bulk of the Temperature Control returns are coming back in the end of the third, the fourth quarter. So that's why the returns are much higher at that point. And what we do, is we progress through the year, we accrue based on what our expectations for those returns are. And for approximately, minimum three years, we have been trending down in that area within customer returns for Temperature Control and the warranty end of the business. At the end of last year, we had said, because of the cool summer, we had a slight increase in overstock returns.

Okay. Could you review for us again the seasonality of the sales of the Dana product?

It's not big. It's minimal. It's somewhat cold weather, but even, not really. It's not that seasonal.

Okay. So, if we're looking at the 60 million of sales in the first quarter, is it reasonable to say you are on a 240 run rate?

Well, let's multiply 60 by 4. Yet, we still think that we are trending towards the 250. And again, the main point in all of our numbers and projections -- to us, the most gratifying part is we have not loss a single account. And I'm sure, if someone's done the arithmetic, to count that in the first three quarters -- we've had this company for three quarters now -- it'll take a heck of a quarter coming up for us to hit 250. So, we probably won't hit 250 in the first 12 months. But we remain confident that 250 is a reasonable number. And again, to us, the biggest element is that we have held onto the customers.

Okay. Very good. In regard to the question that was being asked about your gross margin and the commodity price/raw material price pressures that many other manufactures are noticing right now, understanding that you are going through a planned consolidation process and the longer-term goal of this process was to get much greater efficiency through your plans, to what extent have you been able to measure where most everyone is seeing cost pressures in raw materials, that your initial gains in gross margin, due to productivity and more things going through the plants you are keeping open, is simply being offset by this, by these cost pressures?

Well, we measure it. We measure purchase costs separately.

Okay.

And in the first quarter, we were okay.

So your purchase costs are quite simply not going up?

They're not --

Well again, it is a net number, and to put it in perspective, within Engine Management, we are close to 20,000, or in excess of 20,000 SKUs. And we purchase a wide variety of basket of goods, and we're sourcing from overseas. So, the net impact was not a significant increase. Yes, we are experiencing some of the increases that are going through on various commodities, but we have been able to offset, and our materials management and purchasing teams have been able to do an excellent job so far.

Very good. Thank you very much.

David Siino, Gabelli & Co.

Maybe I'm looking at this the wrong way, but with 50 percent of the distribution being moved over, and it sounds like the ball is rolling on everything else and in regards to the integration, is it possible that your 30 to 35 million number could be a bit high, given that you spent 8.5 million over the past nine months? Or am I not looking at it correctly?

Well, you're looking at it, but the key is we are quoting as we are exiting the facilities, David. Again, we are reviewing these on their week-to-week, and the largest item that we have in there in the 30 to 35 million is employee-related costs related to severance. And that is paid out over time, upwards to as much as six months after the employees have been let go. So there's a large piece for that.

And also, we really will be exiting some of the facilities. And through the end of March, we really, for accounting purposes, only exited one facility that we charged against the reserve. We been conservative on that, so any lease costs are in our operating results. So we exited one at the end of December. Beginning now in the second quarter, we vacated the facilities -- those are the other charges that will be coming through. Yes, we hope it would be the 35 -- 30 to 35 million number is high, but you cannot just extrapolate where we are so far over nine months and look over the next nine.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). Robert J. Smith, Center for Performance.

Could you just give me an idea how you monitor, whether internally or within the corporation? Do you look at degree days and then break it down in regional changes? How do you get a handle on how the season develops? And how early would you really have a handle on how Temp might perform or otherwise, with respect to weather?

Well, obviously, we look at it daily. It's pretty hard to project. I can facetiously give you a formula that one of my customers in Florida uses -- and his formula is, it's got to be 90 degrees before Memorial Day. 90 degrees before Memorial Day is like his Groundhog Day. But, we watch it. It's too soon to know, but we get some good 90-degree days, and in much of the country, we will do all right.

Okay. And how does the regional picture balance? Where do we -- certainly the East Coast is --

Where do we worry about? The heart of the air conditioning business -- and you can really look at it, because the New York Times does it by region in their weather charts. I would say the Southeast and Texas. So like last year, it was very warm out west and in the mountains, but it really did not matter because nobody lives there. The heart of the business is the Southeast and Texas.

Okay. Thank you.

If you want to look at the map, that's where you look.

Thank you.

It looks as though we have no further questions at this time.

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

Thank you.

Thank you. Goodbye.