Standard Motor Products Inc (SMP) 2004 Q2 法說會逐字稿

Good day. All sites are now on line in a listen only mode. If at any time during the call you need operator assistance, please press the star and zero on your touch tone telephone. At this time, I'd like to turn the conference over to your moderator,

Mr. Jim Burke please go ahead, sir Thank you. Good morning, welcome to Standard Motor Products second quarter 2004 conference call. In attendance from the company are Larry Sills, CEO, 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 -- 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 discussion of the risks and uncertainties that could cause our actual results to differ from our forward-looking statements.

I will review the financial highlights and then turn it over to Larry. Let's begin with the statement of operations. Our consolidated net sales variance for the quarter was up 68.9 million and on a year to date basis up 138 million. As stated, this is primarily related to the Dana acquisition which took place on June 30th, 2003. The Dana sales for the quarter were approximately 62 million and on a year to date basis 122 million. Excluding the Dana sales, consolidated net sales variance was 6.9 million, favorable 4.2%, and on a year to date basis up 16 million and favorable 5.3%. Now looking at the segments, entry management excluding the Dana business, net sales for the quarter were 82.9 million favorable 6.6 million for 8.7%. On a year to date basis, sales -- net sales were 164.5 million, 9.5 million favorable, and favorable 6.1%. Overall, our entry management business has been strong throughout the first half.

The temperature control business net sales were 76.2 million, basically even with the prior year. On a year to date basis, net sales were 127.4 million, favorable 5.5 million and up 4.5%. The temp season has been mixed and we are cautious for the balance of the season because some public companies have expressed concern with weather related products. Lastly, Europe net sales for the quarter were 10.8 million. Isolating a small divestiture that we had last year, they reflected a favorable sales variance of .5 million for 4.8%. On a year-to date bases net sales were 21 million, again excluding the divestiture in the prior year sales were up 1.4 million or 7.3%.

Turning to gross margins. Our engine management business including Dana in the second quarter of '04 was 28.6% compared to 29% in the second quarter of '03, which excluded Dana. Our engine management gross margin reflects sequential improvement from 27.1% in the first quarter '04 to 28.6% in the second quarter. And is only slightly behind the 29% of the prior year. Looking at temperature control, our gross margin was 22.3% compared to the second quarter last year of 21.2. Temp margins improved as we entered the season exceeding the prior year second quarter by 1.1 points.

Europe the gross margin was 2. 6% compared to 21.9% the prior year. Europe margins were 1.3 points behind the prior year, however, favorable 0.5 points on a year -- (no audio) Are we live? Yes, sir. You cut out for just a minute there.

I don't know what actually happened. Okay. Turning to SG&A expenses for the second quarter 04, SG&A was 46.2 million or 19.6% of net sales compared to 32.7 million and 19.7% the prior year's quarter. We continue to make significant strides reducing Dana's redundant costs. Further improvements will be reflected going forward as we exit the Nashville facility in the third quarter.

Looking at our operating income, excluding integration costs, it improved $5 million from 11.1 million to 16.1 million in the quarter. Our spending or our operating profit by segment all excluding integration costs, engine management, operating profit was 15.9 million compared to 9.6 million the prior year. Temp was 6.6 million compared to 4.3 million and Europe had a 100,000 loss compared to 100,000 profit the prior year.

Our integration and restructuring spending for the Dana acquisition. Cost charged to the P & L for integration in the second quarter were 2.6 million in the first half or 3.9 million. Restructuring expenses charged to the balance sheet for the second quarter were 2.8 million and 5 million cumulative for the first half of '04. Combined spending for the second quarter was 5.4 million and 8.9 million for the first half. To date, we have spent 13.9 million in the first twelve months and expect to be below our original estimates of the 30 to 35 million over the first 18 months of integration.

Looking at the balance sheet. Accounts receivable increased 48 million since December '03 as we entered the temperature control season. During the same period in 2003, accounts receivable increased 76 million. The benefit in reduced the accounts receivable investment was due to the customer accounts receivable draft programs implemented in 2004. In essence, some of our large customers have entered agreements with their banks which allows the manufacture election to accelerate collection for a discount fee. Approximately 600,000 year to date in related fees was charged to interest expense for these fees. We estimate accelerated collections were approximately 30 million as of June 30th, 2004.

Inventory increased approximately 11 million year to date, all related to the Dana business. primarily as we build bridge inventories during our manufacturing and distribution moves. Since engine management sales have been strong we continue to build and procure additional inventory to catch up to customer orders. We expect to reduce inventory levels by the fourth quarter with improved inventory turns going into 2005 and 2006.

Good will and other intangibles. We have completed the financial balance sheet valuation for the Dana acquisition. As such, we have identified values for the following; Trademarks, 6.1 million with an indefinite life. Customer relationships, 8 million with a ten-year life. Hence, beginning the third quarter of 2004, we will begin amortizing a pre-tax, non cash charge of 800,000 per year for ten years. Our total debt as of June '04 was 240 million compared to total debt at June of '03 of 281 million. This reflects a 41 million reduction in total debt. However, recall the benefit of 30 million accelerated AR collections helped reduce our borrowings. Excluding the 30 million, the net 11 million reduction still exceeded our expectations over a period when we absorbed Dana acquisition business losing 1 million per month and approximately 14 million in restructuring and integration spending. We are currently borrowing approximately 120 million against our 305 million revolver with greater than 90 million excess availability.

Our capex spending for the quarter was 1.7 million and year to date, 3.7 million. D and A was 4.5 million for the quarter and 9.1 million, year to date. To summarize, we are pleased with the second quarter results reflecting strong engine management volumes. We are cautious for the temp season and our gross margins and SG&A expenses reflect sequential improvement from the Dana acquisition and look for further improvements. The net result was the outcome of generating an incremental 5 million in operating profit excluding our integration costs. With that I'll turn it over to Larry Sills.

Good morning. I'm very pleased to say that as far as the integration is going, we are fully on schedule. Terms of major moves, all the manufacturing moves have now been completed, all the customer shipping moves have now been completed and we are now in the process of finalizing our departure from the 7 locations that we are going to be exiting as you recall we -- we started with nine and said we would be exiting 7 of the 9 and two will remain. We will be fully out of those 7 by the end of the third quarter. Now, because of all the startups and the new hires and the learning curves, we're not yet at normal operating efficiencies and you see that in the -- in the gross margin. But we're improving daily and we fully expect to be at normal efficiencies by the end of the year. So that's -- that's the word on the physical moves.

In terms of customer retention, we are still at 100% and we are very pleased with that and our original estimates of 55 million in annual saving and a 40 to 45 million operating profit from this acquisition, we're still quite comfortable with those estimates. They still look good. So, short and sweet summary, we are very pleased with the results in the quarter and we are very pleased as to how the dana integration is moving and we are now happy to open it for whatever questions you have

Okay. At this time if you would like to ask a question please press the star and one on your touch-tone phone. To withdraw please press the pound sign. Okay. We'll go to our first question from the site of David Siino from Gabelli & Company. Please go ahead, your line is open.

Good morning.

Good morning.

JIm, do you have an after-tax number on the restructuring charge in the quarter? Basically the 25% tax rate?

Well the 25% tax rate takes the benefit of our foreign location so you should use a 40% rate if you were -- I think to be conservative--

Okay.

On that spending

and the -- the cash you said -- the cash payout should come in between -- should come in below the original 30 to 35 million. What is the actual number looking like now?

I don't want to quote. I think we'll be below that low end. We will be below that low end of the range over that first 18 month period.

Okay. And lastly, on the working capital, first on the inventory, how much do you think you can get out by year end and second, the accounts receivable accelerated payments, how much more room do you have to run on that and is it a permanent reduction in days outstanding.

Okay. On the inventory, what i wanted to make note of that we may be up for the -- for the third quarter, but i think the trend will turn by the fourth quarter. I don't think significant amount of inventory will be out by the fourth quarter because volume has been very strong in the engine management business. But we'll have already peaked and taking it out because it will be all in their end destination. The -- what was the second question

The accelerated receivables-

On that, that's specific to individual customers. it's new in the industry and they're bringing -- they're bringing these programs to us. I can't speculate how many more we may sign up with, nor can I say that they would -- that you can look to them to be permanently in place either.

But we won't see another 30 million reduction like we did this quarter?

I don't know.

Okay.

I don't know. If more customers come with programs there's a possibility but I would be cautious and say there would be a -- another increase, but not significantly.

Okay. And can -- I'm sorry to do this to you Jim but the engine management profit can you just repeat that for the quarter?

Okay. Engine management operating profit, all of this excluding -- and all the integration costs that we show in the consolidated P&L was for engine management so excluding the integration costs was 15.9 million versus 9.6 million the prior year. this quarter.

Thank you, very much.

You're welcome.

Thank you. And one again to ask a question please press the star and one on your touch-tone telephone. We'll take our next question from Chris Hussey with Goldman Sachs. Please go ahead, sir.

Hi, good morning. It's John Shapiro sitting in for Chris. A couple quick questions. First on the engine management up almost 9%, can you break that out in terms of how much -- and you said volumes were strong, how much was volume versus -- what are you getting for price --

Good morning, Chris. I'd rather focus on the --

John -

Oh John, I'm sorry.

That's okay

I'd rather focus on the six months than the three months because three months is such a short period so we're up about six, and I'd say maybe two of that's price and the rest of it is, just business has been pretty nice. The -- the we've always talked about being in the sweet spot that our age group five to ten-year-old vehicles is growing. I think some of the consolidation and distribution that hurt us in the past is somewhat behind us but, that's speculation. It's -- business is pretty good.

Great. And then you eluded earlier to the -- you know, Dana losing you know, when you took it on was losing $1 million a month. Is Dana making money? I know it's hard to break out but would it be making money on a stand-alone.

Again it's not a stand alone business, it's merged together and you can see the improvement in our combined operating profit. So from that, you can look and assign X dollars of it to the Dana acquisition

You can't look at dana as an operating entity anymore. It's fully merged

So when you break out the revenue, is that from the customers you brought on specifically

Yes. But I would keep in mind there's some back and forth movement already. It's --some people who had Standard want to have Dana, some people who had Dana want to have Standard. It's starting to be difficult to differentiate them and we'll be starting to think of it more as just a pure engine management number as the years go on.

And just lastly, on the weather in temperature control, were there any parts of the country that were particularly bad, that you guys know of?

Did you guys see the times on Saturday? It's an interesting little chart they showed. Essentially this year isn't very good but last year wasn't very good either and what they show in this chart is the eastern half of the country and they show the number of days that they measure heat and that's a very good way to do it, how many days were over 90 compared to the norm, and if you look at this year for every -- basically every other location they were way below the norm. And last year they were also way below the norm. So it's two really cool summers in a row. And they don't show the middle of the country but I know that hasn't been terribly good either. There's been a lot of rain in the midwest. Texas hasn't been as high as usual so yeah, it's been a -- it hasn't been a good year but again, last year wasn't a good year either

Okay. Thanks very much.

Okay. And we'll take our next question from Derrick Winger from Jefferies & Company.. Please go ahead, sir

Thank you. What is the capital expenditure outlook for the year?

We're trending below what I originally expected. At this point total has been three seven. I'd say we'll be under ten then for the year.

Okay. Thank you very much.

Okay.

And we'll take our next question from Bill Dizellum from Davidson Investment Company.

Thank you. We had a group of questions. First of all, relative to the higher cost inventory that was flowing through the -- the P&L, has that completed the -- the flow through and if so, how much of a positive impact would you anticipate in coming quarters and then secondarily, a bit of a nitpicky question but the allowance for doubtful accounts rose 900,000 or something sequentially. Would you give us some perspective as to what was behind that?

Okay. On the inventory which is again more difficult to measure, we were producing throughout the second quarter there, and the -- the -- our higher costs from the manufacturing facilities as we've built up significant amount of inventories carry that higher cost than the inventory. That will -- we'll see benefits as we move forward but our original projections were that that would continue throughout the second half of the year and that -- 55 million in savings, we would say would begin and in place fully by January '05 I still stick with that. I can't measure it any better, Bill, because of the amount of skews that we have in our product line. The allowance for doubtful accounts, that increase there is not specific to any -- any particular customer. That also includes allowance for discount -- cash discounts also, and as our receivables have increased as we move into the temperature season, you will see that as a norm with our increase and that combined doubtful accounts and cash discounts.

Okay. Thank you and let me circle back to the cost of goods sold. was thinking that there was some higher cost inventory that you basically, as a result of purchase accounting, needed to write that up to zero margin, and for whatever reason,I was thinking that the second quarter of this year was going to be the last quarter that that flowed through the P&L, and now I may be completely wrong, but would you get me pointed in the right direction here, please.

Well, we completed our balance sheet valuation and the inventories related to the opening balance sheet, because they were losing money there, there was -- there was not much of a valuation adjustment on the -- on the inventories there. And we continued to produce in the Dana facilities up through the end of the -- the end of the year, and through the -- the first and second quarter, so we -- we have seen our manufacturing costs come down, the bulk of all the fixed costs and facilities and people costs have -- have started to come out in the second quarter, but that will materialize as you go over the third and fourth quarter. I can't point to a means to be able to measure that other than just our overall gross margin.

All right. Thank you. And then let me change gears completely to the OES business and what is the update on that front?

Okay. well we continue to make strides and improvements but I can't point to any dollars yet. These are very large companies and you have to work your way through lots of marketing people and engineering people and quality people, so we're in the process of moving along in those areas. We -- we remain optimistic but would say you will see very little increase in that area this year with one big exception. Our Johnson controls who we purchased the fuel injection plant from, has been placing quite large orders. And we've got that plant running at a -- at full capacity now. But again, these aren't -- you know, in terms of the company's sales gigantic numbers, but we are -- we are very pleased with -- with all the potential out there and we hope to see some real dollar numbers next year.

THANK YOU BOTH.

THANK YOU.

OKAY. We'll take our next question from Robert Smith with Center for Performance. Please go ahead.

Good morning. My questions actually have been answered. Thanks and good luck.

Thank you, Bob.

Thank you. And once again if you would like to ask a question please press the star and one on your touch tone phone. We'll take our next question from Jonathan Stenmits from Morgan Stanley, please go ahead.

HI. Its actuallyZoe Stinn from Morgan Stanley I was wondering, some of the after-market retailers have reported weaker than expected sales. especially year over year throughout the quarter. I guess year over year June, versus year of the year of May or even April. Have you started to see that in July or what was the pace of business last quarter?

Well, we -- we haven't gotten much in the way of -- of July information yet, but I'd say it's kind of a -- of a mixed bag. Some up, some down. I think that's more a function of the lines that they're selling and some lines which may be headed more towards professional installers, but no, we haven't seen a major either up or down really with the retailers.

Okay. And in terms of the integration costs so after this year, is that it or can we expect to see some of -- I guess the flow into S,G&A next year?

There may be -- there may be a small -- a small portion of carryover into next year on the P&L side which I expect to be very small. I would be thinking 2 million or less if it's not all completed by this year. However, after December we still have some long-term lease commitments which will be expended on an annual basis. We've reserved for those. We'll charge -- those will be charged, it will be a cash outlay and charged against our balance sheet and again it's -- it will be a function of how well we have an opportunity to sublet these facilities. The largest one being our Nashville, Tennessee, facility.

Okay. Thank you.

OKAY. We'll take our next question from Tom Spiro with Spiro Capital. Please go ahead, sir

Good morning gentlemen

Hey Tom.

Hey Tom.

I was a little curious about the change of the composition of the board. As I recall, there were two families with long standing ties to the company, Larry, your family and another family. Does the other family still have board representation and could you give us a sense of the thinking that lay behind the decision for those two board members to step down?

Yes. Really it's really one family. We're all third generation from the founding family which was -- we have a common grandfather. So it's two branches of that family.

I see.

Okay. Yes, I would say they did it -- they decided to retire after many, many years of service, and they've express it as purely personal reasons. They just feel it's the right time in their lives for them to do this, and -- and that's what they're doing. We -- we don't see any major change any ways

Okay. Thank you.

You're welcome.

Okay. And that does appear to be the last, final question. We have no more from the phones.

Okay. I want to thank everyone for participating in our call. Thank you.

Thank you. And bye.