Standard Motor Products Inc (SMP) 2004 Q3 法說會逐字稿

Good day. All parts are now online in the listen-only mode. I would like to hand over this conference to your moderator, Mr. Jim Burke. Go ahead, please, sir.

Thank you. Good morning, and welcome to Standard Motor Products third-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 review the financial highlights and then turn it over Larry. But before I begin, I wish to apologize first for our late release. However, I am pleased to report that our new audit firm, Graham Thorton (ph), was very thorough and worked very hard to get us here today. Recall that Graham Thornton's engagement only began on September 27, and we only completed our financials in the second half of October. Let us begin.

Consolidated net sales for the third quarter were down 11 million. This shortfall was entirely in our temperature control segment due one of the coldest summers on record. By segment -- engine management net sales were 136.3 million for the quarter. This is important because it's the first comparable quarter that we have since we've done the Dana acquisition back in June of '03. Sales for the engine management group were up 2.9 million or 2.2%. Year-to-date sales were 422.8 million, up 134.4 million. Overall engine management volume remains strong and steady.

Temperature control net sales were 54.8 million for the quarter, down 14.4 million or 20.8%. For the year-to-date net sales were 182.3 million, down 9 million and down 4.7%. As stated earlier, 2004 followed 2003 for a weak summer season.

Europe actual net sales, 10.4 million for the quarter, up 400,000 or 3.5%. For the year-to-date, net sales 31.4 million, down 600,000 or 1.8%. However, in 2003 we had a divestiture. If you carve that out of the 2003 sales the year-to-date sales would have been up 1.9 million or 6.5%.

Dropping down to gross margins by segment. Engine management gross margin was 26.1% for the third quarter compared to 27.2% in '03. The key area here to address is the drop was in two areas -- one, material purchases during our transition period where we paid a premium. I'll talk to this later as I address inventories. And the second area is, as we've added all the new employees, labor efficiencies and a learning curve. We expect both of these conditions to be temporary.

Temperature Control gross margin was 22% for the quarter versus 26% for the prior year's quarter. Again, Temp margins were weakened due to be almost 21% decrease in sales for the quarter.

Europe margin was 18.7% as opposed to 19.8%. Europe margins were off approximately 1%, however basically flat on a year-to-date basis. The combined consolidated gross margins were 25.8% against 27.2 last year.

Looking at SG&A expenses, for the quarter 43.4 million compared to 49 million last year, for a 5.6 million savings. However, inclusive in SG&A expenses in the third quarter '04 were discount fees associated with the sale of customer receivables. This program began in 2004 and was previously classified as interest expense. Discount fees for the quarter were 1.1 million and 1.6 million year-to-date. If you carve out the discount fees on the sale of receivables, SG&A would have been 42.3 million as opposed to 49 million for a net savings of 6.7 million. This was primarily attributable to the Dana integration.

Operating income, excluding integration costs for engine management, were 13 million for the quarter as opposed to 7.4 million last year. This was a 5.6 million improvement in engine management, and excluding the AR discount fees, it was 6.2 million favorable. Temperature Control operating income was 1.6 million as opposed to 6.6 million. The 5 million decline was due to the 14.4 million sales decline in the quarter. Europe had a loss of 500,000 compared to 400,000 loss the prior year -- basically flat.

Looking at the integration and restructuring spending for the Dana business -- integration expenses for Dana only in the quarter were 4.3 million. Charges due to restructuring reserve were 3.6 million for a combined spending in the quarter of 7.9 million. Year-to-date it is 16.8 million. And to-date from June of '03 we've spent $22 million and expect to be below our original estimates of 30 to 35 million over the first 18 months.

Looking at the balance sheet -- our inventories increased approximately 16 million in 2004. Engine management's inventories increased almost $25 million as we wanted to ensure that we had sufficient inventories to cover the moves. Again this impacted gross margins as we paid premium prices during this transition. Again, it is temporary. Our temperature control, with reduced volume, we were able to reduce inventories, and those inventories were cut approximately $10 million.

Total debt increased 8.3 million compared to December '03. At September '04 total debt was 226.1 compared to 217.8. And this was primarily related to the Dana integration and restructuring spending of almost 17 million in 2004. We're currently borrowing approximately 115 million against our 305 million revolver with almost 85 million of excess availability.

Our asbestos reserve position at the end of the third quarter -- we complete our review and an actuarial review on an annual basis. The undiscounted liability settlement through the year 2049 in the 2004 report had a range from 28 to 63 million. The prior year report, 2003, the range was 27 to 71 million. The net change on the low end of the range was a 1.5 million increase and at the high end of the range, a reduction of 7.9 million. Accordingly, we increased our reserve $3 million to bring it at the end of September to 28.2 million.

Our CapEx spending for the quarter was 2.4 million and on a year-to-date basis 6.1 million. Depreciation and amortization was 4.6 million for the quarter and 13.7 million year-to-date.

To summarize, or third-quarter results were impacted by the very cool, wet summer season. Our engine management business, the volume remains steady. Our integration timing and spending are within plan. Our margins are expected to improve as we reduce outside material purchases and achieve normalized efficiencies. While 2004 has seen an increase of 16 million in inventories, we have ample opportunity for working capital improvements going forward. We will be targeting reductions in engine management inventory in 2005 of 30 million, followed by an additional 20 million, for a total of $50 million improvement return in engine management turns back to three times turns.

With that, I will turn it over to Larry.

Okay. Good morning. I'd like to bring you up-to-date on the integration, and I will report in terms of our previously-announced goals. In a word, we're very pleased with our progress. First, all the physical moves have now been completed. It took us approximately 15 months starting July of last year to accomplish this. You may recall our original target was 12 to 18 months, so we were right in the spot-on middle of our original target, fifteen months.

As Jim said, our budget to do this was $35 million, and we will finish well within that number. The third goal was to hold on to all the Dana accounts. And again, I am happy to report that as of this time, we have held on to all the Dana accounts.

The fourth is cost savings. And to refresh your memory, we had forecast a $55 million annual savings when everything was in place and everything was operating with full efficiencies. Here's where we are today. As you saw from the statement, we are beginning to achieve the savings. In the third quarter, which is our first apples-to-apples quarter, we showed approximately a $6 million improvement over the prior year in operating income, with essentially flat sales, slight increase in sales. So that says that we are roughly 40%, a little over 40%, on the way to achieving our $55 million target. And we're really just getting started.

To achieve the full 55 million -- and we fully anticipate doing that -- two things have to happen, two main things have to happen from where we are today. First, as Jim said, we are not operating efficiently because of all the new people. We promised savings of close to 600 people. We are roughly halfway there. So with several hundred to go to achieve our target, we are confident we'll get there as we achieve efficiency and as our people get more knowledgeable in their tasks. We hope to be there at fully efficiency by mid-2005, with steady improvement in the period until we get to that point. So that's one, one is the people efficiency.

The other big one is material. We had targeted $8 million of material savings in our original forecast. As of this time, we have actually identified more than that. But, for those savings to be shown in the P&L, two main things have to happen. First, we have to work our way through existing Dana inventories before we can replace their inventory with the lower price that we're going to have. And on some of these, they had fairly extensive inventories, and it's taken us a while to get there. The second is, from an accounting point of view, these savings then have to work their way through the balance sheet. And third, as you saw, as Jim mentioned, we actually went the other way in the second quarter as we wanted to make sure that we didn't backorder during this transition period. We purchased stuff on the outside at actually higher costs than we would normally have. We anticipate that all these should be behind us by mid-2005, and should be getting there at that point.

So to conclude, we're very pleased with how the integration has proceeded and is continuing to proceed. We are confident with our 55 million savings target, and we should be operating at that or close to that rate by mid-2005. And that is our current estimate. Again, I want to thank and congratulate all the people at Standard who have really gone beyond themselves in making all this happen.

And now I guess that completes our remarks, and we open up for questions.

(OPERATOR INSTRUCTIONS). David Siino, Gabelli & Co.

Thanks for the segment data, Jim. What was the after-tax number on the integration cost?

After-tax. You could take 75% of that number that is there.

Okay, so the same tax rate --

Our effective tax rate is 25%.

And just remind me again, loss from discontinued ops, what's in there? And why was that up year-over-year?

That was -- again, for everyone that may not be familiar with us, that relates to a divestiture back in March of '98, the ice break business that we had. What we are recording there on a quarterly basis are the costs, the after-tax costs related to asbestos costs. During the year we have legal fees that we are incurring, so we are expensing them to that line. And on an annual basis, we review and have an actuarial report run for future settlement claims. So within the quarter it included, on a pre-tax basis, a $3 million increase to increase the reserve and legal fees. And then it's on an after-tax basis, at 40% for taxes.

40%, okay. And that will -- even though it is called discontinued ops, as you incurr and adjust the liability on an annual basis, that number will continue to -- will it run at about $4 million a year? Can it be modeled?

Basically, if everything plays out as the actuarial report, again the number that we said, the reserves at 28 million. On an annual basis through the year 2049, expectations are that the payouts in that reserve will be, going from memory, a little less than 2 million at a peak, and dropping off down to -- at some point -- a million 5, a million. So, it's a manageable number. Each year we'll adjust that based on the forecast of our history. What we have seen in the past 12 months is that the number of incoming cases has remained very steady, less than 100 cases per month, really down near 65 -- very steady. And settlements have been very steady also.

Last question on this. So in the absence of any further adjustments to the liability upward or downward, that discontinued ops number should look like (multiple speakers) a million or --

That number on an after-tax basis would probably be about $2 million on an annual basis. Legal fees, related there.

Great. And then the last question, on inventory, since you are on FIFO, those issues -- you are no longer buying inventory at a premium related to Dana? This just reflects actions taken?

That was actions taken, and they are now -- it's much, much reduced. They'll be some open POs commitments that we had outstanding that will come through. But now that the moves are all completed, the distribution moves are completed, it is winding down.

Walter Shanker, Titan Capital Management.

Proving at least two people are listening to the call. Hello, gentlemen. How long do we keep losing money in Europe? Since Larry has indicated in the past, if we cannot turn it around at some point, we give up?

Well, I think we've seen that every year we have made improvements, not as much as I would like. Europe is no longer a drain, really. We are approaching the breakeven point. Each year we have reduced fixed costs and done a little work in the sales area. We are anticipating more of that next year, and we should do better in 2005 than we did in 2004. And we've really seen steady improvement over the last several years. So we have a good group there, and we're still working on getting it better.

And the reason we are happy losing money? Because at some point we're actually going to make a lot of money? Or are we just going to prove we can stop losing money?

You're putting words in my mouth, Walter. I didn't say we were happy losing money.

I understanding that.

Okay.

If you weren't happy, you would not do it.

I do think that this has the potential of being a profitable business. It's a difficult business; it's more difficult, as other companies have found as well. It is, in a sense, more difficult than the North American market. But with the steps we're taking, we've got some new customers, we've got some new products, we are reducing costs. Yes, this has the potential in the near future of being a profitable business.

Secondly, do we anticipate next year hopefully seeing the fruits of the work you are doing to break into, in a meaningful way, supplying aftermarket parts to the OE service organizations?

None of those numbers are in our forecast. We've gotten some -- it's a tedious event because you're dealing with very, very large companies, and you have to work through many layers of approval. I'm not forecasting it. Yes, we hope to get it; we hope to get some, but it's not in any of our forecast. But believe me, we are working very hardy on getting some of this business. And when you get them they are pretty good chunks. But at this point, I've got nothing to say except we have many prospects and we are diligently pursuing them.

And last question. Realize you don't know but you'll know pretty soon, so you should have a feel for it, your view about whether or not year-end returns, for one reason or another, are likely to be on budget?

Yes, I'd say at this point, it's getting pretty close to the end of the year. So I would say that returns should be essentially according to our budget. Yes, that looks pretty good right now.

Tom Marks, Bankers Investors.

I'm just wondering -- I listened -- Temperature Control, we lost AutoZone, weather. Is there a point where you might consider selling Four Seasons and reducing debt or it utilizing in an area? Obviously engine management is where you're making your money. So I guess it's a simple question -- have you ever considered selling it or will there be a point where you will?

We look at everything all the time. Again, we just had remarkably bad luck with the weather. Two of the worst summers in the world, back-to-back. Law of averages is on our side for a better summer this year, but we're not counting on that. We're taking some fairly aggressive steps to reduce costs, such that even if we have another dreadful weather summer as we've had in the last two, this will be a profitable business. And with any luck in the weather at all, we should do pretty good. So no, we have no plans at this point to sell that business.

One more question -- do you think you have a chance of getting the AutoZone business back?

Well again, we talk to customers all the time. We are talking to them, and they always talk to us. Again, it's not in any of our forecast.

(OPERATOR INSTRUCTIONS). Jonathan Shapiro (ph), Goldman Sachs.

I was just wondering if you could give an update -- it sounds like Granham Thornton did a good job to get up to speed so quickly. Do you have an update on the Sarbanes-Oxley 404 and what the timing on having that taken care of might be?

Our timing is for year-end, and we're working diligently on this, as many companies are. We have identified gaps and we've identified deficiencies, primarily in the areas of information systems and documentation. We have plans in place to remediate many, if not all, of them by year-end as promptly as we can. We have a full-court press going towards year-end, and it will be up to -- Granham Thornton has done a very good job. They will do their assessment and will determine how we do at year-end, and we will continue with the progress into 2005.

I was looking through my notes from the last conference call, the second-quarter call, and you guys were talking a little bit more in terms of having the employee-based up to full speed or, quote, full speed more by the end of 2004. Has there been -- is there an issue there? Or are you guys just being a little more conservative --

I'll answer that. Yes, I think in hindsight, that was probably a somewhat over-optimistic forecast. With all the new people -- and they had to learn not only -- now only were they new, but we had to learn new systems, new customers, new ways of doing business. It has taken us a little longer than we first thought. And I would say, yes, we probably were somewhat over-optimistic on the timing. We are not over-optimistic, however, on the numbers. So yes, you are right. If you look back at previous calls, we had hoped to be there by the end of this year. We are not going to be there by the end of this year. But we should be there as we get into next year. As we've said, for sure by the middle of next year. That has been a change, I would agree with you.

(OPERATOR INSTRUCTIONS). Well gentlemen, it appears we have no further questions at this time.

Okay, very good. I want to thank everyone for participating in our call. Thank you. Goodbye.