Standard Motor Products Inc (SMP) 2004 Q4 法說會逐字稿

Good day. All sites are on line in a listen-only mode and at this time I’d like to turn the program over to your moderator, Mr. Jim Burke. Go ahead please.

Good morning. Welcome to Standard Motor Products fourth quarter 2004 conference call. In attendance from the company is Larry Sills, CEO and myself, Jim Burke, CFO. Before I begin, I want to apologize for the late release. Our planned release was supposed to go out before the markets opened today. We have a new marketing service company and there was unfortunately a glitch and I realize that it went out just before this release and I’m embarrassed by it and apologize.

But as a preliminary note, I need to run through the forward-looking statement, so I’d 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’ll begin with a review of the financial highlights and I’ll turn it over to Larry to follow up. In 2004, as you can see in our release, we had a number of significant and, we believe, one-time occurrences primarily related to the Dana integration. I will review each of these items as I walk through the financials. Let’s begin.

Consolidated net sales for the fourth quarter were up 18.5 million or 11.4%. I’ll run through the individual segments for you. Engine management for the quarter, sales were $140 million, favorable $14 million against the prior year’s quarter, up 11.1%. The full year sales were $562.8 million, up $148.4 million and the percent is not applicable because, as you will recall, in the first half of 2003 we did not have the Dana sales. More meaningful measurement is to look at the second half of 2004 where we were apples to apples and that measurement we are up 6.5%.

Temperature control net sales for the quarter $27.8 million, down $500,000 or 1.8%. On a full year basis, sales were 210.1 million, down 9.5 million or 4.3%. And as we discussed during the third quarter conference call, this past summer was one of the coolest on record. Our Europe segment actual sales were 9.3 million, favorable 1.1 million or 13.3%. The full year sales were 40.7 million, favorable $500,000 or 1.3%. As I mentioned earlier in the year, we had a divestiture in 2003 for a small business which had 2.5 million in sales. So if you isolate that out of the base, Europe actually grew sales $3 million or 7.5% for the year.

Dropping down to our gross margins by segment, engine management margin was 13.9% for the quarter and 24% for the full year. The engine management gross margin was negatively impacted in the fourth quarter due to the following items highlighted in our press release. $3 million related to under absorption of overheads. This impact was from the closing of plants for physical inventories that we took at many of our locations. Also, in the fourth quarter and in the second half, we closed plants to reduce the bridge inventories that we built up. We actually reduced engine management inventories by 17 million in the fourth quarter as a significant impact on the gross margins.

Second item as a $3 million unfavorable physical inventory adjustment. This reflects really the movement of activity of inventories during this entire integration period and the final scrapping of any raw materials and work in process inventories prior to the moves. The last item, $5 million identified as an inventory valuation adjustment. This is primarily the cost of purchasing product on the outside during the transition. Again, to insure that retain the customer base which was one of our primary goals. I want to assure you that our cover production has recovered and we’ve eliminated these spot buys that have caused the majority of this variance.

Looking at temperature control, the fourth quarter gross margin was 13.6%, full year basis was 19.3%. Within temperature control, the fourth quarter is usually the lowest and it’s impacted by higher returns in this quarter. However, on a full year basis, our returns were favorable against ‘03. The 19.3% full year was off 2.3 points from 2003 and this was primarily due to the $21 million reduction in gross sales that happened because of the weather conditions.

Europe segment. Gross margin 26.1% for the quarter and 21.4% for the full year. Europe again experienced good sales growth and it was reflected itself in the favorable gross margins. The consolidated gross margins were 16.1% for the quarter, 23.7% for the full year. Looking at consolidated now, SG&A expenses. For the quarter, we had 22.9% of sales in SG&A against the comparable quarter in 2003 of 24.4, a 1.5 point improvement. Year to date basis, the numbers were 21.7 for ’04, 22.6 ’03, favorable 0.9 points. In this area we are starting to see the synergies of the Dana acquisition. I’ll also point out inclusive in the SG&A expenses for 2004, were 2.4 million for discount fees for the sale of accounts receivable that were not present in 2003. If you would exclude the A/R discount fees, we actually reduced the SG&A spending for the quarter by $653,000 while shipping $18.5 million more in volume during this period.

Operating income. And I’ve broken this out to exclude the integration costs and the goodwill impairment. By segment, engine management for the quarter had a 3.7 million loss and on a full year, a profit of 35.3 million. This 35 million is reflective of all the one-time events that were incurred within the fourth quarter. On temperature control, the loss was 3.5 million for the quarter and 3.4 million profit for the full year. Temp again completed a very tough year with a $21 million reduction in gross sales, finishing with a positive 3.4 operating profit.

Europe for the quarter was $500,000 profit. On a full year basis, $400,000 loss. We continued to see year over year improvements within the European segment and the full year results reflect a 1.8 million improvement over 2003.

Quickly looking at the Dana integration spending and the restructuring charges, again, integration expenses are charged to the P&L. For 2004, we incurred 10.7 million and for 18 months since the inception of the acquisition 13.6 million. The restructuring charges against the balance sheet for the quarter were 12.2 million, for the 18 months 14.3. To date we have spent approximately $28 million against our original estimates of $30 to $35 million during this period.

Let’s discuss the two accounting changes that we recorded in the fourth quarter. The first, the goodwill impairment charge of $6.4 million. $4.8 million of it was in temperature control and $1.6 million was in Europe. Both of these charges represent the remaining goodwill for temp and Europe. I’ll point out that the engine management valuation, which we also performed, was significantly in excess of the carrying value of this segment, which carries approximately $50 million of goodwill.

The second item was accumulative effect of accounting change and this was related to our new customer acquisition costs. In the fourth quarter, and more specifically on October 1st, the beginning of the quarter, we changed our method for handling new customer acquisition costs. Previously, we amortized such costs over 12 months. The new treatment is to expense them as incurred. This change reflected a 2.6 million pretax charge and 1.6 million after tax charge which is broken out on the face of the P&L.

A couple of points I’ll highlight on the balance sheet. Inventory year over year increased $4.9 million. However, it decreased $11.5 million in the fourth quarter. Again, the lion’s share of this was in engine management with a decrease of almost $17 million which, of course, affected the gross margin in the fourth quarter. Total debt increased to $224.2 million or 6.4 million in 2004. This was inclusive of approximately $23 million of spending on the integration, the Dana integration and the restructuring expenses. Today, we are currently borrowing approximately $40 million against our $305 million revolver and have approximately $75 million excess availability.

Due to the fourth quarter results, we are seeking a waiver from our bank group. I anticipate receiving this approval today but I am still waiting for 100% approval. This delay is due to our finishing our financials very late and almost rushing our banks for the approval. Again, I expect to receive this approval and file our 10K today.

I want to get more specific now related to engine management and the Dana savings. As you will recall, we identified 5 major savings which made up the roughly $50 to $55 million. I’m going to walk you through what we said we would do for 2004 and where we would be from 2005. Headcount reductions. We estimated we would reduce 580 heads by the end of 2004 and would generate an ’04 $20 million in savings. Going forward on a full year basis, ’05 we would have the same head savings, 580, and it would be worth $28 million. In ’04 we achieved actually 450, approximately 130 heads short, and this was actually achieved later in the year. Estimate of the savings was about $12 million. We see continuous improvement on a month to month basis in this area and Larry will go into this further.

The second major item was material cost savings. We anticipated $5 million savings in 2004 and $8 million savings in ’05 and going forward. In actuality in 2004, we identified about $3 million in savings against the 5 and unfortunately we incurred about $7 million in spot buys which I talked to earlier. So we actually had about $4 million unfavorable in this area. We fully expect to achieve the planned $8 million material savings on an annualized basis in the second half of 2005. The remaining areas we are basically on target achieved what our estimates were. Facility savings were 4 to 5 million in savings. We achieved them and exited the Dana facilities.

The MIS computer related areas were targeted for 5 and 6 million in savings and basically achieved those savings. We’re off the Dana systems and on to SMP systems. In total, 2004 we anticipated about 32 million of savings. I estimate we achieved about 19 million. Again, the full ’05 plan on the items I mentioned above would lead to 50 to 55 million. It has taken a little longer than expected, but we fully expect to be there during the second half and Larry will go into this even further.

To summarize, despite all the aberrations in 2004 with the engine management business, we believe the 24% gross margin is a reasonable base to improve month to month and quarter and quarter going into 2005. Very shortly we will be issuing our first quarter 2005 results and we’ll be going up against a comparable quarter in the first quarter of ’04 of 27%. The first half of ’04 we see the benefits in margin by building significant inventories for the bridge and we don’t expect to achieve those levels. We anticipate to improve off the base of 24%, again, month to month, quarter to quarter. However, in SG&A area, we expect to improve in that area from the first quarter on going forward. At this point, I’ll turn it over to Larry Sills.

Okay, good morning. I think Jim has done an excellent job of reviewing the numbers, but I’ll just try to give a little flavor to some of these numbers. The Dana integration, just to emphasize again, from our point of view went extremely well. To refresh your memory, we closed 7 of their 9 facilities affecting over 1,000 people and we relocated them to existing Standard locations. We gave ourselves 12 to 18 months to do this and a budget of about 30 to 35 as Jim said. We finished it on time. It took roughly 15 months and we did it within budget and best of all, we kept every single account. And as you heard, the sales were up 11% in the fourth quarter and 6% for the 6 months where we had comparable figures.

So the physical moves and the retention of the customers went extremely well. In the long run, that’s the most important. Now regarding the cost saving goal of 50 to 55 million, we remain confident of achieving that and we still believe we will be achieving at that rate during the second half of this year. But it’s taking a little longer than we thought for two reasons. In hind sight, I think we somewhat underestimated the learning curve. Having never done anything like this before, it’s taken a little longer for all of the new people that we’ve hired to achieve our historic efficiencies. We’re heading there, we’re not there yet. I’ll go into a little more detail on that.

And material, again, as Jim mentioned, is taking a little longer. Let me try to give you a little flavor by being somewhat more specific, give a specific example of each one. First, efficiency. Some of you have actually visited us here in Long Island City and have seen our molding, our plastic molding department in the basement. It’s a fine department. Historically, we have run that at 95% or better efficiency. Approximately the middle of last year, we relocated all of the Dana plastic molding into Long Island City, actually more than doubling the volume. We had to hire many, many new people and the result is that our efficiency fell from 95% or better down to the mid 60s in the latter half of last year. This is one of the reasons that we haven’t achieved all of our people goals yet because we have more people than necessary to get out the product.

So we were in the mid 60s in the latter part of ’04. But slowly but surely, the people are getting trained, they’re getting more experienced, and we’re starting to return to historic numbers. In January, we were roughly 75%. In February, we were in the low 80s. I haven’t seen March yet. I think March is going to show continual improvement and we expect to be getting back to the pre-Dana levels during the second half of this year. Now, this is just one example of all of our locations, but it is essentially the same situation replicated in all of our other locations. We had to go through the learning curve. The result is more people than we anticipated, but slowly but surely, we’re getting to our numbers. Okay that’s the people side of it.

The other side is material. As Jim said, our goal was $8 million in material savings. We have actually at this point, by studying it, we think we see somewhat more than that. So we feel quite good about that but it’s taking a little longer to get there. Let me give you one big example. What we’re doing is basically simple. We look at our vendors, we look at Dana’s vendors. We line them up, low cost wins. And just by doing that exercise, we have been able to come up with roughly $8 million or more in savings. Now, it’s just taking a while to get there.

Here is an example. Several fairly popular import items which are purchased, we purchase from vendor A, Dana purchased from vendor B. It so happens that our cost on these items were substantially lower, roughly $3 million. So that’s there. However, we had to work through all of their inventories. Their inventories, we’re still bringing them down and they have inventories that are going to last until March or April of this year. As soon as they’re exhausted, we switch to our vendor, and there’s a $3 million savings. So we remain confident that it’s there. It’s just taking a while to get there. And in fact, in ’04 we went the other way. As Jim mentioned, we did some spot buys to make sure we continued shipping during the transition. Those spot buys costs of $7 million, so we had $7 million. Instead of $8 million savings, we had $7 million going the wrong way. And that $7 million is roughly behind us now.

So to summarize engine management, we’re looking for quarter to quarter improvement. We believe the first quarter of ’05 will be better than the last quarter of ’04 and onward. And so that during the second half of 2005, we strongly believe we will be hitting our original targets. And that’s the engine management story.

I spent a lot of time on that because it is the most important, but I want to dwell for one minute on our other two divisions. First, Four Seasons. As Jim mentioned, it went through a very difficult sales year. Gross sales were down over $20 million. We didn’t lose any customers. It was purely the very, very cold weather. However, the folks there worked very hard on reducing costs, on controlling returns, and we maintained a small operating profit despite the very low sales. Looking to 2005, what I see happening is we have obtained roughly $10 or $12 million of new business in the OES field. They’re still working on reducing costs, so we continue to look for improvement and expect improvement in Four Seasons even if we have another very, very low sales year. Of course, if we get a normal summer, that will be a big help. So that’s the Four Seasons story.

Europe has really made nice strides in the last few years though it is still operating at a small loss. Here’s what we have going for us in 2005. We have begun outsourcing a good amount of product that we have been making historically in the UK in our Nottingham plant. We have been outsourcing it to low cost areas in eastern Europe and the Far East. This was an ongoing process. We moved some of it last year. We expect to move more this year. And these plans are in place and will reflect themselves in an improved bottom line. We’ve also picked up some new business. We are now the licensee for engine management products for Lucas in the UK and Lucas is a very strong - - they’re almost like Delco, the equivalent of Delco in the UK and have started doing business with McNulty Morelli, which is the main OES company in Italy and connected with Fiat. So we see the costs continuing to come down. We see some new sales and we believe we are continuing to make progress. And that’s Europe.

But obviously the key is engine management and again, we are confident we will be achieving our cost targets during the second half of 2005. Now before we turn to Q&A, Jim is going to spend a minute taking about Sarbanes-Oxley.

Just to - - I gave everyone a number of statistics. I realize that I omitted two key items, one in our depreciation and amortization on a full year basis was $19 million and for the quarter it was 5.3 million for D&A. Cap ex spending was $9.8 million on a full year basis and in the fourth quarter it was 3.7 million. All right, I want to address the Sarbanes-Oxley evaluation of our internal controls. And before I go into that, I want to state again we anticipate filing our 10K today and with that I expect to have a report from our auditors who also have a responsibility to evaluate our internal controls. We’ll have an unqualified opinion on our financials, however, we have identified material weaknesses in three key areas.

The first, unfortunately we had incurred significant turnover in the finance area within engine management and really the corporate finance area within the fourth quarter. This caused the delay in our preparing our financials and also a little bit of sloppiness, and for that we identified and targeted that as a material weakness. A second area was in the company’s IT controls, information technology. And while we have a number of controls in place, a number of areas were identified where they needed further enhancements, particularly within areas like security control and password protection and recovery systems.

The third item really is almost a combination of the first, but it’s with the turnover, it’s analysis and reconciliation of general ledger accounts. And with this would be month end cut off processes and one particular area which was restructuring charges. We did have a significant adjustment within the fourth quarter. It did not affect the prior quarters for an adjustment. Between expenses, there were erroneously charged against this reserve. This is twofold. One related to a very late implementation that we had done for a payroll system and also the personnel that was handling that has now left the company. So those corrections, I want to assure you, were all caught within the fourth quarter. I’m very comfortable with the balance sheet that we’ve prepared and that Grant Thornton has audited.

We are taking a number of actions to remediate these deficiencies and weaknesses and already have in place areas to rebuild the finance area in this area. The company believes actions that we will take during 2005 will remediate all of the material weaknesses that have been identified. With that, I’d like to open it up for Q&A.

[OPERATOR INSTRUCTIONS]. We’ll take our first question from Derek Wenger from Jeffries & Co. Go ahead.

Yes, thank you very much. Several questions. I’ll just go through them one by one if I can. What is the capital expenditure outlook for 2005?

Again, I would say I would target a range between 12 to 15.

Okay, and were any violations or covenant violations or anything triggered in the credit agreements by these results?

Yes. I had pointed out that there’s a fixed charge covenant there and because of the results in the fourth quarter, we are seeking a waiver and an amendment going forward.

Can you go into the number that’s required and the number you achieved?

The specifics that I - - I do not have the numbers in front of me at the moment, but the number going forward is 1.25 for the fixed charge and I do not have the final numbers which was a rolling 12 months though in the past.

Okay, and what are the amounts drawn under the credit agreement?

I went over that earlier. It was about 140 million I think I said. I had about 75 million of - - I have 140 million borrowing, that’s today. And I have 75 million of excess availability on that line.

Okay. And the $42 million of other assets, the last item on the balance sheet, can you just go through what that consists of?

Bear with me for a moment, I can. We’ll be filing our K later today and you’ll be able to pick those items up in detail. Hold on. Okay. The largest item that’s in the deferred income tax is $24 million deferred financing costs which are amortized over the debt instruments about $5 million. There’s $10 million of other in there and equity of joint ventures a little less than $2 million. That’s broken out in a footnote that we’ll be filing later today.

Okay, and of the $11 million of costs that you kind of identified as one time in the fourth quarter, is there any overlap between that 11 million and the 2.857 million of integration costs?

No. No, those are all separate. And while we will be going forward, we’ll be incurring on a cash basis, restructuring charges which will be going against the balance sheet that we have for exit costs of facility and some remaining severance costs. On the P&L, we’ll be really measuring on an operations basis unless there’s something that we identify specifically. But basically at this point now going forward into 2005, we’re saying that all of that integration spending in the P&L, we will report against that basically as normal operations. So you’re looking at dollars of $12 million, I’m sorry, 10.7 million in the P&L really going away.

Okay, but in terms of this fixed charges coverage calculation, the banks are not viewing these $11 million as kind of one time exclusionary items?

There was, being specific - - good question, Derek. There was a number that we were allowed which was over the period which was really the first 18 months. And so it did not allow for the full coverage of the 2004 number because we had used up part of our allowance in the second half of ’03. Did you understand?

Yeah, but if I were to look at this rationally, would you say that your EBITDA calculation we should be adding these back because they are not going to occur in the future?

I will respond to say that we - - they will not occur in the future. I don’t want to state what should or should not be added back to calculate EBITDA for the group.

Okay. And then how many shares are outstanding at the end of the year?

19.3 I think. Well we had 19.3 at the year. So the quarter’s closer that we had there. Yeah, 19.3.

19.3 million shares outstanding?

Yes.

Okay, thank you.

Thank you. We’ll take our next question from Walter Shanker from Titan Capital Management. Go ahead please.

Good morning. I thought maybe you’d have the conference call and not get the earnings out.

I knew you would jump on that.

A series of questions starting with - - I guess I’ll start with Europe. A couple of years ago, I think it was a couple of years ago, you indicated that if we couldn’t get Europe turned around, maybe we’d have to re-evaluate it. Could you explain why it’s good to only lose a little money and why we have to be in Europe? And not lose any money, like get out?

Well, let’s just say this. Our first order of business is to get Europe fixed. And we see us fixing it. I do believe that this is going to be a good year. However, I can’t disagree and we will always be taking a good hard look at Europe and see whether it’s the right thing. But right now we are optimistic that Europe is headed in the right direction.

Okay. When one looks at the inventory, different inventory charges, those inventory charges sort of don’t fully reflect the magnitude of what you did because it’s only the differential on the write-offs as I think about it, between what you paid and what you then sold it for, i.e., when you had to make a spot buy or bridge inventories, etc., it seems to me. So if I bought a unit for $10 and I resold it for $10, all I’ve written off is the differential in gross margin you would have otherwise achieved, question mark?

Yes that’s true. When we sold a unit, I guess the one given that was left out of there was if our in-house manufactured cost on that was $7, when we purchased it, we would have went into inventory at $10. When we sold, it would have charged the P&L at $10 and would have been a $3 unfavorable hit to gross margins during that period.

So $5 million is probably 3 times that in the amount of inventory? I mean, weren’t you writing this off during the year as you were selling it? Or did you just save it all for the fourth quarter?

No. The bulk of it, because we were really building the inventories during the first half of the year, we weren’t really having to buy it at that point. It was really as we started to enter the third quarter and the physical moves started with manufacturing that was in the process of moving and the distribution locations that were going through the moves, that we had really fell behind maintained set of goal to maintain the customers as being critical and started purchasing significantly during that period. We exhausted that inventory over the latter part of the third quarter and the majority of it in the fourth quarter.

And that no longer continues to be a problem as we go into this year?

At this point now - - and there were really a number of items that we purchased. But there was a handful that made up the lion’s share of that number and we are back in production on those numbers and not incurring any of those spot buys.

Okay.

There is some lingering inventory that is being exhausted during the first quarter. We’re making no more buys, but there’s a little bit of inventory left that’s slowly working its way out.

Which would not have been included in the other various, the two other inventory charges?

Correct. That’s still on the balance sheet. That will be exhausted out by the first quarter.

Okay. What have you done this year on pricing versus what are you seeing on raw material costs?

I’ll do the pricing side. Jim will do the raw material costs. The pricing is probably more favorable than it has been in some time. We’ve come to appreciate that the main people we need to price against is original equipment. And Delco and MotorCraft, etc., etc., they have been raising prices as this year began. We’re looking forward to some decent price increases, most of which will occur from May onwards. So we’re looking for some pricing help in the last 6, 7 months of the year. We’re working on price sheets right now. We think we have room. And Jim will talk about material inflation.

No, before you get Jim, you I assume came into the year though anticipating raising prices anyway?

In ’05.

In ’05, right?

Yeah, that’s in our plans for the year. But that’s correct.

So this is the second round of price increases you’re anticipating in the second half of the year?

We had a small net increase, we had a price sheet that came out in the December/January timeframe. It netted out minimally because what we did was, again, we realize now that the main competitor is OE. And on some of the slow moving items, we had gotten quite high against OE. We made those corrections, we reduced a bunch of them to be more competitive which will help us in the marketplace. We went up on others. The net effect was maybe a point or less. Now we’re going to have one, a second round in the second half of the year, which should be a healthier price increase. That’s our plans for the year.

Okay.

And Jim will talk about the material inflation.

Okay. Again, as a large part of our products are outsourced, we do not identify a singly commodity that impacts us. Now obviously as we’re able to pass through some price increases, vendors are also, but because of the close to 25,000 SKUs that we have within engine management and the opportunity of sourcing many of these parts and achieving savings, we don’t deem this to be a significant impact in either our engine management or temperature control area.

So you’re the only company in America that is not seeing the adverse impact of higher raw material costs, higher fuel costs for your truckers, higher rates on your truckers?

Well, I’m - -

Obviously not the only. That was - - Larry know where I’m coming from.

We do receive the freight costs. I was addressing – I may have omitted that. We do experience those costs. But what I’m really looking at are the materials costs that we have in the company. And while we’re outsourcing our materials management, purchasing personnel consistently year over year have done a good job in offsetting a lot of those raw material commodity type increases with reductions in the newer parts that we’re buying to have a minimal impact on our gross margins.

Okay, thank you.

Thank you. We’ll take our next question from Jonathan Shapiro from Goldman Sachs. Go ahead please.

Hi. Good morning. I just wanted to clear up - - I may not have understood you correctly. When you were giving some of the segment detail, particularly on the EBIT, were those excluding or including the $11 million?

They were excluding.

So in engine management, negative 3.7 would exclude any impact from 11. So that’s - - it would have been less without that?

Yes. With that.

Okay, understood. And for the year, same thing?

For the year, yes.

I thought you said one was excluding and one was including, so I just wanted to make sure.

Let me just try it again. Engine management - - then we’ll be clear. For the quarter it was 3.7 million loss and we had costs related to the integration of $2.5 million and we also had [cross talk]. I just gave him the quarter. If I go to the year on there for engine management, I stated that it was $35 million in there. The actual number including the expenses would have put me down at 24.5 or so.

Got it. Okay, understood. Okay, and can you give us what was temperature control and what was Europe? So 2.5 of the 11 was in engine management in the quarter?

You want the--?

I’m trying to figure - - following up on the earlier question of whether the $11 million is recurring or not. And you’re implying that it’s not. If we were to so choose to add back the $11 million, I’m just trying to figure out exactly where I’d put it.

Oh. Well the 11 million was really all in engine management. There was another little bit between really temperature control of like $700,000 but that’s small enough to where I treat it as just regular business. I would just adjust the 11 million for engine management.

So take the 3.7, add 11, or 10.3 and you get $6 or $7 million if we were to choose to add it back?

Well the 10.7 was for the full year. If you were working on engine management for the quarter, the number is 2.5 million for the quarter.

Okay, I think I understand. And then I guess separately, just in terms of the market, what do you guys attribute the acceleration in engine management growth? Double digit growth in the fourth quarter is pretty strong. What do you guys attribute that to?

Well, I think part of it is the fourth quarter of ’03 was not that strong, especially with the Dana business. And if you recall the conference calls we were having at that time, it was being brought up the volume is less than you expected, da, da da. So I think some of it was really a catch up from the prior year. And the other one is, from what we are getting, business is pretty okay. Yeah, Jim just pointed that out to me. A more meaningful number is 6 months. In a quarter anything can happen.

6.5% isn’t bad either.

Yeah, that’s a decent number.

[inaudible] or did you guys take market share?

We didn’t take market share. I can’t really say but [cross talk].

Do you think the engine management products grew 6.5% in the second half?

I’m sorry?

Do you think that the engine management market in the United States in the second half of the year grew 6.5%?

At this point, I wish I could answer it.

I think it’s, just to add for a second, again, it also is impacted by the inventory management by our customers and the timing of how they place our quarters. So I think you have to look at it for the second half and then it can be an even influence.

I wish I could give you a more precise answer.

Understood. All right, thanks very much.

Thank you. We’ll take our next question from Alan Webber from Roboti and Company. Go ahead please.

Good morning. A few questions. One is, I’m not clear - - what are the remaining cash costs to complete the integration?

Okay, there are costs related to severance costs that we’re paying out to employees and there’s also facility exit costs that we have. And one particular location we have a long term lease on it. It’s Nashville, a distribution center, very large distribution center. We have an agreement which was negotiated in the contract that when we vacated that facility we would share the cost of that facility with Dana, but I believe the lease is out through the year 2021. And that’s the most significant item. So we have, let me put my hands on it - - we have potential 15 million in exit costs for that we’ve estimated for facility costs for long term leases and that’s all spread out over a number of years obviously. And over the next year really, about $3 million or so in employee related costs.

And those will be the actual cash costs, not the P&L, right?

Correct.

And then I’m not sure if you gave the number - - did you give what you’re expecting inventory levels to be on the engine management side at the end of ’05 compared to where it was at ’04?

Earlier in the fourth quarter we had targeted that we were going to be, because inventories were building up, that we were targeting to get a significant amount of inventory out within ‘05. And the number that we were looking for was about $30 million. Since we were able to achieve, and we closed facilities which took the short term impact on gross margin, we achieved part of that now within the fourth quarter. So that number that I was looking, the $30 million for the company, is probably a bit of a stretch and I would say that I would look more towards the $20 million range.

That was reduction of inventory by about $20 million in engine management in ’05?

$20 million for the company wide.

Yeah, I would be more comfortable with a 10 to 15 engine and maybe 5 everything else.

And so again, when you talked about - - and so a good part of that 10 to 15 will happen in the first half. So that’s why you expect the margins - - part of the reason the margins will improve in the second half?

No, the inventories will actually be gradual as they come out because a lot of the in-house manufactured costs we’re balancing that. The inventories that are going to come out are really in the back end of the line of product that we purchased. And we just have to wait until that inventory is exhausted before we begin to place the purchase orders and that was what Larry was talking to where we have identified different vendors with already identified material cost savings. And we won’t place those orders until we need the inventory. But it’s more related to purchase resale type products.

Okay. Then just on a separate issue, the market of selling from the engine management side, selling to dealers. Just with the integration, do you see any improvement there in the outlook on that?

I assume what you’re referring to is what we call OES business?

Correct.

And I wish I could be more precise and tell you I have this deal and that deal and this deal and that deal at this point. I can tell you we have more potential prospects than ever in our history. We are becoming, slowly but surely, a player in this field. But it’s a slow process. We’re dealing with big companies with all sorts of bureaucratic rules. It’s a slow process but we are making headway. I see this as a good long term growth area for the company. I can’t give you a number for the year 2005. We are getting some extra business this year, but I do see a good long term potential here.

And my final question was, in terms of your facilities, I think you talked about Europe setting up a facility, I think you said in Asia or like that. Is that correct?

Well, we’re not setting up a facility in Asia. We’re going to be purchasing from Asia.

Okay. Just with what you have here, is there any need to move any of the current facilities that you are using now kind of offshore to reduce costs?

Well, yes, and this is obviously a major issue for us and probably for every major American manufacturer We’re looking hard at all possibilities. We already do a fair amount in Mexico. We do already have over 300 jobs in Mexico assembling wire. We’re looking at that. We’re looking at some other things. But I have nothing imminent at this point.

Okay. Thank you.

Thank you. Once again, if you’d like to ask a question, please press the star and one on your touchtone phone. And we’ll take our next question from Robert J. Smith from the Center for Performance Investing. Go ahead please.

Yes, good morning. I guess we’re moving into the afternoon here. But can we be simplistic enough in just saying that things have been pushed ahead 6 months for the savings that we were looking for? I mean, if we look at the July 1, ’05 through June 30, ’06, everything else being equal, would it be fair to say that your targets would be achieved in that timeframe?

That is a fair statement, Bob.

Okay, that’s the first thing I was looking for. So in essence, the projections which I guess were something like $1.55 as a bottom line or so, is still good?

Well again, we don’t [cross talk] but what we had said was that we felt the Dana business with 50 million in savings, 50 to 55 they were losing a million, there would be approximately 40 million that we felt we could deliver from the Dana business.

Okay. Thanks very much.

Thank you. We’ll take our next question from Bill Desolin from Davidson Investments. Go ahead please.

Thank you. We have a group of questions. First of all, following up on the question relative to sales strength that you saw in the second half of last year, given that we’re now through the end of the first quarter, what have you seen for sales here in Q1?

We’re coming to the end of the quarter. I’d say sales are holding up reasonable well, roughly close to our projections at this point.

Would it be fair to say that on the engine management side that the sales growth has continued here in the first quarter in that roughly 6% range that you had?

No. I think it’s probably going to be less than that.

Okay, thank you. And second question is relative to temperature control. Looking back on your experience with cold summers, does that create some sort of pent up demand where when eventually you do have a normal temperature summer that not only do you get that summer’s repairs to take place but also previous summers that have breakage that simply was not fixed as a result of it not being so hot for folks to do it?

That’s a good point. But there’s a big counterbalancing trend. You probably have two things working in cross purposes. Yes, you have that cars which chose not to repair last year because it wasn’t hot and so they rode around with a broken air conditioner. If it does get hot, then they will go to fix it. So yes, that’s true. The other side though is that our customers typically – we’ve now had two very slow years sitting on fairly large inventories. So those two things kind of balance each other out.

Thank you. And next question, Jim, I believe that I heard you mention that the borrowings today are at $140 million. Would you reconcile that number with the numbers that we’re seeing as of December 31 on the balance sheet, please?

Yeah, well because of the seasonal nature of our temperature control business and building inventories in there, we also have other expenditures within the first quarter in timing. And we usually bill through the first and second quarter and then receivables are collected as we go into the third and fourth quarters. So it’s a normal cycle that we go through.

And the way to think about it though is if we look at the notes payable on the balance sheet, as roughly $110 million, that number now is roughly $140 million. Is that right?

How I look at it - - in the first 6 months of the year, very simplistically, we tend to go up 10 a month. And then in the second half of the year we tend to come down a month. Plus improvements.

Bill Desolin. Right. And that shows up in the short term?

Yeah, the only thing I’d add to that, Bill, would be, and I don’t have the exact number, but within that notes payable of $110 at the end of December is, I forget the number, it’s $4 million or so of other debt, then the $4 or $5 million other than the revolver that we’re talking about.

All right, that is helpful. Thanks. And final question is as you sit today, what is the free cash flow goal for 2005?

Good question, but as we’ve said in the past, we do not want to put out guidance and be held to targets in there. I think the position that we’re taking, we’ve spoken to inventory improvements and while we’ve achieved better reductions in the fourth quarter, we’re saying $20 million for ’05 and we’re talking about the delivery by the second half of ’05 on an annual basis to Dana savings. So you’ll have to do the calculations, Bill, yourself.

Thank you both.

Thank you. It appears we have no further questions at this time so I’d like to turn the program back over to your moderator, Mr. Jim Burke.

Okay. I want to thanks everyone, it’s now this afternoon, for participating in our call and again, I apologize for the very late release of our financial numbers. Thank you very much. Good bye.

This concludes today’s conference. You may disconnect at any time.