Standard Motor Products Inc (SMP) 2005 Q1 法說會逐字稿

Good day.

[Operator Instructions]

At this time, I would 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 2005 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 expectation 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 review of the financial highlights, and then turn it over to Larry. To begin, we will look at our statement of operations. For the first quarter 2005, consolidated net sales were 207.3 million, up 2.5 million, a slight increase of 1.2%. By segment, Engine Management sales were 140.4 million, down 1.2 million, which reflects a slight decrease less than 1%. However, the month of April is above expectations, so we are essentially flat through April.

The Temp Control Segment, sales were 53.6 million, up 2.4 million or 4.6%. This increase is basically from new OES business. Europe was 10.9 million, up 700,000 or up 6.6%. The key takeaway on net sales is that we're basically within our long-term forecasts of up 1 to 2%.

Looking at gross margins, consolidated gross margin percent was 23.4%, down 1.5 points compared to the first quarter of '04. By segment, Engine Management margin was 22.8%, down 4.3 points.

In the first quarter of '05 we are measuring expenses on a consistent basis as opposed to multiple systems in 2004, while we're in the multiple Dana locations. If we look back over the last 6 months, the Dana Engine Management margin has averaged approximately average 22 to 23%, and that is after adjusting for the onetime items in the fourth quarter of '04.

We expect this to be a low point for the year, primarily impacted by premiums from outside purchases and labor inefficiencies from new hires. Going forward, the Engine Management gross margin percent will benefit from 2005 announced price increases, material cost savings from the integration as we exhaust the Dana inventory acquired, and labor and overhead efficiencies which continue to progress toward our pre-Dana levels. Larry will expand further on this.

Temperature Control gross margin was 20.4%, up 5.2 points. I'll point out that the first quarter '04 for temperature margin was very low, and we anticipate that the Temp segment will generate gross margin percents in the low to mid 20s. Europe gross margin was 20.6%, down 0.2 points, basically flat.

Turning to SG&A expenses on a consolidated expense for the first quarter, SG&A was 20.3% as opposed to 23.1% in the first quarter of '04. This reflects a 2.8 points improvement or 5.3 million of reduction. This savings reflects the benefits of consolidating the Engine Management businesses with the largest reduction in distribution costs, as we are able to cease operations at the almost 700,000 square feet Nashville distribution center, previously utilized by Dana.

Dropping down to operating income on a consolidated basis, operating income was 5.8 million, an improvement of 3.6 million versus the prior year. Engine Management operating income was 10.1 million, up 1 million, and despite the lower gross margin percentage, we were able to control SG&A expenses to generate incremental earnings.

Temperature Control operating income was 1.5 million, up 2.7 million. This Temp improved earnings primarily off of a low gross margin percentage basis from the first quarter '04 discussed earlier. Europe operating loss was 500,000. This is down 200,000 versus the first quarter '04, and the Europe slipped a little the first quarter. However, it's expected to be near breakeven on an operating income level for the year, and slightly ahead of 2004 for the year.

Turning to the balance sheet, accounts receivable increased based on the seasonal nature of the business, up 47 million. Inventories also increased slightly, a little less than 6 million for the quarter. Total debt was 261 million, up 37 million, again, primarily from the rise in accounts receivable. Just commenting briefly on the restructuring expenses, the restructuring reserve at the end of March was 17.1 million, spending in the quarter was 2.3 million and integration expenses for the P&L were 500,000.

Looking back since July of '03, our cumulative spending to date is now at $30.7 million, still well within our original targets. Finally, our CapEx spending for the period was 1.9 million, and our depreciation and amortization expense was 4.4 million.

At this point, I will turn it over to Larry.

Okay. Good morning. It has only been 6 weeks since our last conference call, so I don't have that much new to report. But I'd like to bring you up-to-date and give you the latest information on the Dana integration.

As you can see, we've made very good progress in SG&A as Jim mentioned. If you compare the total company SG&A for the first quarter of 2005 versus the first quarter 2004, it's roughly $5 million savings, which annualizes out to about 20 million a year. That's even more dramatic if you look at only Engine Management and then compare the third quarter of 2003, which was the first company -- first quarter that our 2 companies were together; so the third quarter 2003 versus the first quarter of 2005, just Engine Management. In the third quarter of 2003 SG&A was 21.6, in the first quarter this year; it was 15.6; that's about a 6% savings, which works out to be somewhat north of a $30 million savings in SG&A.

Now, if you recall our original forecast, we were -- our goal was a $55 million savings from the Dana business. SG&A takes us slightly more than half of the way there. So I'd say we're sort of halfway there in our savings goal. Now, obviously what's heard is the gross margin, which has actually gone the other way.

Now, some of the reasons for this have already been covered, but I'll say them again. We're still working off some high cost Dana inventory. We continue to buy some product on the outside that would be normally manufactured in order to reduce back orders and take care of our customers. We are still not at pre-acquisition efficiencies as we have all these new people and equipment to learn how to master.

Now, each of these has been improving month-by-month, quarter-by-quarter, and we see continuing improvement in these areas. Now there is a fourth reason, and the fourth is pricing. It's close to 2 years now that we acquired Dana Engine Management. During that period of time we've had -- not only have we not had a price increase, we have actually -- since the first quarter of this year, a slight decrease, as we made some onetime adjustments in our Engine Management Division to bring our prices in line with a OE. That's a price reduction that took place in January of this year, so it hurt the first quarter.

This is what's called -- caused the shortfall in the gross margin. So here we are today, and where do we see ourselves going forward? And this is critical now to achieve our goals. First, we have price increases which have been announced and been accepted by our customers. They're beginning in May of this year. Two, we had already mentioned material savings through combining the lines of roughly $8 million. We will start seeing those savings hit the P&L toward the latter part of this year.

Third, as I said before, we are getting more efficient every day; our people are getting better at it. This is a high priority with our company. We're working on it constantly, and we see it improving every month. And finally, those outside purchases, which really hurt the margins -- this is product that we normally make and we were buying. We see them coming to mostly as an end and will be negligible by the -- towards the end of this year.

So, all of these things are improving, and as we gain in all of these areas we see our gross margin improving as the year goes on. We have already made significant improvements as you see in SG&A. So as we start to get the improvements in gross margin, we remain optimistic that we will hit our original forecast. So that's the summary; that's the quick summary. We will now open it for questions.

[Operator Instructions].

We will take our first question from the site of Derek Wenger (ph) with Jeffries & Company. Go ahead please.

Just two questions, what is the anticipated capital expenditures for the year, and what is the availability under that line of credit right now?

Okay. Derek, on the CapEx, we are a little less than 2 million for the quarter so I would say on the high side, we would probably be at 12 million. Availability on the line is north of 60 million.

Okay. Thank you.

You are welcome.

Thank you. We'll take our next question is from the side of Jonathan Shapiro with Goldman Sachs. Go ahead, please.

Hi. Good morning, guys.

Good morning, Jonathan.

I just wanted to -- I guess a couple of questions on the gross margin. On the Dana inventories, when do you guys sort of think you have worked away through basically all of it or where it is sort of a de minimous impact?

Okay. If I had to guess, again just to put this in perspective we're dealing with roughly 25,000 skews and the backend of the line becomes the slower moving items, and that is really where we generate a material savings from. We minimize any additional purchases as we combine the lines. But - and you cannot be precise on it, but I would have to say that we expect to exhaust that inventory hopefully earlier in the second half, but by the end of the year. By the end of '05, the bulk of it.

So, then if you have that and you are still working on the efficiencies do we sort of think about '06 as when we could think about the 50 million to 55 million? It sounds like you've largely gotten there on the SG&A side --.

Right.

Is that sort of when we would say alright we'll see a year?

We again its hard to point to -- we are targeting all efforts and focus for the second half of '05, but again it is either the second half of '05 or again the beginning of '06. The benefits will come from as we minimize the outside purchases and that's kind of twofold. It brings production into the shop, which also improves absorption and reduces costs. So that's kind of a double edged sword benefit.

Okay. One more just on the A/R and then just a housekeeping one. I guess on A/R you talked about the seasonal increase, but I guess if you are looking year-over-year you would have the same seasonality end of March '04 and end of March '05 would be roughly the same. Is there anything else going on with the A/R that it sort of jumped up so much or should we think will sort of work it's way down?

Well again, that increase is from December. The increase in receivables in the first quarter of '04 was up about $36 million. Part of what we're looking at there also is a program on customer A/R draft programs, where we had previously accelerated the discounting of the sale of those receivables. We are actually holding some, and we will be holding more. So in 2005, we will increase in there. The offset will be lower A/R draft fees, which are already in our SG&A expenses.

Okay. And then just on the -- you have given the gross profit by segment -- I'm sorry the operating profit by segment, what did you say was for Engine Management?

The operating income was 10.1 million. I think.

All right. That was I guess my question. You had 5.8 total, just trying to work my way down from the 10.1 at Engine Management sort of work my way down to get back to 5.8

Okay. It's the corporate segment that we have which are unallocated expenses that we maintain there. So this way, when we look at operating results within the segment levels, we keep those isolated at the corporate level corporate and Canadian distribution.

Okay.

You are welcome.

Thanks, guys.

Thank you. Next we'll go to the site of Walter Schenker with Titan Capital. Go ahead please.

Good morning.

Good morning.

Good morning.

There are things I won't discuss, but it is a favor, and a joke. Larry, as you continue to every quarter talk about hitting our planned goals. Up until this quarter actually put a timeframe on it. I see in this quarter, you have not -- maybe to retain credibility, you have not put a timeframe on it.

It seems to me that when you did this deal and virtually every time through the last 4 when you talked about this deal, in the merger you consistently laid out all of these things that were under your control, I emphasize your control that was going to get you to the 50 million to 55 million.

We are 7 quarters into this and we have made net-net, if the take the gross margin, net of the SG&A savings, we have made de minimus progress toward 50 million to 55 million, largely due to things which are under your control whether -- your meaning the company's, whether it's incremental people working in all inefficiencies buying outside inventory, pricing the product or not pricing the products to make money, when do -- again why are we supposed to - and you know I own the stock and I'm a friend by the way.

Why are we supposed to have confidence that 50 million to 55 million, which when you originally laid it out looked pretty easy, and 7 quarters later, we haven't made much progress toward a reasonable expectation?

We'll, I think I would disagree that we have not made much progress. I think the SG&A is roughly half of it. And I think we've explained why we went backwards in gross margins. And we do feel comfortable that we need to hit the goal of 55 million, 25, 30 million improvement in gross margin. And with the things we have on the table, we feel that it is there.

The one thing I'm not comfortable is giving you a firm timeline on the efficiency. But the others are in place and are going to happen. And the efficiency is going to happen to, I just do not feel comfortable giving you an exact month in which it is going to happen. But we are 25 to 30 million short of our goal, and I believe that we have the elements in place to achieve it.

And the price increases on the Engine Management side are roughly what?

Frankly, I - we do not wish to disclose it. They vary by market segment, and so we do not -- we just don't want to disclose it. But they are in place, and they should be okay.

Okay. Thank you.

Thank you. Next we'll go to the site of Alan Weber with Robotti & Company. Go ahead please.

Good morning. Can I add on a follow-up to that? When you talk the gross margins and the pricing, when you go back to the 50 to 55 million savings given that you said pricing is down, can you still reach those levels?

Yes. We think we can. The pricing -- the down pricing was a onetime adjustment. We had gotten away from comparing ourselves to OE. We -- all of us, aftermarket companies had probably fallen into a trap of competing only with each other. And we had gotten away from our original mandate, which is make sure you are never above OE. That was brought home to us quite substantially over the last couple of years.

We bit the bullet. We made the adjustment. It was a onetime event. It is behind us. OE is in fact raising prices, so now that onetime adjustment is behind us and we should be moving forward. So, we feel reasonable with pricing as we march forward from this time. And with that in place, again, and the other elements in place the 55 looks reasonable. Remember, we got have half of it already.

Okay. Just to the other part was, and maybe I have this wrong, but the -- in March of '04 it looks like -- actually since March '04, compared to March '05, inventory of the company is actually higher. And I was just wondering, at one point you talked about reducing inventory and generating cash inventory. I'm just kind of wondering where all that stands?

Yes. You are right about that. We put our focus over the last 6, 9 months into filling orders. First, we had to make sure we had enough safety stock to move the locations, and then we had to scramble to make sure that we fulfilled customer orders. Results of all that is the inventory grew. It has grown slightly this year as well.

We are now for the first time shipping at what I would call a satisfactory rate. We are now over 90%. We had been in the low 80s, which was unacceptable. We are now over 90, and we will start looking to reduce inventory during the second half of this year.

Okay. And will that then continuing into '06?

Yes. It will continue for quite awhile, because some of the inventory that we inherited from Dana, we have a very, very long lifetime supply and it is going to take -- and they tend to be slower moving items. So it's going to take a while for them to get out of the system. This is the back end of the line. But so, yes, we see -- I will say starting in the third quarter of this year. We will look to see some inventory reduction and that will carry for 12 to 24 months easily.

And so between the expectation of higher profits, lower inventory, you should be generating a quite a bit of cash to pay down debt. Are acquisitions -- are you still looking at acquisitions or where does that stand?

At this point all of our focuses on hitting our numbers.

Okay. Thank you.

Very good.

Thank you. Next we will go to site of Chris Cook with Zazove. Go ahead please.

Hi. Just a quick question on your restructuring accrual totaling, I guess, about 17 million. Over what timeframe will that 17 million be paid out?

A large portion of that is related to a long-term lease that we have with that Nashville facility, which extends out toward 30 years 2021. Obviously, we have exited the facility; we are sharing the cost and facility with Dana, and it'll really be dependent upon how fortunate we are on subletting it, but the period could extend out to that period of time.

How much of the 17 million is the leased?

I don't -- again, that is probably in the...

Okay.

1 million and 1.5 million range -- $1 million per year there about.

Okay. Million, so that's --?

If I had to summarize I would guess that probably of the 17 maybe there is 12 left to the real estate and 5 between other employee benefits and other costs coming due within the first -- within the next 2 years.

So, 5 within the next 2 years, and then the 12 million will be paid out between now and 2021?

Yes. That's what I'd estimate.

Okay. Great. Thanks.

You're welcome.

Thank you. Next we will go to side of Bill Dezellem with Davidson Investments. Go ahead please.

Yes. We had a couple of questions. First of all relative to inventories, and I know we are beginning to beat the dead horse here, last quarter if I am remembering correctly inventories came down a little bit faster than you had anticipated. We actually had somewhat hoped that inventory would continue to decline here in the Q1, versus the Q4 and maybe even that they just stay flat.

Could you walk us through why they in fact grew a little bit sequentially? And then secondarily, relative to accounts receivable, your customers factoring program, how much or what was the dollar amounts that you no longer participated in that factoring program?

Okay. On the inventory, let me address that first. Really at this point now, in many ways we have the business and the operations in our facilities. And Larry had pointed out that we were protecting fill rates. I think at this time our goal is -- fill rates are now north of 90%, and we will be able to target for Engine Management our original goal of achieving three times thirds. So at this point, I think we will be able to move forward with inventory reductions in that area.

Again, a single quarter may have a change, but on a long-term trend, we still have significant opportunities for cash generation from the Engine Management inventory we are carrying. On the accounts receivable, I do not have the specific numbers to quantify for you, Bill at this point. However, we are evaluating based on the terms of the various customers that have programs in there, against what our own borrowing costs are, and also within arrangements within our banking syndicate.

It is really a balance between if we accelerate those -- the sale of those receivables and incur the fees, which we are recording above our operating income. Our expectation going forward is that, with our banks is that we will be - the tendency will be to reduce the amount of the acceleration on those receivables and to minimize those discount fees. The offset will be slightly higher interest expense, though.

Thank you. That is helpful.

Okay.

Thank you. Next, we will go to site of Robert Smith (ph) from Center Performance. Go ahead please.

Hi. Good morning.

Good morning.

Good morning, Bob.

Any movement in original equipment service agreement possibilities?

Yes. I would say, we are gaining with the -- that has been a big part of our increase in 4 seasons this year. We are gaining with all the companies, and I would guess that this year our total number is going to hit maybe 60 to $70 million of OES business. And I just see it growing above that in the time to come.

Anything kind of big or --?

I don't have a huge one-time dramatic thing to give you.

Okay. Larry, it appears that the asbestos mess is finally moving to resolution. If asbestos litigation finally goes away under the present proposal, will this affect at all your reserves?

You are little more optimistic than I am on that. I hope you're right. Just so to tell everybody, a Bill has been introduced in the senate. It's to setup a trust fund of roughly $140 billion. They are working on amending it, and it's complicated and there is lots of dollars at stake, so lots of people are lobbying aggressively in all directions.

We sure hope it happens and if it does happen, I'll let Jim tell you, if we are over reserved or not. We'll go on the basis that it won't happen, and be happily surprised if it does happen. And if it doesn't happen, our case as it's still muddling along at roughly the same rate of under 100 a month. Most get discharged, dismissed, some get settled for few thousand dollars, we are confident we're adequately reserved for the current situation and possibly over reserved if legislation passes, but we have to see what the legislation would be.

Okay. And what would be the best of all worlds with respect to developments of GM now, and the difficulties there?

Well, we like to see them thrive. We still -- our market share is best with American cars, and they are still the huge part of the market, so we are rooting for them to survive. And we are confident that they will. We'd like to see them gain market share rather than lose market share. So, we are certainly rooting for them.

And just circling back to the question of your targets and planned goals. On the last call, it seemed that we were talking about 6 months, and now we are talking perhaps about a few months slippage, but looking at '06, I mean, is that really the year that we could see the full utilization of those --?

Yes, that would be a reasonable expectation. And again, the one factor -- the one factor that I can't tell you about for sure is when we are going to hit our pre-Dana efficiency. I can only tell you, we are going there every month. The others are pretty much in place. And then the only other thing that could hurt it would be something from the outside that we haven't anticipated, pricing or some dramatic event. But again, all things being equal, and we continue to improve efficiencies month-by-month. That's a reasonable expectation.

So the full implementation of efficiencies, how much of that is of the 50, 55 million?

That's a great question. I would think in the 10 area.

Okay. And yes just finally, a previous question focused on use of funds, I was wondering, when your goals are reached, when might you believe that it's an optimum dividend payout percentage? And how would you order priorities say, with respect to the dividend debt reduction possible stock buybacks, etcetera?

Well, again, those are our 3 key criteria that we would be looking at for returning capital to the shareholders. Specifically, we are targeting that on a long-range our dividend payout ratio would probably be in the 30 to 35% range.

Okay.

Repurchase of company stock also. And then, availing ourselves to any future opportunities, but in the short-term we are focused fully on the Dana integration in our 2 core businesses.

Okay. Thanks very much. Good luck.

Thank you.

Thank you. Next, we'll go to the site of Jonathan Shapiro with Goldman Sachs. Go ahead, please.

Hi. Sorry, just a quick follow-up question. The tax rate, it sort of bounced around a little bit. I think, last year we were sort of running about 25% in the latter part of the year and now 43%. What's the tax rate you're been thinking about for this year?

Okay.

And future years?

Right. That's a good question, Jonathan. The tax rate that we are looking at is really isolating -- what we are doing is, we're isolating any of the loss that we incur with the European business. So, the benefit from favorable tax jurisdictions on our mix of business, excluding Europe, we are targeting in the high 20% range for taxes.

And then, what causes it to skew upwards is the -- any incurred loss on Europe with no tax benefits recorded. So that being said, you can -- either when we breakout our numbers, you can isolate Europe separate and then use something in the high 20s and then apply Europe or, you can look at this number going forward as a reasonable number. But that's our formula that we are basically working off of.

Okay.

Thank you. There are no further questions at this time.

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

Thank you, everybody.

That concludes today's teleconference. You may now disconnect.