Standard Motor Products Inc (SMP) 2005 Q2 法說會逐字稿

Good day, [OPERATOR INSTRUCTIONS] At this time, I'd like to turn the call over to your moderator, Mr. Jim Burke. Please go ahead, sir.

Okay, thank you. Good morning and welcome to Standard Motor Products second 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 expectations reflected in these forward-looking statements are reasonable, they are based on information currently available to us and certain assumptions made by us, and we cannot assure you that they will prove correct. You should also read our filings with the Securities and Exchange Commission for a discussion of the risks and uncertainties that could cause our actual results to differ from our forward-looking statements.

I will begin by reviewing the financial highlights and then turn it over to Larry.

To begin, on the top line, net sales -- consolidated net sales for the second quarter were $226.5 million. They were down $8.5 million, or 3.6%. For the first half, numbers were $433.8 million, down $6 million or 1.4%. I will drill down and look at it by segment.

Engine management net sales were $143.8 million, down $1.1 million or 0.8%; for the first half, $284 million, down $2.5 million, or 0.9%. Overall, the net sales for engine management were basically flat for the quarter and year-to-date and included a 2.4% price reduction. In addition, the impact of customer returns pulled down net sales and our actual growth sales were slightly higher for the quarter.

Looking at temperature control, net sales were $67.4 million, down $8.8 million for the quarter, or 11.6%; for the half, they were $121 million, down $6.4 million, or 5.1%. Warm temperatures late in the summer have benefited June and are reflected in a 25% increase for the month of July, which will help us going into the third quarter.

Europe -- net sales were $12.1 million, favorable $1.4 million, or up 12.8%, and on the half they were $23.1 million, favorable $2.1 million, up 9.8%. Overall, net sales were mixed for the quarter; however, the benefit of a warm summer has provided momentum as we enter the third quarter.

Turning to gross margins -- engine management gross margin was 20.4% for the quarter and 21.6% for the half. Engine management gross margin slipped in the second quarter to 20.4 from 22.8 in the first quarter, primarily due to the 2.4% price reduction from the last price sheet, which is a one-time adjustment to match OE prices in a specific segment, and also an increase in customer returns for the quarter.

In addition, margins continue to be negatively impacted as we consolidate the lines and rebalance the acquired Dana inventories. This effort will continue throughout the balance of 2005 as we reduce duplicate SKUs and excess inventory.

Temperature control gross margin was 21.1% for the quarter and 20.8% for the half. The temp gross margin percent increased sequentially from 20.4% in the first quarter '05 to 21.1% in the second quarter '05. Year-to-date gross margins are 1.3 points ahead of the prior year, and increased production volumes going into the third quarter '05 should further benefit the temp group.

Europe -- margin, 21.6 for the quarter, and 21.1 for the half. Europe gross margin percent also improved sequentially from 20.6 in the first quarter '05 to 21.6 in the second quarter '05. Year-to-date gross margins are 0.4 points ahead of last year.

Looking at SG&A expenses on a consolidated basis, they were 43.7 million for the quarter, favorable 3 million. As a percent to net sales, 19.3% and 0.6 points favorable against the prior year. For the half, SG&A was 85.8 million, favorable 8.2 million, percent to net sales 19.8, and favorable 1.6 points. The significant savings in the SG&A expenses is from the engine management group, primarily related to savings and distribution expenses. The prior year included the costs associated with the operation of the 700,000-square-foot Nashville distribution center, which has now been fully absorbed into our Virginia distribution center.

Integration expenses -- on a consolidated basis, integration expenses, including an impairment charge, were 3.9 million for the quarter and 4.4 for the half. The largest item in the quarter was an asset impairment charge of 3.5 million for our temp group, 3.4 million of it being noncash charges related to a strategic decision to outsource certain previously manufactured product lines. The benefits will be $2 million in annual savings and an opportunity to sell an existing owned facility generating a one-time cash flow benefit.

Engine management overall integration expenses at this point were significantly down in 2005 against '04 as spending has been completed as we closed seven of the nine acquired facilities.

Operating income -- consolidated basis was 1.3 million; excluding the integration expenses was 5.2 million for the quarter. For the half, it was 7.2 million and, again, excluding the integration expenses, 11.6 million. For engine management, operating income was 7 million, which was down 5.9 for the quarter and 17.1 million for the half, down 4.9. Engine management operating income was negatively impacted by lower gross margins, partially offset by lower SG&A expenses and lower integration expenses.

Temperature control operating income, excluding the 3.5 million impairment charge was 3.5 million of operating income, which was down 3 million for the quarter and for the half was $5 million and down slightly 200,000. The temp control operating income was essentially flat on a year-to-date basis, excluding the impairment charge, primarily on lower sales volume year-to-date. However, we have a much-needed boost going into the third quarter on the back of a 25% increase in July sales volume.

Europe operating income was basically breakeven for the quarter and favorable 200,000 against the prior year. For the first half, operating income was down 500,000, which was slightly favorable to the prior year excluding small integration expenses.

Looking at the balance sheet -- accounts receivable increased 97.3 million versus the point at December '04 and 26.4 million looking back at June of '04. The increase in accounts receivable is due to the seasonality against December '04 and due to a change in strategy by holding AR drafts as opposed to discounting them. At June '05, we were holding 46 million in accounts receivable drafts. We are in the process of evaluating this AR draft program due to rising interest rates.

Total debt was 293 million at June of '05, which is a peak period for the company due to temperature control receivables. Currently, our revolver borrowings are approximately 173 million against that 305 million line that we have excess availability of approximately 75 million.

Inventory levels are up 2.8 million against December '04, however, they are down 3.7 million against the comparable period June of '04. From a cash flow perspective, capex spending was 2.3 million in the quarter, 4.2 million for the half, depreciation and amortization was 4.4 million for the quarter and 8.8 million for the half.

I would like to close by reviewing our progress against the overall engine management 55 million savings goal. As you will recall, we identified five major savings categories.

The headcount reduction where we targeted a 580 headcount reduction, at June of '05 we have achieved 450. We are basically 130 short in the hourly workforce in that area.

The material cost savings, we had targeted $8 million, but we have identified 7 million in savings to date and expect to achieve this savings on an annualized basis by the second half of '05.

The third area was facility savings, $5 million. We have exited all seven targeted facilities and achieved this savings.

MIS savings was $6 million. We achieved this planned savings in integrated systems.

Other savings, which are a myriad of various items, were $8 million, and we are in the process of achieving approximately half of those.

Overall, we have achieved many of the planned savings targets, and Larry will go into more detail on the engine management gross margin.

At this point, I'll turn it over to Larry.

Good morning. As Jim said, the big issue on engine management is gross margin, and I think it breaks into two questions. First, why is it so much lower than the first half of '04? And, secondly, and I think, more important, how are we going to get to our ultimate target?

Okay, because, as Jim mentioned, the rest of the Dana integration is actually going quite well. We've moved out of all the Dana locations, the seven locations. We did it on time and within budget. We held every single customer, and sales are essentially on target. In the SG&A area, savings are actually somewhat better than we anticipated.

Which leaves gross margin -- so, the first question -- why is it so much lower than 2004? The answer is that it is really not an apples-to-apples comparison. During the first six months of 2004, we were getting ready to close down those places and move to the Standard locations. At that point, we had already eliminated much of the overhead in these locations, but we were turning out the product to build inventory to create a bridge inventory for the move. The result was that our gross margin in the first six months of last year was temporarily high.

A better way to look at it is that, really, since that -- for the last four quarters, the last two quarters of '04 and the first two quarters of '05, we have been running at essentially 21% and 22% range. Our target is 28%, which means to hit that, we need about a $30 million improvement, and we are confident we can achieve it.

Our first in material cost savings, as Jim says, we targeted eight; we've uncovered seven. It's just beginning to come in. We'll start to see it in the second half. In the second half of '06, we also expect to see the benefit of lower manufacturing costs, but the big area is pricing. We have effectively not had a price increase on this line for more than three years.

Since March of 2002, we had one price increase and then the recent decrease, which tended to balance out and, as Jim said, that decrease was to make a one-time adjustment against OE in a certain piece of the line.

Now, since we normally have increases of 2% to 3% a year, we are essentially 6%, maybe 7%, lower in pricing than we normally would be at this time. You multiply that shortfall by $500 million in sales, and that's, again, most of the gross margin shortfall.

Starting in middle of May and extending, really, through August, we are instituted a round of price increases, which we calculate will yield margin improvement of roughly $1 million per month, once they are all in place, and they'll all be in place by August or September of this year. That's $1 million a month, or $12 million annualized.

Beyond that, we are confident in our ability to implement additional increases in 2006. Because we had fallen behind, we believe we had the room to do so. So with the improved pricing and as we start to see the benefits in material savings and manufacturing improvements, we are very confident in our ability to achieve this $30 million improvement in gross margin, and as we have accomplished the other goals in sales and in SG&A, we are confident that we can hit our original projections for the Dana acquisition and integration.

Okay, that's the engine management story. If you have further questions, we'll, of course, try our best to answer them.

In temperature control sales -- we're showing behind for the first six months, but that is because our pre-season sales were very low compared to prior years, and that was anticipated because the last two cool summers left our distributors with heavy starting inventory so their pre-season orders were much less than historically. But it got hot. As you know, this business is very dependent on the weather. It got hot in June. We started to see the increase in orders the last two weeks in June. July has been very strong. It was up 25%, and the first week in August is strong. So as long as it stays hot, we expect favorable sales for the balance of the season.

On the cost side of the equation, as Jim mentioned, we outsourced various product groups mostly to the Far East, and we've taken the $3.5 million charge for this. The savings we anticipate at $2 million a year, but it also enables us to combine facilities in Texas and free up additional cash.

In Europe we are working on a similar strategy, and by the end of this year, essentially all of our traditional manufacturing will be outsourced to Eastern Europe and the Far East, and we expect to start seeing the benefits of that in 2006.

Okay, that's the highlights from my point of view, and now I'd like to open it up for any questions that you might have.

[OPERATOR INSTRUCTIONS] Jonathan Shapiro with Goldman Sachs.

Just a question on the price increase or the reduction and then the increase in engine management. Can you just give a little more detail on what you were cutting price on to match up with the OE, and then where you are able to raise prices -- what the different parts of the lines are where you are able to do that?

Over the years, essentially what we call the "back end" of the line, which is the bottom 20% to 25% of sales, we had allowed ourselves improperly, in hindsight, to get above OE, and some of them were not 5% above OE or 8% above OE, but were 30%, 40%, 50% above OE. They were slow-moving parts, so we didn't hear too much repercussions. But we finally realized we had to react to that as our long-term competitor, we believe, is OE. And so we took these. Some of these were dramatic -- 30%, 40%.

Now, since it was only the bottom of the line, and we went up on the balance of the line, the net effect was 2.5% roughly -- 2.5% down. I say it's a one-time adjustment because we will never have to do anything like that again -- these 30% to 40% drops on part numbers. We are basically in line everywhere now.

Now, from this point, going forward, we believe that normal inflationary increases are fine. We have the room to do it. We have the room to do it versus OE and versus our other competitors. These price sheets, the first round has been implemented, and very shortly will be implemented, and we anticipate another round early in 2006. Does that answer your question?

It does, thank you. I guess the follow-up is what happened or what was going on over the last three years outside of the OE issue that you weren't able to get in any of the years, the 2% to 3% on the primary part of the line?

Well, we did have one, which was balanced by the minus, that's why I say it netted out to zero. So we did have one increase. I think it was early '04. But we were going through a fairly difficult operating time. As we shifted over locations, and we shifted to distribution centers, our shipping percentage dropped, our turnaround time dropped, our customers were somewhat sympathetic to this, because they knew we were going through these big moves. But we just thought it would be inappropriate at that time to come up with an increase when we're shipping 85%. We just thought it would be like rubbing a stick in their eye.

So even though we had the room to do it, we held back. It was more of a voluntary on our part, because we were not operating at our normal level. Now we're back to operating at our normal level, our customers are satisfied, and now we feel free to implement these increases once again.

Derek Wenger with Jefferies.

Yes, four different questions -- what is the capital expenditure outlook for the calendar year '05?

Okay, I would target it about at the 12 million.

Okay, Jim, and I just want to verify -- the $3.5 million noncash charges -- that was included in total integration costs at 3.88 million?

Yes.

When do those wind up? The integration costs?

Well, most of them are asset impairment related to fixed assets and inventory, and there's a minor 100,000 related to employee costs. Or if I didn't answer it, Derek, repeat your question.

I was just wondering when the integration costs were going to finish up in terms of when will we see that line item not be there any longer?

Oh, primarily for Dana line. Basically, the end of '05 is what we have in there for the P&L. There will still be a restructuring reserve related to the balance sheet, where we have previously reserved leased facilities that we have commitments on.

Okay, and then in terms of the accounts receivable, do you still anticipate taking off -- what's the figure for the back half of the year that you'll wind down just through your normal seasonal methods? Is that probably 60 million or so?

Again, it's a significant number, and the key will be, as we evaluate the AR draft programs, what we're doing there but probably our peak borrowings to end-of-the-year levels, and it's related to receivables, is in that 50 million range.

Okay, and then when you sell this facility that you are now going to close down, how much do you think that might bring in?

We have appraisals on the facility. It will be a period of time before we coordinate the movement of any other product lines that we have there. So I would not look for that happening until '06, and I'm not sure what the specific time would be. Again, we're not in the real estate market, so how fast we can move a facility.

What levels does it appraise out at?

Probably, I'd say, conservative, $3 million to $4 million.

Matthew Dane with Titan Capital Management.

Thank you, it's Bill Dezellem with Matt. A couple of questions -- to start with, relative to the accounts receivable you had mentioned that this year there's 46 million of drafts, and yet your receivables are 37 million higher than they were last year. So does that imply that if we net things together, that you actually reduced total AR by $9 million? Is that a reasonable way to look at it?

No, I'd have to run through the math, but basically at the end of -- the program really started in the beginning of June of '04 last year. We had accelerated collections at December and now we're holding drafts. So I would say overall, if you exclude the impact of the draft program, the receivables are in line with where the P&L would be, and then we're evaluating this overall program now in the third quarter.

All right, and then allow me to shift, if we may, to the price increases and price reductions. First of all, with the price reductions relative to the spots where you got way ahead of OE, what has been the resulting change in your volume on those slow-moving parts?

Interestingly, they went up. They went up, I think, close to 20% in units. So it did show that there was more of a demand for that than we realized; that we have been losing out at the installer level. Because what was really happening was our installer would check our price, and then check the OE price, and we were so out of line that he bought it from the car dealer. So that kind of besmirched our entire line. That's why I think it was a good thing to do it, although it hurt temporarily, and the sales of those items went up some -- about a 20% increase in those units.

And is a 20% increase in units enough for you to look back and say, "Well, gosh, these actually are not slow-moving parts?"

Yes, what will happen is -- that's absolutely right. Most of the items that were in that group are items that we do not manufacture and that we purchase both from OE. As the volume goes up, we hope and intend to manufacture more of those and thereby, of course, reducing our cost significantly on those items. It will give us a chance to do that, and that's going to happen overnight, but that will give us the opportunity to manufacture more of these and improve our margins on those.

That is helpful, and then I want to make sure that we're thinking about the price reduction versus the price increase versus the gross margin targets correctly here. So you all had mentioned that your target gross margin is the 28%, which equates to roughly $30 million of gross margin improvement.

That's correct.

And that you are getting 12 million of that, or 1 million a month, with the price increases that have taken place through the course of this year --

I will say some of it is in the next couple of months.

Okay, and in another part of the conversation or in your comments, we thought we heard that it was a net 2.5% there -- 2.4% price reduction, and so are we starting -- is the $12 million, does that go towards the $30 million improvement, or is that not the case?

I think what you're asking -- the 2.5% reduction is in our numbers. It's our starting point. That's where we are today. That's what's giving us the 21% to 22% gross margin. That's in our numbers. So the 12 starts to get the improvement from the 21, 22, towards the 28. Does that answer your question?

Okay, so that would be incremental then?

It is incremental. The hit from that price sheet is currently in our numbers.

Rodney Hathaway with Heartland Funds.

I was just wondering if you could give some insight, also, on pricing trends for the temperature control side, and with the pickup in demand here are you seeing any above-normal price increases there?

Well, okay, there we have gotten our typical 1% to 2% to 3% price increases, but it's somewhat different than the engine management because you only get one shot to do your pricing. You do it sort of January, February of the year. We are not in a position at this point to raise prices just because the demand is up. So our margins, which Jim said, were slightly ahead of last year, even though in the first six months our volume was down, reflects some of those price increases and some internal improvements.

We can't raise prices now. I've got to wait until the season is over, and we will take another round. We fully expect to do so, another round of normal inflationary price increases prior to the 2006 season. Does that answer your question?

Sure, and as far as the overhead absorption then with higher utilization -- is that going to impact your margins here in the third and fourth quarter?

We should -- yes, we should see benefits from that in the second half of the year. And, obviously, it depends how long it continues on for but, yes, the improved volume and production levels will improve margins.

Walter Schenker with Titan Capital Management.

You can hang up on me when you've heard enough, Larry.

I wouldn't do that.

You may want to. First question, although we haven't addressed it, there's 130 still headcount too high, was that what you said?

Roughly, yes.

Why, at this point, is that still there? I thought that we were getting close in the prior conference call three months ago to getting our efficiencies back up, and our took our efficiencies back up since they're supposed to be back into the 90s as getting rid of people?

That's correct. I say the bulk of the shortfall or the overage, whichever you look at it, is actually in distribution. We are probably 50 or 60 heads higher than we anticipated. The reason for that is that the mix of Dana orders was different than the Standard mix. We didn't appreciate that until we really started doing business with them. They have a lot higher percentage of smaller orders, which are less efficient. That has been the biggest cause of that.

Now, we are in the process of relaying out the Virginia warehouse, improving our workflow, and I don't know if we'll knock out all of those 50 or 60, but maybe half of it.

The balance is in manufacturing, and there, in order to knock the other 50 out, yes, we are getting more efficient, but we haven't completed our task of what we call "symmetry," which is the Dana product was made one way, and the Standard product was made slightly differently. Now, we haven't yet -- it takes some engineering work and some cataloging work to bring them together. That project is about 80% complete, and I hope we'll get some improvements at that point. So when these two things are together, we should get quite close to our original manpower reduction in place.

Okay. The second tangential question, we'll get to the main meat -- I would like to hear you say that we are not going to hear at the end of the third quarter that the substantial benefit from higher sales of engine control has been offset by running overtime to meet demand because we had to supply our customers.

We'll be watching overtime quite carefully. Demand is really not excessive. Demand is where we figured. So we're not looking for that overtime.

Okay, and then now to get to the -- I guess -- since we've done this many times in the past, which is my view, that you continue to manage the company without a stronger regard for profitability as shareholders should require. If, in fact, we are running behind 6 to 9 percentage points of price --

Six to 7, excuse me.

Six to 7, $12 million is 2, 2.5, why didn't we just raise prices 5%?

Well, that's getting into the managing of the business. Our feeling is it's much more accessible to do it in two smaller increases than one big one. Yes, I guess, in the short term you get more profit, but we feel that, from a customer acceptance point of view, and getting through without a lot of arguing, it's really advantageous to separate them by six months and smaller increments. We just think that's an easier way to do it, a less antagonistic way to do it, and six months later it comes out even. So that's, quickly, a discussion of strategy, but that's our strategy.

Well, six months later it doesn't come out even because we've lost $15 million, which is half a year of 3% or 4% or 5% price increases. Eventually, it catches up, assuming costs don't go up in the interim, which I assume some are, given oil at $60 a barrel, distribution costs should be going up. Some of your raw materials are probably going up, and it would seem to me in an environment like this, that 6% to 7% by next year when we have this goal, probably, will still not get you fully where you need to be, and that pricing, which has been a sore point for some time for some of us, is still not getting us to where you committed to getting this business years ago when you made the merger with Dana and basically committed to getting a certain level of profitability.

In each quarter we look at it, and we make very little, or no bottom-line progress, and three months ago we remain optimistic about hitting all of our planned goals relative to gross -- the $50 million to $55 million savings, and it keeps getting pushed out from the second half of this year into sometime next year. It just seems to me that the only way you're going to get there is price, and you're still unwilling to move in a meaningfully aggressive way to get there, even though you haven't made any money in a decade. How's that for a lecture? I apologize.

I accept. I definitely agree with the second half of what you said, which is that this 30 million will not get us where we need to be fully because -- it may in the short run, because we will be seeing cost increases that go the other way. So we're not relaxing with the 30. The 30 is, in our mind, a short-term event, and we know we need at least another 10 or 15 beyond that to hit our numbers. We are focusing on getting that extra 10. It will come from all three areas. It will come from pricing, materials savings, manufacturing improvement. We're not going to sit back and say we got the 30, so we're home free.

Yes, I am sure there will be some cost increases in inflation and material and labor, so we definitely need to do more than the 30. But this 30 will get us a long way there.

And, lastly, when it became apparent three months ago -- or some of us would say years ago, that we needed more pricing, why do you phase in a price increase? Why can't, on June 1st, you just say, "Everything is up 2.5%, here come all the catalogs." Most of it's online, anyway.

It's just in our industry practice you really can't do that. The customers demand, for the most part, 60-day lead times, because they are, in turn resellers, and with most of our major customers, we have agreements that say we will give them somewhere between 45- and 60-day notices. And then you just work backwards -- we have to do a lot of work. You just don't take every price and multiply it by 5%. Some you go up 10%, some you go down 2%, because you've got to look at each one individually. It's a big task with 30,000 SKUs. So it does take a while. We are now starting on the price sheet, which will be implemented early next year. So between the time it takes to figure it out, print it, distribute it to our customers, and give the required 45- to 60-day lead times, it is a good four or five months from conception to fruition.

So we have started -- we are about to start, I think, on the price sheets. That will take place early next year.

Okay, I'll work for free, I'll come in, we'll raise all prices 5%, it will take me a week, Larry.

Happy to do it.

Alan Weber with Robotti & Company.

First of all, I guess, when you talk about you addressed the headcount is not at the level -- it doesn't sound as though you may reach that level. Do you think about other price cuts or other cost-cutting measures? I think the target was 8 million and you're at half there? What is the other 4 million or so?

It's really a myriad of things. Part of it is marketing, part of it is -- we have a thing called "stock lists," if you recall, or customer acquisition costs. It's a little tricky to measure it, because it does fluctuate from year to year, but we do assume that our customer acquisition costs over a long term will be much less, because a lot of our money, they were taking our accounts, and we were taking their accounts. This is somewhat amassed by a different way of accounting now. We used to amortize them over --

-- 12 months --

-- 12 months, and now we have to take the hit immediately. So in the short term, it's kind of hard to measure, but that was a good part of it. And I don't think he had specific manufacturing improvements specified, and we know that a bunch of make/buy things, in other words, products that we formally purchased and now manufacture, a whole bunch of them have just come online, mostly in Puerto Rico, and we will start seeing the fruits of that in the latter part of this year. So that 8 million covers a myriad of topics, but I am convinced that we'll do at least that well in the long run.

Okay, and then, Jim, can you talk, again, about the accounts receivable -- what you're actually looking to do now? Is that to reduce to generate some cash? Is that the intention?

Well, first, the program is where the customer has arranged with a financial institution a draft where the manufacturer would be able to accelerate collections on that, whereby discounting it. We had limitations on the amount of drafts that we can cash in. That, combined with rising interest rates -- it's an overall cost to the company. It's significant enough that we need to address it, and we're looking at that in the third quarter '05.

Okay, and then the other part is, when you look at, you know, with the acquisition, which is I guess two years old now, you talked about at one point you were going to increase inventory to satisfy the customers. And then you talked -- I don't remember which conference call -- about inventories coming down, reducing cash -- reducing inventory, generating more cash out of working capital. And yet the balance sheets actually continue to worsen. So could you address when do you actually see better cash flow from working capital?

Again, receivables will be related. We talked about that with the draft, but on the inventory levels, I think what we'll see now will be the peak period from June. Again, we're going to get strong sales going out on temperature control products; that we'll be moving temperature control product off the shelves.

And also, within engine management, Larry talked about our struggles operationally, and we did load up on inventory to correct those. Our fill rates are up significantly. So from this point forward, should be also a peak for the engine management group. We had said previously that we felt there was roughly $50 million in inventory availability, and that's kind of a period of time that we have to get through that. I can't specify exactly -- is it three years that we're able to achieve it, but from this point forward we should be able to see improved turns in our engine management group.

So from all measures, the balance sheet should start getting noticeably better?

Yes. Again, it's always seasonal until we come into December, and then you'll get the receivable billed in the summer for next year.

Dwight Mamentel [ph] with Winfield Capital.

The last conference call, you mentioned that you were going to start supplying the OEs. Can you provide some color as to where you are with that relationship?

Yes, we currently do about $50 million from the OEs. We picked up, this year, maybe about a 10% increase, so we're running about 55 to 60, something like that. We have some substantial prospects, but the OEs tend to move slowly. So I can't give you a timeframe, but from all indications, we are anticipating some nice increases that will come in over the next 12 months.

Okay, thank you. We're talking about price increases and price decreases, can you tell me how the OEs have responded to these events?

Yes, frankly, I think it's less -- they don't look at us as much as we look at them. So they just go on, and they have been, because they're all having their own problems. They have been raising prices fairly healthily, and that's why I feel optimistic and comfortable that we have the ability to rise and still be quite competitive with them.

Robert Smith with Center for Performance Investing.

So just to clarify -- to get to the so-called "profitability projections," which were initially predicated on the 50 million, 55 million -- we now need 60 to 70 million by adding 10 to 15 million, is that accurate?

Is that because you're saying are we going to have 10 to 15 million costs going the other way, is that what you're saying?

Yes, that's what you said -- I thought you said.

To hit our final target -- to hit our short-term target, we need about 30 million, which we see. Now, to keep it on an ongoing basis, we can't just stop there. Yes, we'll need another 10 or 15 beyond that just to, in my mind, to compensate for some costs that will be going the other way but, again, I feel that's a doable number.

I assume you chose your words carefully in the press release, so I'm going to read you this sentence -- "With our plans in place for improvements in material costs, manufacturing, and pricing, we believe that these targets are achievable and that we will begin seeing the bulk of these in 2006." Can we remove the word begin?

Are you asking me if we're going to start seeing some of it in 2005?

No, essentially, I'm trying to get my arms around -- you say that the bulk will be achievable and that "we will begin seeing the bulk in 2006." Can we take out the "begin." Can you achieve the bulk of these in 2006?

You're asking for a timing.

Well --

-- and properly so. I'm a little hesitant to give timing, and that's probably why we put in so many qualifying words in that sentence. I know it's there. I think we'll start this year, for the balance of this year, we're going to start seeing the value of some of these price increases come in. So we're going to get some of it this year. We will continue to get it and, in my mind, on an increasing basis throughout the year 2006.

Will you see the bulk of it as we draw to the close of 2006?

Not on an annualized basis. In other words, I won't get -- I'm not ready to say that we will get $30 million for the year, but we should be approaching that rate as the year goes on.

And, Larry, how do you define the --

I'm not ready to give you a more precise estimate.

How do you define "approaching," Larry? I mean, this is serious business.

Well, I'll try to define it as best as we're able to define it.

Okay.

And we should be getting close to this -- another way of saying "approaching" -- that rate towards the latter part of 2006. I'm not prepared to make it more precise than that.

Okay, I hope it's real close. Good luck to you.

Matthew Dane.

Thank you, it's Bill Dezellem again -- a couple of additional questions. First of all, relative to the price increases that you have taken, how have the customers responded and what has been the magnitude of pushback or lack thereof that you have received?

We have essentially had no pushback whatsoever, which makes me feel optimistic about the next round.

Great, thank you, and then shifting to the gross margin improvement -- over the last few quarters on the conference calls you've highlighted some of the manufacturing improvements that you have been experiencing. We haven't got an update yet this quarter in terms of what took place during Q2 in terms of manufacturing improvements.

Okay, I think I was referring to the efficiency levels in previous ones. I'm going by memory now -- where we talked about how we'd normally operated at 90% to 95% efficiencies, and it had fallen as low as in the 60s and was coming back up. Is that what you're referring to?

Exactly, correct.

Yes, we're getting close, we're getting close, we're getting to the -- we're not back where we were, but we're getting close. The next big step will come when we implement what I refer to as "the synergy." So that instead of having a Dana part number and a Standard part number, slightly different, we will have one part number for both. It's a longer-term event than one would imagine, because we have to do some changing with customers. But that will be the next step up. But the manufacturing is moving along.

Thank you, and then shifting to temperature control for a moment, if we could, please -- two questions relative to the demand associated with the warmer summer -- what signs have you received that competitors have or have not been having trouble meeting demand, and then how about yourselves? Are you having any challenges meeting demand?

To the first half of your question, I don't have any information at all, up or down. To the second half of your question, we're getting a little skinny here, but we've been -- the folks have been expediting well, and we're still shipping at over 90%.

So, presumably, if the hot weather continues for the next two months, for whatever reason, goes into September, that's when you start to add some real challenges.

True, but, in all honesty, the season really doesn't go much beyond August unless it stays enormously hot, say, in the South. It certainly won't go beyond much of the country, because once you hit September, the person figures, "I'll wait until next year."

Right.

So the bulk of the sales are over towards the end of this month.

Derek Wenger with Jefferies.

Yes, I just think it would be helpful if you could elaborate just a bit on the accounts receivable. You're carrying about $26.5 million more in accounts receivable this year June versus last year June. If you could just kind of elaborate on why that is and the AR draft change in policy -- if you could just elaborate on that.

At December of '04, we were not holding any drafts. So if that same practice was in place today, I would have had roughly 45 million of receivables collected, and I would have been down about 20 million.

And then that basically would match up with a slight decrease in sales that I had. So it's really all a strategy between holding or accelerating the draft program. The overall customer mix or the customer terms are basically the same, so it's just really the management. At December of '04, to repeat, I accelerated all available collections. So the number was, and I'm going from memory now, that we probably collected about $40 million in -- $30 million to $40 million in receivables early than what normalized terms would have been. And now at June of '05, I've gone the other way. I'm actually holding drafts. Does that help, Derek?

It does help -- I'm just wondering why you're doing this. What's the benefit to the company?

Well, one, I have some restrictions related to the number of drafts that I can accelerate. So we're managing that within our revolver restrictions, and that's the primary reason. The second point is interest rates are increasing, so separate from what we're doing with the AR drafts we had, the company, overall, has to address and face the cost of this program when dealing with our customers.

Alan Weber with Robotti & Company.

Jim, did you say -- and you threw out a lot of numbers -- the operating expenses for engine management was -- what was it for the first six months?

Well, I break out the operating income.

Right, you did operating income --

Right, and I do gross margin. Well, I have the operating income for engine management was $7 million for the quarter and $17.1 million for the half.

Oh, $17.1 million was the operating income for the half?

Yes.

Oh, okay, and then -- and a general question is when you look at comments you've made in the past presentations, et cetera, you, at one point, talked about engine management and having $80 million of operating income before corporate overhead and like that, you are obviously not even going to probably meet what you did, I don't know, last year, the year before. When you talk about the pricing, was that something more recent that you saw you had reduced prices coming to OE that when you made these original kind of comments, you didn't foresee that?

I'm not sure of the numbers you're using here. But, yes, I think it's fair to say that when we made our original projections, we did not anticipate the fact that we were going to be coming down in prices. I think that, in hindsight, we should have done a better job of figuring that out. But I am -- every assumption that we had, going in, basically, in my mind, remains valid, and we remain comfortable about our ability to achieve it. It's taking -- I think, perhaps, also, we gave a -- maybe because we hadn't thought it too clearly, the belief that the minute we finished our integration we would be hitting the numbers.

We kept saying it's going to take us 18 months to do the integration, which it did, we never then specified that you're not going to see those numbers 18 months plus one day. And it's moving along, and it's -- I still feel we're going to get it, but we're only six months after we actually put the two companies together.

Okay, because I'm looking at something -- I guess it was a presentation you did -- I think it November of '04 -- where you talked about operating profit before integration expense of 15% on engine management for the '05-'06. That was the goal. It's obviously not going to happen in '05. Is any of that even realistic into '06 or even into '07? I'm just wondering what parts have actually changed?

The '06, we're going to work through inventories and levels for '05. For '06, Larry, it said that the $30 million that we expected in gross margins would be there by the latter part of '06 when we were pressured to be able to identify it. If we hit that $30 million in that area there, we will be basically coming back close to where we had originally projected we were going to come in for engine management; that those offers that we were saying were in the $75 million to $80 million range for operating profit before any corporate overheads.

Walter Schenker with Titan Capital.

Larry, why can't you make a commitment to your shareholders that you will raise prices enough in the next round -- and I realize it takes three to six months for price increases to go through cost of goods sold as you work inventory and some stuff was slower, and some stuff was faster, so that by the middle of next year, almost a year from today, you would be giving us the $30 million benefit from this integration that you originally committed to.

I'm certainly going to try to do that.

But it's in your power, Larry. You just sit down, you work through the price sheets, and they're there.

It's 80% in our power. We do have to remain competitive, but it's 80% in our power, and I do feel the ability to do that, that we have the ability to do that, I'm just not prepared to give you a firm guidance on that point. But it's certainly, in my mind, a doable thing to get.

And the 20% that isn't in your power is?

Somebody comes in and cuts prices extraordinarily, and I have to decide what to do about it -- something like that.

And somebody else could sell product meaningfully lower than you can, given your market share, your volumes, your vertical integration, and not lose a lot of money?

I just feel, hypothetically, today. Delphi, it's becoming a competitor.

And is going bankrupt.

I know that, and people do funny things when they're going bankrupt. So I'm just giving you a hypothetical situation. Delphi decides that to save themselves they're going to take fuel injectors and drop the price 30%, even though they're losing money. I can't ignore that. That's the kind of thing. So we don't operate in a full vacuum. We have to deal in the world. But based on what we know today and based on what we see in the competitive situation today, I feel comfortable -- and, yes, we should be able to do that. I can't give you 100% guarantee.

I'm not asking for a guarantee, I'm just asking for a commitment that next round gets you to where you hope to be.

The next round plus the other improvements. It's not going to all be in pricing, but the next round plus the other improvements that we see, that we see in the very short horizon, will get us there, yes.

Robert Smith with Center for Performance Investing.

Larry, let me follow that up. Did you just say that the price increase and the other cost savings will get you there? It sounds like it's a different flavor from what you said prior?

Our intent is that the next round of price increases, which will hopefully happen in the first half of next year, plus the savings that we anticipate in material savings and in manufacturing improvements, should get us to 30 million. The answer to that is yes.

Now, what I'm always loathe to commit is that there's always something going to come up that you didn't figure.

When you're speaking about the $10 million or $15 million incremental costs that you have to recapture, it's projected.

Yeah, some of that. I mean, something could always happen. That's why we're hesitant to put a number out there, and then we didn't hit it, and we're really bad guys. But from what we know today, the price increases plus the material costs that we know we have plus the manufacturing savings that are in our pocket just haven't been reflected yet, should get us there. It depends what happens on the other side, that's all.

You mentioned Delphi -- can you just give us some brief thoughts on where the long-term business is going? How do you see the prospects longer term?

Could you define a little closer, please?

Well, there are different things happening in the business competitively, and I was just -- also the movement to hybrid cars and stuff like that.

Oh, it's a long question, okay. The second part, I'll deal with. The move to hybrid and any other changes are so far off in the future before it would affect our market that in the next five, six, seven years, there is zero impact. So we can just put that aside for now.

What else is going on in the market? Well, obviously, if you read it, Delphi and Visteon are going through whatever problems they have, and my understanding is they have their conference call today, too, so we'll hear what they say. But they are obviously going through turmoil. The balance of the competitive environment, at least in our product line, is fairly stable. I don't see new people coming in, I don't see people going out. It seems relatively stable. So that's why I'm comfortable in saying we should be able to hit our targets here.

And as capacity has shrunk, it will benefit you?

It ought to.

It appears that was the final question today.

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

That does conclude today's call. You may now disconnect your lines.