Standard Motor Products Inc (SMP) 2005 Q3 法說會逐字稿

Good day and welcome to today's teleconference call. (OPERATOR INSTRUCTIONS). Please note, this call may be recorded. At this time I would like to turn the call over to your moderator and host, Mr. Jim Burke.

Good morning, and welcome to Standard Motor Products' third 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 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 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 financial review and highlights, then at that point turn it over to Larry. To begin, our consolidated net sales were 224.4 million for the third quarter, favorable 20.9 million, or up 10.3%. On a nine-month basis they were 658.3 million, up 15 million or 2.3%.

By segment, Engine Management net sales were 135.8 million, down 300,000 for the quarter, and for the nine-month period net sales were 419.9 million, down 2.8 million. Engine Management net sales were basically flat, reflecting the price reduction of 2.5% at the beginning of the year, while unit volume was up slightly.

Temperature Control net sales were 74.5 million in the quarter, up 19.7 million or 36%. For the nine-month period net sales were 195.5 million, up 13.3 million or 7.3%. The Temp sales in the third quarter reflect the hot summer season, while the nine-month period reflected the earlier in the year preseason weakness in orders.

Europe net sales were 11.6 million for the quarter, up 1.3 million or 12.4% favorable, and on a year-to-date basis they were 34.7 million, up 3.3 million, and favorable 10.5%. Overall net sales for the quarter were strong, reflective of the Temp volume during the hot summer season.

Looking at gross margins, Engine Management gross margin for the third quarter was 18.2%, and the nine-month period was 20.5%. The Engine Management gross margin slipped for the third quarter and the nine-month period primarily due to, first, selling price decreases earlier in the year. Slightly higher sales deductions in these periods by the customers. Inventory write-downs as we consolidated the SMP and Dana inventories. And finally, product mix reflecting a faster drop off in older style ignition with higher manufactured margins to later model applications that we currently purchase and resell, which carry lower margins.

Looking back over the past two years, our Engine Management engineering group has been concentrating on bringing our SMP and Dana lines together. This has had a negative effect on the number of make versus buy projects we introduced. However, many of these make versus buy projects will be launched by 2005 year end with positive impacts for 2006.

Temp Control gross margins were 25.1% in the quarter, favorable 3.1 points. And for the nine-month period 22.4%, again favorable 2.2 points. The Temp gross margin was very strong, benefiting from the higher production volumes and favorable manufacturing overhead absorption. In addition, Temp margins benefited from favorable outsourcing efforts from the Far East.

The Europe gross margin was 22.6% for the quarter, favorable 3.8 points, and for the nine-month period 21.6%, or favorable 1.6 points. Europe continues to make progress on improved margins as we outsource older ignition production to the Far East and Eastern Europe.

Consolidated SG&A expenses were 39.1 million for the quarter, favorable 4.3 million. As a percentage of net sales they were 17.4%, which was 3.9 points better than the prior -- quarter last year. The nine-month numbers, SG&A 124.9 million, favorable 12.5 million, 19 percent of sales and favorable 2.4 points.

The SG&A expenses in the third quarter included the benefit of significant changes the Company implemented to its post-retirement medical program. These changes will have an annual benefit of approximately $5 million per year, and the third quarter 2005 reflects 4 million of this benefit. Excluding the post-retirement benefit for the third quarter, we still gained favorable leverage on SG&A expenses due to higher Temperature Control sales volume and controlled spending.

SG&A expenses as a percentage of net sales, excluding the 4 million post-retirement benefit, were 19.2% or 2.1 points favorable against the third quarter 2004.

Integration expenses were 200,000 in the third quarter and 4.6 million for the nine-month period. The integration expenses were significantly reduced in the third quarter for Dana compared to the third quarter '04, reflecting a 4.4 million savings. The year-to-date 2005 integration expenses of 4.6 million included a previously announced 3.5 million asset impairment charge in our Temperature Control group, of which 3.4 was non-cash.

The operating income on a consolidated basis was 9.8 million for the quarter, 16.9 million year-to-date. Engine Management operating income was 2.3 million for the quarter and 19.5 million for the nine-month period. As stated earlier, the rebalancing of Dana inventories negatively impacted gross margins and consequently operating income.

Temperature Control operating income was 7.1 million for the quarter, and 8.6 million for the nine-month period. Excluding the 3.5 million non-cash impairment charge in the second quarter, year-to-date operating income would've been 12.1 million compared to 6.9 million for the nine-month period in '04.

Europe operating income was 200,000 for the third quarter, and a loss of 200,000 for the nine-month period. Europe operating income, while basically breakeven, was favorable 700,000 for the quarter and for the nine-month period compared to the prior year.

Overall, the operating performance of the business has been hindered as we complete our Engine Management integration, which we stated in previous calls would continue through the end of 2005. Our other two segments, Temperature Control and Europe, both reflect positive performances for the quarter and nine-months. In addition, we have dramatically curtailed our post-retirement medical program, which should reduce operating expenses approximately $5 million per year going forward.

Looking at the balance sheet, accounts receivable increased 109.5 million versus December '04, and 84.1 million versus September '04 levels. This large increase in accounts receivable is attributable to two items. First, the hot summer season increased Temp sales by almost 20 million in the third quarter '05 over the third quarter '04.

And second, our customer AR draft program, which reflected approximately 60 million of negotiable drafts being held to maturity, as opposed to the prior year when we monetized all drafts. We have announced to our customers we're terminating this program. Due to rising interest rates and restrictions on being able to accelerate collections of these drafts. As we exit this program, we plan to accelerate collection on all open drafts by year end, which will significantly reduce our borrowing base.

Looking to 2006, the benefits of exiting this program will be a slight favorable cash flow impact from reduced accounts receivable, no draft fees and lower interest expense. Inventory levels decreased substantially in the third quarter by 21.1 million from June '05 levels. Inventories are now down 18.3 million versus December '04 and down 29.8 million versus September '04.

The only remaining significant change on the balance sheet is our total debt levels, which have primarily been impacted by the AR draft program. Total debt was 294.8 million at September '05, compared to 224.2 million at December '04, up 70.6 million. As stated earlier, we expect to dramatically reduce this level as we accelerate collection of open drafts by year end.

Finally, cash flow items. CapEx spending for the quarter was $3 million and 7.2 million for the nine-month period, and depreciation and amortization was 4.2 million for the quarter and 13 million for the nine-month period. At this point, I will turn it over to Larry Sills.

Good morning. Jim has given a good detailed review of the quarter. Before opening for questions, I just want to review a few key areas. One, that we always discuss at these meetings is our progress towards our goal on Dana cost savings.

As you recall, our goal when the integration would be fully completed was $50 to $55 million. Our best estimate is that at this point we've got about 40 of that, and we believe that by the end of '06 we should be in the 45 to 50 area. Jim can give you the details of that. But obviously we're missing our gross margin numbers by more than that. Most of the improvement has been in SG&A. With the disappointing area being gross margins.

Again, as he mentioned, three basic causes, two of which I believe are short-term and one is a longer-term. The two that are shorter term are the inventory write-downs, and the fact that our pricing is still below 2004 on a cumulative basis. The one that is longer-term is the change in product mix from the old traditional ignition, which had higher gross margins, to the newer, more sophisticated electronic parts, which we tend to purchase more of and have lower gross margins.

So what are our plans here? As I say, the first two I think are short-term. The inventory rebalancing, which has led to the write-downs, will be essentially completed by December. Regarding pricing, we have announced a new round of prices which will be implemented beginning in December through March. When fully implemented, they will generate roughly $1 million a month, or 12 million annually.

The third one again is the longer-term issue, which is the change in mix from higher margin to lower margin, and the fact that one of our biggest growth areas is now OES, which typically has lower margins.

Here the effort is on cost reduction in two main areas. One, making products that you previously purchased, (indiscernible) provides a big savings,. And secondly, re-sourcing those you'll continue to purchase but at lower prices. Again, as Jim said, the people who are responsible for these activities were very, very involved in the integration, so these activities slowed for a while. But we're back full steam ahead.

And in the fourth quarter, we will be implementing savings, both in the area of make versus buy and in the area of re-sourcing purchased items, which will generate $6 million in the year 2006, and we have aggressive plans for further improvements during the year. And again, this is a necessary activity because we see that long-term trend of switching from higher margin old products to lower margin new products and the growth in OES.

Beyond that, as Jim mentioned, we've taken strong steps to reduce costs in every conceivable area. We've taken $5 million out of medical retiree. We have initiated a purchasing program in the Far East. We've eliminated the factoring (ph) program and we are looking at everything.

To summarize before we open for questions, I think really every area of our company is performing well except this one, but of course this one is huge, which is the Engine Management gross margin. But we're committed and confident that we're going to get this number correct. With that, we will open it for questions.

(OPERATOR INSTRUCTIONS) Jonathan Shapiro, Goldman Sachs.

A question I had is on this mix shift to products that you're not manufacturing yourself. I guess we've talked a lot about it in recent quarters how if you look at the car park that's out there, how sort of it's moving in the direction of your sweet spot. I guess I'm a little bit -- what you've got -- I want to know what you guys saw in the third quarter that leads you to believe that's not actually happening the way you've been talking about.

There's so many different variables, it's hard to measure. Yes, the car population if you look at gross cars, the three to nine-year-old cars are in are moving towards our sweet spot, which is a positive sign. But the cars that are, let's say, three or four years or younger are tending to have parts, i.e. our distributor caps, which is a high margin product for us, are not on cars I think that are less than seven years of age.

This is not -- as we always say, our industry moves very slowly. And it's not a precipitous shift, but we see this as a trend. And the trend has hit us somewhat in the last two years. And we see that trend continuing. So yes, while the total cars on the road that are of the age that we call our sweet spot is growing, the newer of those cars have parts that are -- at the moment we do not manufacture.

We absolutely plan to manufacture them. But in the short period, where we are buying them instead of making them, that has affected the gross margin. And the solution is to make more and more of these products, and we are working full speed ahead on it. Does that answer your question?

It does, thank you. My other question is, do you have any -- if you look across the products that you manufacture versus buy, is there any tilt towards US versus foreign cars, or vice versa?

I don't fully understand your question. In what we're manufacturing?

In what you manufacture, are there any things us that are specific to a specific car model or manufacturer, that skews in either direction, US versus --

Obviously the trend is towards import.

I mean, but in what you manufacture.

Again, we manufacture -- it doesn't matter to us. Import or domestic. It's a part, and when we justify the tooling we go make it. And obviously with the increase of import cars, more of our newer manufacturing is going to be for import.

Bill Dezellem, Titan Capital Management.

First of all -- a couple of different questions. First of all, relative to the SG&A being down versus the Q2 and Q3 year ago, that's due to the reversal of the retiree medical benefits. Is that correct?

(multiple speakers) There was $4 million there. We're actually 4.3 million favorable. $4 million of that is the reversal of the retiree medical. However, the volume, the sales volume is up $20 million, 21 million for the quarter. As a percent of sales, we still had favorable leverage on SG&A spending, which includes distribution costs in this area also.

That's helpful. And then, would you please walk us through the changes that you have made relative to the retiree medical benefits?

I will try to summarize it, because these are complicated areas. Our program was relatively modest to begin with, because people couldn't qualify for it until they were 65 years of age. So they were -- we were always secondary to Medicare.

But the basic change we've made is -- I don't want to go into all the details, but the biggest change is that eligibility now is only for those people who have been with us a minimum of 10 years. So that all people who have been with us less than 10 years, and all new hires will not be eligible for this program, which puts a sunset to it and obviously greatly diminishes the future liability. That's the basic change. Other changes as well, but that's the basic change.

That is helpful. Then relative to the gross margin, walk us through what you had expected for the gross margin, and why you didn't achieve it. What -- how did you expect to achieve it and why did those issues not come together as you had planned?

Again, the points in the gross margin. We didn't put out what a percentage was that we were expecting, as we don't issue guidance on it. We had, as previously stated, said that we were going to be going through and rebalancing the Dana inventories. What I mean by that is actually having to go through and determine what are like parts and what we could combine together. So we were experiencing charges for that as we went through.

We put out a press release that we're going to be doing a presentation at the Gabelli conference tomorrow, and we plan to have a slide on this item and we will be posting this on our website for tomorrow. We are fine-tuning some of these points to break that down in further detail. So tomorrow we plan to have that out on our website.

You would prefer that we waited until tomorrow to get that level of detail?

Yes, to go through the points.

Dennis Scannell, Rutabaga Capital.

Just a couple quick things to drill down on the inventory issue again. Are you writing off obsolete inventory, or is there some under-absorption by pulling back production to reduce inventories?

The answer to both of those is yes. We're providing for additional inventory obsolescence that we have in that area. We're also experiencing lower absorption, as we've cut inventory significantly in the third quarter. And part of that inventory reduction was also from our Temperature Control business, but from the Engine Management we have lower absorption.

But also as we evaluate the inventories and bring the Dana inventories together, our engineering efforts as they determine that the applications are the same, we can combine these inventories. And we are identifying that and writing the inventories down to our lower cost on those products.

That effort has been across thousands and thousands of individual part numbers, SKUs that were going through this effort. And it's been in the works for in excess of 12 months, with it finally culminating in the fourth quarter of 2005. So we feel we will have all this movement of inventories behind us as we finish 2005.

Any sense that you could desegregate how much would be obsolescence versus writing down to the lower cost versus under-absorption?

Again, we're fine-tuning some of those numbers, as this is still for the third quarter. And we plan to do -- to have some of that available -- that breakdown for tomorrow. We're going to post it on our website.

And the price increases, is that really focused more on Engine Management or is that in Temperature Control as well?

The number I gave was only Engine Management. We will be having some increases in Temp as well. But the number I gave of 1 million a month, 12 million annually, is just engine.

Alan Weber, Robotti & Co.

Back on -- actually first question on the customer account receivable draft program, how much of -- if I understood it correctly, how much additional cash do you see generating for standard (ph) and over what period of time?

Right now we're holding approximately 60 million in drafts. We're exiting those programs with our customers as we speak now, so they will be reverting back to their prior terms. So what I expect is that between the collections of those drafts, we will be dropping the debt levels in the $50 to $60 million range just on collecting those drafts.

Going into 2006, then, we will have a slight favorable adjustment in accounts receivable. Because the tricky part here is on the drafts that we were accelerating, you had lower accounts receivable. So what will happen, those customers will revert -- receivables will increase. For the customers that we were holding drafts, their longer terms will go back to prior.

So all of that put together, I am estimating it will be approximately an $8 to $10 million benefit in accounts receivable going forward. And on a P&L side, we will have no draft fees in our SG&A expenses for '06, and we should get the benefit of the $8 million in interest expense. 8 million lower receivables and the effect of that on interest expense.

That 8 million going forward, that's after that 60 million has kind of winded down.

Yes.

On a similar level of revenues, I assume.

Yes.

Back on, which everybody asks, on the gross margins and what you manufacture, a few questions. One is, is it the time spent through the integration that has prevented you from doing more manufacturing for some of the electronic parts and newer parts?

Yes. The answer is yes. Because the key resource here is engineering talent. And we have spent the last year at least with our engineering effort primarily devoted to bringing the two lines together. This was a mammoth task. We had 30,000 SKUs, they had 30,000 SKUs, and to make them congruent, it was a big task for engineers. And we have limited resources; they were working on that. We felt that was the right priority, but that task is essentially over. Now we're going back to what we do for a living, which is making more parts.

So when you talk about some of the newer products, there's nothing you can't manufacture. It's not as if to say it's more electronics and you're not capable of doing that in-house.

That's exactly correct. There's nothing out there we can't do. I have overstated it. There's hardly anything out there we can't do.

And what is there -- when -- it is that starting, where you're actually starting to manufacture more, or (multiple speakers)

Some of the products, I mentioned 6 million in savings that will hit in the fourth quarter, but really be effective for '06. The availability would be in the fourth quarter. That includes make versus buy. Products we were buying and we're now making.

It's a stream. And it does take time from the moment you decide to do it to getting the drawings, buying equipment, making sure it works. It's not overnight. So there's a pipeline. But the pipeline, we're starting to get stuff out of the pipeline now.

That -- really start to see the benefits -- I guess sequentially in '06.

Yes.

Derrick Wenger, Jefferies & Co.

Sorry if you said it already, but what where the capital expenditures in the third quarter, and the outlook for capital spending for calendar year '05 and calendar year '06 if you have it? And on the line, how much is drawn and how much excess availability do you have?

On the CapEx spending was 3 million for the quarter and 7 million for the nine-month period. And on a going forward basis, as we've been talking about we will be manufacturing more products doing more tooling, I'm expecting our CapEx spending to increase to -- in the $15 million range on an annual basis, to be conservative.

Looking at our revolver, our 305 million revolver, currently we have outstanding approximately 155 million against that revolver. And roughly 70 million in excess availability.

(OPERATOR INSTRUCTIONS) Bill Dezellem, Titan Capital Management.

A couple more questions. Relative to the $21 million reduction in inventories, what was the split between Engine Management and Temperature Control?

I think Engine Management -- and I don't have these numbers handy, it was slightly more for Temperature Control. I want to say that I think Engine Management was about 8 million down, and the balance of it was in Temperature Control.

And with that in mind, how would you characterize four seasons inventory level, now that the air-conditioning season is complete? And also, characterization of the industry's inventory level of temperature control products.

Again -- very good question. You're asking about our inventory levels, which we were able to blow through a significant amount of inventory. Our Temp group has done an excellent job reducing their inventory levels, and also maintaining very good fill levels to the customers. In the fourth quarter, we build that up a little bit as we start to prepare for the 2006 season.

And a better question is our customers' inventory levels. I'll let Larry speak to it.

We do track that, and we get the data from our largest accounts. Remembering our accounts had excellent years this year, because it was hot. And their inventories are -- it looks to me like slightly -- it varies somewhat customer to customer. If you added them all up, they are slightly lower than the year before on much higher sales, so that their turnover has increased.

Given the amount of heat we had late into the year, does that surprise you that inventories at your customers are only down slightly rather than having a pretty good significant drop where they were somewhat bare-shelved?

I think over the -- we had two terrible years, and a very good year. I think our customers have become more sophisticated, so that in the bad years, they didn't pile up the inventory. So they've been able to keep their inventory levels fairly consistent in good or bad years as they're getting better.

I think it's probably true that for the smaller accounts who I don't track, who are possibly less sophisticated, that they will be ending the year with less inventory than they started the year, which is a good sign. But I don't have any hard evidence for that, it's just speculation.

That's helpful. Taking that a step further, relative to your anticipation for preseason orders, how would you view that as we skip forward a few months?

Last year, preseason was very poor. What the customer does is compare what his sales were for the prior year with his current inventory and places an order. When you made that calculation before you came up with a minimal order. Now, when he compares what he has in stock to his previous year sales, I think that will probably incentivize him to order more.

However on the other side of that, we have made a management marketing decision to essentially limit the preseason incentives. We used to give it in two ways. One gave dating and two gave discounts. We have decided that we will not be giving a discount this year, only dating, which is a savings to the Company that may tend to reduce it as well.

So we will have to wait and see. I would anticipate that preseason orders will be somewhat higher than last year, only because the previous year's volume will look much higher. But I can't really predict accurately.

One final question in this area. Given that some of the customer base out there has split their suppliers across many small suppliers, depending on the region, have you found or did they find -- I guess the question is what have you heard about customers' inability to get product when they needed it when demand was high or when it was hot?

Talking about Temp, correct?

Bill Dezellem Yes.

I'm not sure that the -- your basic premise is correct, that our customers have picked away at the line. We have just sat with customers for the last two days, and for the most part they have been fairly loyal. Some of the very bigger accounts, the retailers, have been picking away at the line, and on that I have no real data on how they did. Because some of those who really split the line up, and i.e. AutoZone, if you want to say it, we don't do any business with them. I can't evaluate that.

But our daily bread and butter customers for the most part have been loyal. And in order to confirm that and cement that relationship, we've instituted this year what we call a loyalty program. Where there are some major benefits to customers who are loyal to us. We give them a decidedly bigger discount, we give them slightly more here and there, and that is to takeaway their incentive to pick away at us for lower prices. We will have to see how that works out as well.

That is helpful. And AutoZone was really where I was going with that prior question.

We can't predict AutoZone, we don't sell them.

Jack Howard, Steel Partners.

When I'm looking at your press release, the year end accounts receivable last year were 160, and you were talking about 60 million would be coming back into cash from this draft program. Will there be further improvement to get receivables closer to where they were a year ago, or would receivables be higher going forward because of the acquisition?

Again, once we unwind the accounts receivable draft program, we will have -- we should be back to more reasonable levels. It's difficult. In December '04 we had accelerated collections of the receivables, and I want to say rough numbers, and I haven't gone through this, you're working on the gross receivable amount.

We've probably accelerated 30-plus million of receivables last year. So if you unwind that we would be back to -- put us in the 190 million range possibly. And if you look at -- we collect or unwind the receivables in 2005, we will bring those levels down.

Plus the normal seasonality will be down by December also, because the Temp sales will be coming out, will be coming for collections. So you should see those numbers more in a like pattern. There won't be any deterioration or erosion in our receivables from our programs to the customers. They will revert back to where they previously were.

Great. Thanks. And when you're -- you guys have been talking about price increases on the last few calls. Have historically they been sticking, or are these price increases on top of price increases?

The environment now for pricing is favorable. Most everybody is raising price, I am not -- our competitors and our customers realize that it is really -- they need it as well, because their costs are going up. So we have encountered really minimal resistance here.

As you talk about manufacturing more, will that all be, say, in-house manufacturing, or will some of that the outsourced to lower cost regions? (multiple speakers)

The answer is both.

Robert Smith, Center for Performance Investing.

Most of my questions have been answered. Although the question of what might be characterized as turmoil in the parts business, especially OEM, across this space. Do you have any comments about the possible benefits to you?

Good question, Bob. I assume you're referring to Delphi primarily?

Yes.

We have a multifaceted relationship with Delphi. We sell to them, we buy from them, and we compete with them. I can give you two seconds on each. In terms of selling to them, of course once they declared Chapter 11 there was a risk of a bad debt. But I want to assure everyone the numbers were modest, and we're well-reserved. So it really won't affect us.

In terms of them selling to us, we do buy some stuff from them. We have to wait and see. So far we haven't seen any difference. No one (ph) really knows yet. And we compete with them in some product areas. And as you know, they have announced that they're going to be closing some factories and shutting down some operations. This might create some potential benefits for us, but until we know exactly what they're going to do, we can't really. But it might open up some potential benefits for us. That's the Delphi story.

Along the lines of pricing, when your next round is put in place, where does that leave you? Is the catch-up more or less done, or do you have more opportunities?

We will have to see, because it is a moving target. Our basic landmark is that we don't get above OE. But OE is rising as well, so as long as they continue to rise, so we may have room for further (ph). But I can't evaluate that at this time.

And as you increase prices, does the tendency to attract more loyalty customers, is that apparent to you?

As long as we stay competitive, which is what they demand from us, and rightly so, we're fine.

(OPERATOR INSTRUCTIONS) Alan Weber, Robotti & Co.

You gave kind of -- a few minutes ago a little bit of a discussion on the temperature control side of the industry, a little on Delphi. Could you take a step back and look at how you see kind of '06, the market outlook for your products, given higher oil prices and just any thoughts like that?

Temp of course, the whole ballgame is whether it's hot or not. So tell me the weather, I will tell you the number.

I'm talking about the Engine Management side, really.

The Engine Management, I would say, it is a steady business in terms of sales. And really our sales, assuming we don't lose anybody or get anybody new, but on an equivalent customer base, the sales are essentially flat. And we anticipate that going forward. That's been our forecast all long, that has actually been our results, give or take 1 or 2% either way.

So our forecast for next year would be essentially flat, dollar sales, perhaps down a tad in units, up a bit in pricing. And of course that would then be varied by any new accounts we get. On the same group of customers, we anticipate flat sales. Again, the mix changes somewhat. The mix is from the old distributor caps, which are slowly diminishing, to the new electronic. But the total dollars stay roughly the same.

Just -- you have gone through kind of the cost reductions that you've reached, and really -- is it a fair statement to say that unless you can get the gross margins to improve, which you believe you will, then the whole Dana acquisition really wasn't worth it.

I wouldn't agree with that at all. Because the problems that we're facing on gross margin -- not counting the short-term ones, which is the pricing and the inventory write-downs, but the long-term secular trend of the switch away from higher margin to lower margin would've been there in any event. And we would've been in much, much worse shape to deal with it than we are today. This was a very important move for us.

Again, being that our goal is to manufacture more product, we have double the volume. We can manufacture many products which we can justify with this volume to manufacture, we would not have been able to justify if we had not acquired Dana. So I would say no, that was a very important strategic move. My only disappointment, it is taking a little longer than I wanted to get the numbers right.

I guess what I really meant was, it's that -- except you would have been -- and I understand the volume part gives you more products you can manufacture, which long-term is a positive for your margins. Over the last two years, since the Dana acquisition, as you said, as some of these products have shifted, you haven't been able to manufacture because you've been focused on kind of the internal issues of integrating the two companies. So really, you --

That's a fair comment. You might want to say that in the short-term, it hurt a little bit, and I can't argue with that. But in the long-term it's very, very positive.

(OPERATOR INSTRUCTIONS). It appears we have no further questions.

With that, I want to thank everyone for joining our conference call. Thank you, goodbye.

That concludes today's conference call. You may disconnect and have a great day.