Standard Motor Products Inc (SMP) 2006 Q1 法說會逐字稿

Welcome to today’s teleconference. [Operator Instructions] As a reminder, this call may be recorded. I will now turn the program over to Mr. Burke.

Thank you. Good morning, and welcome to Standard Motor Products first quarter 2006 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 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 to differ from our forward-looking statements.

At this point, I’ll begin with a review of the financial highlights and then turn it over to Larry. Let’s begin.

On the consolidated net sales for the business for the first quarter 2006, sales were $210.1 million, favorable $2.8 million. Looking at it by segment, Engine Management net sales were $148.9 million, favorable $8.4 million or up 6%.

Temperature Control sales were $49.1 million, down $4.5 million and down 8.4%. The Temp sales reduction is not surprising as we scale back our pre-season promotional program. We are just entering the season and weather conditions will be the primary driver for comparisons against 2005, which was one of the hottest summers on record.

Europe actual net sales were $9.8 million, unfavorable $1.2 million or down 10.7%. Overall net sales were up slightly with the sales increase in our highest market, Engine Management segment.

Gross margins by segment, for Engine Management were 24.7%, favorable 1.9 points. Engine Management gross margin recovery was one of our critical tasks in 2006, and we are very please with the early results. Margin improved 1.9 points against the first quarter 2005 and 4.6 points against the full year 2005 margin of 20.1%. The margin improvements were achieved through price increases late in the fourth quarter 2005 and early first quarter 2006, cost reduction efforts from material sourcing and manufacturing efficiencies, and the elimination of inventory rebalancing from the merging of Standard and Dana inventories.

Our Temperature Control gross margin was 22.6%, up 2.2 points. The Temp gross margin improved nicely as we continue to work on cost reductions efforts, and we are seeing the benefits from products we elected to outsource in the second half of 2005.

Our Europe gross margin percent was 23.6%, up 3 points. Similar to Temp Control, Europe has strategically outsourced products to low cost regions with favorable market percent improvements.

Our consolidated SG&A expenses were $43.8 million, unfavorable $1.7 million. As a percent to net sales, they were 20.8% or unfavorable a half a point. The entire increase was in selling and marketing expenses for catalogs, and customer programs, and training. The increase was partially offset by the reduction of A/R draft fees for a savings of $700,000. Consolidated integration expenses were reduced $400,000. The key here is we are finished with the Dana integration.

Our consolidated operating income was $9.4 million, up $3.5 million or favorable 1.7 points. By segment, Engine Management’s operating income was $12.2 million, favorable $2.1 million. Engine Management benefited from the 6% sales increase, recovery to 24.7% gross margin and integration efforts behind us.

Temperature Control operating income was $1.4 million, down $100,000. The Temp operating profit was, basically, flat despite the $4.5 million sales reduction benefiting from improved gross margins.

Europe’s operating income was breakeven, however, it was $500,000 ahead of the prior year despite lower sales for the period.

Overall, operating performance was favorable across all segments and we are pleased with the results to date. In addition, each of our segments have initiatives underway to generate additional cost reductions.

The change in other income was, primarily, the benefit of foreign exchange movements.

Interest expense was unfavorable $700,000. Primarily, the impact of higher debt in 2006 due to the elimination of the A/R Draft Program in the fourth quarter of 2005. The increase in interest expense was offset by the reduction of $700,000 in draft fees inclusive in SG&A expenses.

Income tax expense was unfavorable $1.9 million. Higher profits accounted for $1.5 million of the increase and discreet one time items made up the other $400,000. The two discreet items, one was state law tax changes in the first quarter 2006, which impacted us by $300,000, and AMC credit true ups that we had for $100,000. This $400,000 for one time items and excluding them, our effective tax rate was approximately 43%. We are anticipating our tax rate in the low 40% region for the balance of the year.

Looking at the balance sheet, accounts receivable increased $56.1 million versus December 2005, which is our normal seasonal increase.

Inventories increased $6.3 million versus December 2005, however, decreased $14.9 million versus March 2005. We continue to anticipate year-over-year reductions in inventories.

At the end of last year, our restructuring accrual stood at $12.6 million, primarily, for lease commitments.

As you’ll notice, goodwill in both restructuring accrual were reduced in excess of $10 million. SMP was a subtenant to a long-term lease in Nashville that ran through the year 2021. We had vacated this facility early in the integration and per the terms of purchase agreement with Dana, we had to split the cost over the life of the lease. The present value impact of that cost was recognized in purchase accounting as a component of goodwill and the restructuring liability.

Dana received a favorable ruling from the bankruptcy court rejecting their lease commitment which also benefited SMP. This is reflected in the $10 million reduction in goodwill and restructuring liability. However, we do face a remote chance that we may be exposed from Dana’s situation to environmental liabilities that Dana has indemnified SMP from.

We and our outside counsel have evaluated this exposure and deem it to be a remote likelihood that we are held responsible. We will, however, be identifying this as a risk exposure in our 10-Q.

Total debt on the balance sheet of March of 2006, was $291.5 million, which reflects a $43.2 million increase from December 2005. Our total debt increase reflects the seasonal part of our business as we usually peak in the second and early third quarter, and then decrease as we collect the summer Temperature Control receivables.

Looking at cash flow components for CapEx spending in the period, was $1.9 million and depreciation and amortization first quarter was $3.9 million.

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

Good morning. I believe that Jim’s review and our quarterly announcements are self-explanatory, so I will just highlight two points, and then let’s open it up for questions.

Our first is the Engine Management gross margin which, as you all know, has been our major issue for us for the last year or two. I’m pleased to say that we are, finally, making some progress here. Three reasons. First, as Jim mentioned, we implemented a price increase late 2005 and early 2006. Second, the inventory write downs that we incurred last year as were merging in two inventories that’s now behind us, and third and, probably, most important, looking forward.

Now, that the integration is complete and our people who were so immersed in that are now able to concentrate their efforts on improving and looking for cost savings, and we’re starting to see the results. We’re seeing it in new manufactured products, we’re seeing it in getting better sources for purchased items and, frankly, this is just beginning, we have a lot more work to do, but those are the main reasons why the gross margin went up in the first quarter.

The second area I want to talk about is, that we sold our heater core line to Proliance. Basically, three reasons we decided to do this. One, we were a relatively small player in this field. Our total sales was only in the $6 million range. Second, it was losing money and, third, we really didn’t see a way to grow or improve this business, so we decided to sell it.

Benefits to Standard by selling it, it will free up capital, it eliminates the loss, and it frees up a location for sale. Over the next two years we will continue to market this line, buying it from Proliance. We’re doing that so that our customers can have a smooth transition.

Okay, those were the two main points I wanted to cover. With this, let’s just open it up for questions. Thank you.

[Operator Instructions] Bill Dezellem from Tieton Capital.

On the Engine Management gross margin front, where is your ultimate target for that segment’s gross margin? And then, secondarily, also sticking with that segment, what do you-- or what happened with inventories with the-- with the Engine Management group given that Temp Control, probably, was up and may have impacted the overall number.

Good morning, Bill. On the Engine Management gross margin part, we do not put out specific guidance on the single line items, however, you will note it was a concern for us over the levels where we were last year, and we did identify that we had $18 million that we felt we would be able to deliver for incremental operating profit, and that those numbers we still believe are doable and we stand by them. Again, it was a combination of the key points that Larry mentioned. A large part of it was selling price changes, re-sourcing of product, make first buy, and elimination of one time items that we had in 2004 and 2005. So, I think the response to that would be that we believe we can deliver $18 million of incremental profit over the previous year.

Regarding inventories, we do have a seasonal increase in the-- normally within the first quarter. Temperature Control sales were a little light, but we have committed to inventory reductions and we feel we’ll be able to deliver year-over-year reduction in inventory. We have--

Jim, would you be able to pull out the Engine Management segment, specifically, their inventories and whether they-- or what the change was there in the first quarter versus the December quarter?

We have not broken down inventories previously, Bill, but the majority of the year-over-year reduction in inventories that we’re going to see will be in the Engine Management line. Temper Control had a significant inventory reduction last year and our expectation’s that the reduction this year, which we believe will be significant, will be in Engine Management.

Jim, would you like to quantify significant?

No, sir. Our position is limited guidance and we do not wish to put out a formal guidance, Bill.

Derrick Wenger from Jefferies & Co.

I would like to know a couple things. Depreciation and amortization for the quarter, capital expenditures for the quarter, and the outlook for the year, and then, lastly, just some color on this, perhaps, selling this existing facility that was the heater core facility. When might that happen, how much might you get, and what is it on the books for?

Well, CapEx, I previously stated that we’re looking at that we’d be in the $12 to $15 million range for 2006. Again, we feel we have a significant amount of opportunity for cost savings initiatives within the Engine Management business and that’s why we’re stepping up our CapEx spending in that area.

Related to the facility, heater cores is just one product line that we have in that area. We freed up at the end-- the middle five, we freed up a couple other lines that we outsourced that we’re generating savings from. We’ll begin to market that building, we will have to move a couple other product lines from there.

The question-- it’s on the books for approximately $3.5 million. We would expect that there be a minimal gain or loss on the facility, so that the land and the building is close to fair market value, not a bunch one way or the other, but we have the opportunity of $3.5 million there, plus the sale of the fixed assets and inventory from Proliance. So, if you combine the two of them you are looking at potentially $7 million cash flow.

Okay. And, Jim, for the first quarter, what was the total depreciation and amortization and the capital expenditures?

CapEx spending was $1.9 million and depreciation and amortization was $3.9.

Thank you.

You’re welcome.

Walter [Shenker] with Tieton Capital.

Good morning, gentlemen. To what extent did the gross Engine Management gross margin in the first quarter benefit from the inventory write downs done last year, i.e., a year ago or historically if you were selling the higher cost inventory gross margins would be adversely affected, we write it down, and you understand the question, I think and, therefore, we’re selling on the written down cost of the inventory.

Well, I think more importantly than the layering affect of the inventory that was rolling out was the impact of our rebalancing of the inventory and charges that we have taken as we merged the inventories. Again, within the Engine Management line, we’re dealing with 30,000 finished good SKUs and we’re not breaking out specifically the amount that was related to the inventory write down impact within any single quarter.

We previously had said on an annual basis we felt that charges that we had taken were one time in nature $7 million that would not repeat themselves. That was inclusive in the $18 million that we stood by. So, I think to circle back, I think the piece where the Company is stating publicly is the $18 million. That’s the number that we’ll hold to.

Okay. But, to the extent you took a $7 million inventory write down adjustment, whatever we want to call it, to some extent that then is a benefit in future debt periods when you, actually, sell that because the cost basis is low.

A revaluation to a lower cost base, yes.

Yes. Okay. A semantical difference. Have you indicated yet or can you give us your sense as to whether or not the Engine Management business needs further price increases to get to an acceptable, as opposed to good, level of profitability?

Walter, we will look at that all the time. Right now, there is inflation going on in the industry. In our case, it’s masked because we have this compensating savings, but there’s no question that copper’s going up and platinum is going up, and anything with oil in it has gone up and, so with that in mind we are looking. We have nothing to announce, but we’re, obviously, looking.

Okay. The Temp inventory last year, the promotion you ran-- the pre-season promotion, was it dating or a pricing promotion?

Last year?

Yes.

It was a combination, both dating and pricing. Pricing in the form of a discount if you bought [technical difficulty] and that’s what was eliminated this year.

And, therefore, that should benefit, obviously, not just the first quarter, but the full year because you’re going to be selling that product in full margin.

That’s correct, but again, the biggest variable will be how hot it gets, but yes, that’s correct.

Although, we also should benefit from the fact that, as best you can determine, field inventories after such a hot year by your customers should not have been nearly as heavy as they might have been the prior year.

Best we can tell on that, Walter, we do get information from the biggest accounts, but I don’t know if they’re valid for all the accounts, but certainly for the biggest accounts they’re roughly where they were a year ago.

Okay. So, that’s surprising, but okay. And, lastly, in respect to Engine Management, there have been no changes relative to your client base plus or minus?

No.

So, this is now pretty stable? Very stable?

At the moment it’s quite stable, yes.

And, therefore, we are now finally at a point where lift cost and those marketing costs are, pretty much, behind us?

They should be reduced, yes, as we always predicted, yes. That’s correct.

Okay. Thanks, a lot.

[Operator Instructions] Alan Weber with Robotti & Co.

Hi, good morning.

Good morning, Alan.

In the annual report you talked about when you made this Dana acquisition, you talk about $50 million potential savings upon integrating the companies and then you talk about that, maybe, $25 million is accomplished, and today you talk about an additional $18 or $19 million of operating income from the Engine Management side and what I’m asking is, if I look back at the operating profit of the Engine Management business before the Dana-- now, I know ’02, maybe, was a good year, it was in the low $40 million, and last year it was $19 million or something like. So, I’m trying to understand-- trying to get to the apples to apples. You talk about the savings and the improvement, at what point do you, actually, improvements over whenever in operating profit from what you had before you made the acquisition?

Okay. Alan, that’s a good question. Yes, we said we were looking for $50 million in savings and we further said that in the SG&A area we thought roughly half of that and, I think if you just compare what the numbers were before to now, you’ll see we’re pretty close to that and, again, the $50 million included turning the Dana around, which is the number you didn’t see and they were running at a loss, but anyway, I’d say we established our target-- we hit our target in SG&A.

Now, our gross margin prior to the acquisition was-- even if you just look at a few years and I’ll just take one year, it was in the 28 range. Okay? And, now you’ll see we are in the 25 range or something like that.

Now, yes, we have further improvement, but what has changed? So, to some extent we’re up against a moving target and what has changed is two things, which I mentioned in previous calls. One, the customer makes his change and, two, the product mix has changed and those have changed in, what I would call, a negative direction. So, the newer accounts we have tend to have lower margins, however, lower expenses and more significantly the product mix as the newer technological products come in and many of which we have not yet tooled for, have lower margins.

So, that would’ve happened in any event whether we had acquired Dana or we had not acquired Dana. So, to that extent, it was very, very good. So, I think the $50 million was a good estimate, it is still a good estimate. We’re not happy with the gross margin as it is today, even though it’s better than a year ago, and we are planning and working, and fighting to get back to higher than or, at least, where we were before if not better.

It’s a long answer to your question. Does it make sense?

You know, it does. I guess the only part is when you talk about the negative. There should be some positive offset and I don’t know the numbers that-- there’s more cars on the road, driven more miles, and some of that should be somewhat of a positive.

Yes, and the positive-- and if you measure that, there’s lots of statistics out there and the positive is that the aftermarket-- now, this is not just our products, this is a gross number for all lines, is growing, so they say, in the 2% to 3% range per year, so that’s helping us.

Okay. Thanks.

Bill Dezellem with Tieton Capital.

You walked us through the mechanics of the Temperature Control pre-season promos from a year ago, but would you take it a step further and walk us through your decision, simply, to scale that back and why you chose to do that, and then the second question is relative to the OES business, would please provide an update there?

All right. I thought I said it for the first one. It was a line that was small, we were a small player in it--

No, I think the promotional-- the spring promotion--

Oh, I’m sorry. I’m answering the wrong question. I apologize. Could you repeat that question and I’ll do my best. Go ahead.

On the Temperature Control business, what made you decide to scale back the pre-season promos?

The reason we had it historically was we felt that because it was just a seasonal business and all our orders would come in, say, right about now just as the season was beginning, we didn’t have the internal infrastructure and capacity to deal with all the orders quickly, and as a result we fell behind and our customers lost sales, and so on, which is why we motivated them to order early. However, we’ve now improved ourselves operationally a great deal in Texas and that’s no longer a risk. So, we now feel we can handle a dramatic upsurge in business without falling behind, but that’s really the main reason we discontinued it.

That’s very helpful. And, OES?

Is the question being where do we stand in getting new business?

Yes, request a general update there.

Okay, well nothing major to report at this time. We are picking up some pieces here and there, but I have nothing major to report at this time.

And, taking it a step further, relative to Dana and their bankruptcy proceedings, has there been any indication either favorable or unfavorable that they may be exiting some or all of this business?

Dana’s not in our business.

Right, but the business is that-- Dana was-- when Dana spun off, they spun off almost all of their aftermarket about two years ago.

Including the OES business?

No. That’s what they kept, but they’re not in products that we are in.

Okay, that was my error.

Going back to its original roots, and its original roots is what we refer to as hard parts, engine parts, heavily oriented towards trucks. They’re [inaudible] is going back to us. So, we’re not a competitor with them in the least.

All right. Thank you.

It appears that we have no further questions at this time. I will now turn the program back over to Mr. Burke.

Okay. Thank you. All right. Thank you, everyone, for joining our conference call. Bye-bye.

This concludes your teleconference. Thank you for your participation.