Standard Motor Products Inc (SMP) 2007 Q1 法說會逐字稿

Good day. All sites are currently on line in a listen-only mode. Please note this call may be recorded. And now I'd like to turn the conference over to Mr. Jim Burke with Standard Motor Products. Please go ahead, sir.

Okay. Thank you. Good morning and welcome to Standard Motor Products First Quarter 2007 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'll begin with a review of the financial highlights and then turn it over to Larry Sills.

Our consolidated net sales for the first quarter 2007 were $199.8 million, down $10.3 million. The reduction in net sales reflects the guidance we provided in our last investor call, specifically related to Engine Management sales. Engine Management sales were $137.4 million for the quarter, down $11.5 million or 7.7%. The decrease was related to two factors. First, 2006 included substantial preseason orders in the first quarter, 2006. And second, an OE supply contract for fuel injectors expired at the end of '06. For Temperature Control, actual net sales were $50.5 million, favorable $1.5 million and up 3%. Europe's net sales were $10.5 million, favorable $700,000 and up 7.3%. Overall, we look for improved comparative results in our Engine Management as previously announced OE and OES volume of approximately $25 million annualized is launched in the second half of 2007.

Gross margins by segment. For Engine Management, we're 26.3%, favorable 1.6 points. Our Engine Management margin percentage continues to improve from the efforts to outsource product to low cost areas and make first buy savings. Our Temperature Control margin was 21.2% in the quarter, down 1.4 points. The Temp margin contracted 1.4 points, primarily from selected price decreases to match offshore competition. However, the Temp group was able to offset this decrease with SG&A savings leading to an overall improvement in operating profit for the segment. Europe gross margin was 26.6%, up 3 points in the quarter and Europe margin also improved from the outsourcing of product to low cost areas.

Our consolidated SG&A expenses were $42.7 million, a reduction of $1.1 million. Consolidated integration expenses were approximately $700,000, which was an increase of approximately $600,000. In 2007, we are accruing closure costs for our Puerto Rico manufacturing facility, which is expected to be relocated to other SMP locations by the end of 2008.

Our consolidated operating income was $8.5 million in the quarter, down $900,000. Excluding the increase in integration expenses of $600,000, operating income was only down $300,000, despite the $10.3 million reduction in sales. Again, improvements in gross margin percentage and curtailed SG&A spending mitigated the reduction in operating income. For Engine Management, operating income was $11.1 million, unfavorable $1.1 million. Again, excluding integration expenses, it was down only $400,000, the impact of lower sales. Temperature Control operating income was $2 million in the quarter and that was up $500,000. Europe's operating income was $800,000 in the quarter and that's a favorable improvement of $700,000.

Overall, operating performance was favorable in Temp Control and Europe and we expect favorable trends as Engine Management sales comparisons improve for the balance of 2007.

Our consolidated provision for income taxes was $1.3 million, which was favorable $1.4 million. The 2007 effective tax rate was 30%, compared to 50.5% in 2006. The 2006 rate was negatively impacted by discreet items related to state tax rates and Europe losses without recognition of any benefit. Europe's turnaround with taxable income in '07 reduces our current effective rate, as we do not need to provide current tax expense due to carry-forward losses.

In addition, effective January 1, '07 we adopted the FASB Interpretation Number 48 Accounting for Uncertainty in Income Taxes. The cumulative effect of the adoption was a $1.9 million reduction in retained earnings, primarily from uncertain federal tax positions. This is a complex area, new in 2007 and I can expand on it during Q and A if there are any questions.

Looking at the balance sheet, our accounts receivable increased $44 million against December '06, reflecting a seasonal increase. However, a more meaningful comparison is the $5.4 reduction compared to March '06. Inventory increased $8.5 million against December '06, again a seasonable build. However, inventories were down a reduction of $7.2 million compared to March of '06. Total debt increased $33.3 million against December '06 to support working capital needs. Against March '06, total debt has been reduced $19.9 million. As previously announced, in March we successfully entered into a new five year revolving credit facility, replacing the previous facility. The new credit facility provides a line of credit up to $275 million, with an additional $50 million accordion feature if the necessity arises. The facility offers immediate benefits and secures an integral component of our capital structure over the next five years.

Lastly, our Cap Ex spending in the first quarter '07 was $2.5 million and our depreciation and amortization was $3.8 million.

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

Good morning, everybody. Jim has reviewed the numbers in detail so to avoid unnecessary repetition, I'll just highlight a few things and then we'll open for questions.

First, Engine Management sales. Jim reviewed the reasons for the shortfall and I just wanted to repeat our expectation that comparative figures for the balance of the year will be better, especially with the OES sales kicking in in the second half. Engine Management gross margin, we are pleased with the progress. However, we are still below historical figures of 28% and we are going to keep working -- all of our operating units are working aggressively towards that end.

Temp Control sales were ahead in the first quarter, but the first quarter is not a terribly meaningful period. This is a business that the vast amount is second and third quarter. Now April, as you saw, was a cooler than normal month in almost the entire country. As a result, April sales were below the prior April. A bit of good news here is we do track inventories of our leading accounts and based on a sample of some of these largest accounts, our numbers are only through March, but through March their inventories are roughly in line with the prior year, which tells us that we're not going to have to work off any inventory glut at this time. So, we're just going to wait and see what the weather does.

In terms of Europe, we're very pleased with our progress. And even though the numbers are relatively small, we've gone from a loss to a profit and I believe we are setting a base for some healthy future growth.

Finally, let me just give you an update on some of the major initiatives we discussed at the last quarterly call. Really two areas: one, the plant moves and two, the OE, OES business.

First the plant moves, in Engine Management we have two planned moves. One is Puerto Rico, where the product is going to be relocated to Reynosa, Mexico, Independence, Kansas and a certain amount is going to be outsourced. In Long Island City, our plan is to relocate to Independence, Kansas and Reynosa. The plans are, at this time, on target.

To refresh your memory, our timing for both of these is over the next 18 months. There is a one-time cost of roughly $9 million and an annual savings of a similar amount, $9 million. In 2007, we're going to see mostly the cost of this. In 2008, we will get some of the savings and we will get the full benefit of the savings in 2009. That's our plans at this time.

And in Temperature Control, we also have two plant changes. One, as previously announced we are in the process of emptying out our Fort Worth facility. We sold the heater core business to Trans Grove. The balance of the products are either being relocated or outsourced and we plan to sell that facility during the year 2007.

In Grape Vine where we rebuild compressors, we are in the process of moving some of our compressor rebuilding to Reynosa, Mexico. Compressor rebuilding is a labor-intensive operation and we think we can save as much as $10 per unit by relocating it to Mexico. Our plan here is to be able to sell a rebuilt unit at roughly 30% below a new unit coming in from China and in so doing, maintain this as a healthy, profitable business.

That's all the plant moves.

The second major initiative is the OES, OEM business, which we have discussed in the past. Again, the $25 million that we previously announced will happen as planned and we'll start seeing this as an annualized number. We will start seeing this in the second half of 2007. We are prospecting for additional business; however we have nothing to report at this time.

That's the highlights. We will now open for questions.

[OPERATOR INSTRUCTIONS] The first question will come from Derrick Wenger with Jefferies & Company. Please go ahead; your line is open.

Thank you. I believe you said DNA was $3.8 million and Cap Ex was $2.5 million for the quarter. I was wondering what the account of your guidance is for the year? And I have a couple of others. Any other margin guidance you have that you can provide? And then the revolver, what is drawn? What is available? What is the rate? And is it still classified as short-term?

That's a lot of questions.

Okay. The Cap Ex, just to repeat the numbers for the first quarter were $2.5 million and our expectations was that was going to be increasing in '07. So, again we would be possibly in the $12 million to $14 million range, in that area. DNA was $3.8 million for the quarter and again that would be annualized in there at like $16 million, you could look at it.

On the revolver, drawn currently is roughly $180 million, $181 million. And we have a little over $90 million of excess availability on it. And the last question, I'm not sure if it was our classification of short term and long term. We have reviewed it and our treatment was to keep the new facility classified as short term, even though it is a new five year revolver.

Okay. And any margin guidance for the year, in terms of gross margins or SG&A improvement or decline?

Right. No, our policy has been not to put guidance out, Derrick.

Okay. Thanks.

You're welcome.

Thank you. [OPERATOR INSTRUCTIONS] Our next question will come from Robert Smith with the Center for Performance Investing. Please go ahead.

Okay. Good morning, guys. Is it fair to try and ask how much business you're actually bidding on at the moment in OES?

No. There are possibilities out there and we're looking at them, but we cannot quantify it. Sorry.

Okay. Do you have any comments about sort of the landscape that's out there through private equity and what's happening in the auto parts business, per say?

Well, I can't claim to be an expert here; you're reading about these things happening. What we are seeing, and we're reading the same stuff, there is some private equity looking more at the OE companies, especially the OE companies that are in Chapter 11. And there are various people looking at them. But I have no inside information here. What I'm telling you is what you read in the Wall Street Journal.

Well, inside information, no.

You don't know more than I do.

But philosophically, I mean, as a way of life. I mean, it's been no picnic being in the business for the last decade or so or more. So, the motivation of private equity is such and your own [raise] for being in business. I mean, seem perhaps at odds. I mean, I don't know. I mean, philosophically is there anything you guys want to --

As we always tell everyone, we have an open mind and that's it. But nothing has even come close to being entered into.

Sure. Thank you. Good luck.

Thank you. Our next question comes from Phil Dumas with GO Capital. Please go ahead.

Hi. Good morning, guys. What's the rate on your new revolver, please?

Again, it has a grid in there. The current rate on it is LIBOR plus one and a quarter.

Given that, the converts have obviously a pretty high interest rate and they are callable. Have you guys put any thought into refinancing these bonds at a lower interest rate?

We're evaluating current market conditions. Our intent when we put the new revolver in place would be that we were allowed to handle the converts as they came due or we could look at them sooner. We continue to monitor market conditions and have a plan in place well before 2009. That doesn't say that we plan to call them, but we'll have a plan and a strategy in place.

Okay. Would you consider issuing a new convert? I know you can't necessarily say right now. But that would be one of your options?

Obviously, it would be one of the options. But we're not disclosing at this point what our strategy would be. But it is definitely one of the options.

Okay. Thank you.

You're welcome.

Thank you. [OPERATOR INSTRUCTIONS] And now we'll move to the site of Walter Schinker with Titan Capital. Please go ahead.

Good morning.

Hello. Can you hear me; I'm on a cell phone?

Yes, I can hear you.

Good. Hi, Larry. The margins in the business, relative to our longer term target still have a fairly substantial spread. How much of that do you think can be made up from better sourcing and more efficient manufacturing, as opposed to as costs are going up and freight costs and other things go up, will have to be offset by improved pricing? It's always a pricing question, Larry.

I'm aware. I think I've answered this before, frankly. But if you look at --

But I have to hear it recorder.

Again, we're running a little over $26 million; I think that was the first quarter. We say that historically we're $28 million; actually we'd like to do more than $28 million. The spread I think will be -- I can't say it's going to more of one than the other. We have to do both. And that is what we're going to do. It will be a combination of selected price increases and some aggressive cost reduction. And we're looking at both and that is our intent. Whether it's going to be 50/50, 60/40, 70/30, I really can't answer that. But we're looking at both and we're going to maximize our ability in both. That's what I can tell you at this time.

And just a second question. I know from time to time there has been cherry picking, my term, competition, both more so maybe in the air conditioning than in the Engine Management. As you look at the current environment, that is relatively stable. There is always some; it's been coming more intense or less intense?

Well, it's certainly not becoming less intense. Again, as the shift in the market switches to the bigger customers who have the ability to segment more than the smaller customers, the potential for that increases. And so, we have to be careful not just in pricing the entire line or being good in the entire line, we've got to look at every segment of that line. So, I'd say the threat of segmentation has certainly not eased; it is probably increasing and we just have to be alert to that. That's all.

Okay. Thanks a lot, Larry.

Okay. See you, Walter.

[OPERATOR INSTRUCTIONS] And it appears we have no further questions.

Okay. Very good. Alright. I'd like to thank everyone for joining our conference call today. Good bye.

Thank you. This does conclude today's teleconference. You may disconnect at any time and have a great day.