Standard Motor Products Inc (SMP) 2007 Q2 法說會逐字稿

Welcome to today's teleconference. At this time all participants are in a listen-only mode. Later there will be an opportunity to ask questions during our Q&A session. As a reminder this call may be recorded and I will now turn the program over to Mr. Jim Burke. Please begin.

All right. Thank you, Terry. Good morning and welcome to Standard Motor Products second-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.

Okay, good morning everybody. Obviously the market has reacted strongly to these numbers and I just want you to know that we remain quite optimistic about the programs we have in place and our progress in implementing them. So what we want to do now is Jim will review the numbers in some detail and then I will highlight four key areas and then we will open it for questions.

So with that, let me start with Jim.

Okay. We will begin. Consolidated net sales for the quarter were $217 million, off $12.2 million or 5.3%. For the first half, sales were $416.8 million, down $22.5 million or 5.1%. I'll go into detail and review the shortfall by segment.

Engine Management sales in the quarter were $138.1 million, down $1.7 million or 1.2%. For the first half, sales were $275.5 million, down $13.2 million or 4.6%. The Engine Management sales as previously discussed during our first quarter conference call was impacted by the expiration of an OE fuel injector contract that expired at the end of 2006. As you will recall, this was a $12 million annual contract and it impacted both the second-quarter and the year-to-date results to a lesser degree, impacting only the first quarter or preseason orders that we had received in the first quarter 2006.

Overall, Engine Management was down in the first quarter '07 and improved in the second quarter to be basically flat against Q2 in '06. Larry will discuss further our OE and OES opportunities offsetting the fuel injector contract expiration that continued through to second half '06.

Temperature Control sales in the quarter were $63.6 million, down $8.7 million or 12%. For the half, sales were $114.1 million, down $7.2 million or 6%. Temp Control net sales were negatively impacted by the following, lower pricing in 2007 to compete against Asian imports; volume erosion to new Chinese compressors; and a very cool and wet season impacting many of our customers in the AC replacement business.

Turning to Europe, sales in the quarter were $11.2 million, favorable to $2.5 million as we exclude divested AC business in 2006 second quarter of $4.9 million. For the half, Europe sales were $21.7 million, up $6.4 million, again excluding $8.1 million of divested six-month '06 sales.

Turning to gross margins. By segment, Engine Management margin was 26.9% favorable a full 2 points in the quarter and for the half, 26.6%, again favorable 1.8 points. We are pleased with the continued progress in our Engine Management margins. The second quarter improved sequentially 0.6 points over the 26.3% in the first quarter and year-to-date, we are 2 points ahead of the full-year 2006 results.

Temperature Control margin was 20.9%, down 2 points and for the half, 21%, down 1.8 points. As discussed earlier, 2007 selling price reductions and lower volumes impacted our Temp gross margins. Larry will discuss further our plans in this area.

Europe, margin was 24.6% for the quarter, up 2.8 points, and for the half, 25.6%, favorable a full 3 points. Europe continues a favorable trend of sales gains excluding the 2006 divested sales and gross margin expansion from our outsourcing to low-cost areas and transferring production from UK to Poland.

Overall consolidated gross margin dollars were $56.7 million in the second quarter '07 matching 2006 dollars despite lower sales benefiting from consolidated margin expansion of 1.4 points to 26.1% from 24.7%.

Consolidated SG&A expenses were $43.3 million in the quarter, an increase of $300,000. For the half, they were $86.1 million, a savings of $700,000. Overall SG&A expenses were basically flat with the prior year.

Integration expenses reflected a slight increase over 2006 as we incur and provide for closure costs at our Puerto Rico facility. Integration expenses will continue in 2007 and 2008 as we relocate manufacturing from Puerto Rico and Long Island City to low-cost areas.

Looking at consolidated operating income, and I have excluded the integration expenses for this comparison, on a consolidated basis were $13.4 million which was down slightly $400,000. For the first half, they were $22.5 million, again off $600,000. Looking at it by segment, Engine Management operating income without integration expense is $13.4 million or favorable $2.1 million in the quarter. For the half, $25.2 million, again favorable $1.6 million for the half.

Temperature Control operating income was $3.6 million, down $2.6 million. For the half, $5.5 million or down $2.1 million. Again, Temperature Control was impacted by lower sales and margins.

Our Europe business in the quarter operating income $700,000, favorable $200,000. For the half, $1.5 million and favorable $900,000. Overall, consolidated operating income was slightly below 2006 primarily due to lower Temperature Control sales partially offset by improved margins in both Engine Management and Europe.

Income taxes were higher in 2006 related to discrete tax adjustments which were primarily from state tax rate changes. The 2007 effective rate of 33.8% reflects a benefit from Europe's pretax income offset by previously unrecognized losses carried forward. The end result was on a diluted earnings per share basis from continuing operations, we achieved $0.30 for the quarter matching last year and $0.46 year-to-date, $0.02 better than 2006.

Looking at the balance sheet, accounts receivable were up against December due to seasonal nature of the business but down $16.5 million against June '06 on lower volumes. Inventory increased against December '06 by $9.8 million and $8.7 million compared to June '06. This reflects planned bridge inventory builds for the Puerto Rico and Long Island City planned manufacturing moves. The bulk of the bridge inventories will be reduced in 2008.

Total debt was $279.7 million at June '07 compared to $291.6 million in June '06, a reduction of $11.9 million. However, we achieved a $22.3 million reduction in debt net of cash. Our current U.S. revolver reflects a drawdown of approximately $163 million and excess availability of approximately 95 to $100 million. CapEx spending for the quarter was $3.6 million, for the half $6.1 million, and our depreciation and amortization was $3.7 million for the quarter and $7.5 million for the half.

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

Okay, good morning. Let me cover four main topics and then we will open it for questions. First is the Engine Management gross margin where we are continuing to make nice progress. We hit 26.9% in the second quarter, just a shade under 27. This is a very nice improvement over the prior year. Our goal is to return to pre-Dana historical figures of the 28% to 29% range and we are working quite diligently to get there.

Point number two is Temperature Control sales, which is obviously the disappointing part of the second quarter. Jim described the reasons. The main one that I guess you are tired of hearing it, was the cool summer and rainy summer probably one of the coolest, rainiest in history in the center of the country, and Texas mostly. And Texas is the center of the air-conditioning business. We have customers in that part of the country, some of whom are public who had huge drops in sales in that quarter and it is primarily because of the weather.

We also experienced some erosion to Chinese imports despite the reduction we had in pricing in certain areas. Here our strategy for the future, as I believe we have previously announced, we are in the process of relocating our compressor rebuilding which represents about half of our business. We are relocating that to Reynosa, Mexico. Once fully established there, the savings will be substantial because this is heavy labor-intensive business. And we believe at that point we will be able to compete aggressively and profitably against imports from China.

The third area is OES, which we have also talked about in the past. We see this as a big part of our future growth. The OES business represents overall typically 20% to 30% of total volume. Our share is minimal. Our volume is way less than that. We see that as a major opportunity especially as some of the large OE companies are looking to offload some of this business.

We previously announced that we picked up about $25 million of new business since the beginning of the year and that we expect to start shipping this during the second half of 2007. During the last three months, we picked up roughly another $10 million of new business. We don't anticipate shipping much of that this year maybe a little bit; most of that will go into 2008.

There were many, many additional prospects out there and I want you to know we are working aggressively on all of them. Again we see this as a big part of our futures.

Finally, and then we will open it, plants moves. We've previously announced them and they are on schedule. Under Engine Management, Long Island City and Puerto Rico planned moves to Mexico. We plan to complete these over the next twelve months. Annual savings once the moves are complete will be in the neighborhood of $9 million per year. We expect to see a little of those savings in 2008 and the full savings in 2009.

Temp Control, as we said, we're moving the compressors to Mexico. We moved operations out of Ft. Worth, which also permitted us to sell the building which we did just a few weeks ago. We sold it for $4.5 million. We will show an $800,000 book profit in the third quarter.

Companywide, after these moves are complete, just the ones I've said, the majority of production hours of the company in total will be in low cost areas which is a major change for us and this is going to permit us to stay competitive and profitable.

So let me close by saying we have a lot of moves in place. We had a bad quarter for air-conditioning but most everything else went well and we are optimistic about the future. And let me now open it for questions.

(OPERATOR INSTRUCTIONS) Alan Weber, Robotti & Company.

Good morning. Larry, can you go back over the OES business? You talked about the $10 million in the press release. And what were the numbers you mentioned in the previous business and when is that going to come online?

Okay. This is the not the starting -- we have a base of starting business. I'm not counting that. That is there already. We picked up about 25 million of new OES business since the beginning of 2007. Okay? We picked up what we have as the agreements in the contracts; a variety of lines, a variety of customers. To date we have shipped very little of it, it's there, it's for sure, it's there. We're going to start shipping it towards in the balance of this year. And it should be full-blown for the year 2008.

Since then, we got about $10 million of additional new contracts, again, variety of customers, variety of products, and we expect that we will start shipping them certainly not before the last quarter of this year, and probably toward the end of the last quarter of this year. But again, that will hit during the year 2008. Does that answer your question?

It does, thanks. I forgot, what is the -- what is the current size of the OES business?

For us?

Yes.

Or for the world? Again --

For you.

For us, I believe we -- prior to all this from what we've inherited -- you got the numbers (multiple speakers)

Our numbers for what we would have stated at the end of '06 for OE/OES business was just under $[60] million. That is companywide.

And the margins on this business, is that expected to be at the Company levels?

No, well, it's a different business. The margins are less. The margins are in the 15% to 20% range, the gross margins. However, your operating expenses are much, much lower because all the -- most of our SG&A expenses are not present for this. So if our normal SG&A is in the 15% to 20% range, this is much, much lower. You also have much less inventory. You don't hold inventory, you just make it and ship it. So when you factor all those things in, the factor that has a lower gross margin is kind of balanced by the lower SG&A and the lower inventory.

Okay. My other question was, Jim, for the balance of the year, can you just kind of walk through what you expect the direction of receivables and inventory cash flow and like that?

The receivables should mirror our sales volume there. So by the end of the year, the fourth quarter of 2007 again, it is a very low Temperature Control quarter. So our receivables year-over-year dependent upon the second half, I'm going to guess they are going to the down slightly in that area. Inventory levels again, we have planned for these bridge builds so that when we shut down production and move it over a period of time, we have the inventory to ship. We say the bulk of that will come out in 2008.

So I think from this point forward, the inventory levels I think will see some production but approximately the levels where we are now at June. It may be a slight increase. It's plus or minus a little bit from that area. But we won't see a big reduction by December because we're carrying this inventory for the planned moves.

And next year you would expect to see some improvement?

Next year we would be looking for a significant improvement.

Okay, great. Thank you.

Walter Schenker, Titan Capital.

Good morning, gentlemen. Just some minor points and then a bigger question. I noticed the crude customer returns. That is a seasonal increase? I didn't look last year where it was in June.

Yes, it is, Walter. We accrue that as we increase over the -- for our Temperature Control business.

Okay. It is normal, it's not in any way -- abnormal?

No.

On the OES business, Larry, generally you were bidding against other people. You were just sitting across the table negotiating for it? Are you picking up that business?

Yes, I mean you're in a competitive environment so you just can't make up a number to price it at. We are in a somewhat competitive and they send out requests for quotation and we respond.

And there are --

For the most part we didn't get them all but we've done pretty good.

And I would have thought especially on the Temp Control side, on the other half of the business there would be very few people who -- I realize this is not the large number of SKUs for historic -- but who already are -- unless they are the existing incumbents who are being spun out or something is happening to them -- I would not have thought there would be much competition.

Well what you have for the most part is the company making it today, let's take Delphi as an example, they are exiting the business. Okay, they made it, they don't want to make it get anymore. They are closing the factory. So now they put out a request for quotation and we respond but we're not the only respondent. There are other people, some bigger than us, some smaller than us. We are not bidding in isolation. But we are bidding with a margin in mind that we feel we need to be profitable in this business and again, thus far we've been pretty successful.

And you would expect a secondary benefit of allowing you to be vertical in manufacturing for these SKUs which normally you wouldn't start manufacturing for a number of years and therefore you would be buying from Delphi, Visteon or whomever?

Yes, that is correct. And as a secondary benefit, it increases your hours in your shop significantly because it's typically lots of volume and lots of production hours which has a secondary benefit of lowering the cost of the other products you are making there.

Okay.

Filling up the factories very nicely.

Okay. And you would expect given the size of the OES market and you're still feeling modest penetration that at least over the next year or two as we sort of wash through the restructuring of these large OEM suppliers, that there should be significant opportunities -- you won't win them all -- opportunities for more business?

Absolutely, absolutely.

On changing -- on the core side raw materials, shopping, etc., what is happening?

Jim, you got --? We're doing okay. You got those numbers?

Again, we don't put out individual numbers. The opportunities from our sourcing from low cost areas are doing very well and we've been able to offset any commodity price increases that we are seeing domestically. So on a cumulative material cost basis, we are reflecting even to favorable results.

Okay. And one of the big factors in controlling or reducing cost of goods sold has been your effort now that the consolidations are behind you. In sourcing overseas that is on a fairly level area -- you are exiting able to accelerate it as you work on it more?

We are looking to accelerate that. We've got some good accomplishments and we think there's a lot more to be gotten. And we are working very hard in that area.

Okay. And sort of lastly, my standard refrain which is this company has a lot of capital tied up in its business and more often than not, it's not generating what some might consider to be adequate risk-adjusted returns. Do you still remain confident -- I'm smiling, Larry -- that one of these years we're going to get there?

Oh, obviously, obviously. That is why we are here. No, we are -- we are very -- if I were to oversimplify our business right now, I'm surprised you didn't ask me about pricing -- I was ready for you on that.

But you're going to tell me you raised prices and I'm going to tell you you don't raise them enough. So we're not going to get anywhere.

But just so we get that one out of the way. We do anticipate some pricing in the third quarter in our Engine Management business. If you just look at two things, the potential gain in OES and the potential savings in globalization as we move factories around, with those two things we are very optimistic about the future.

Thank you.

Okay.

Thank you, Walter.

Robert Smith, Center for Performing Investing.

Good morning. So, what is your position in Temp Control competitively, I mean as far as market share?

Very, very large. We are far and away the number one competitor in this business, far and away.

So when you have the Mexican facility up and running, what is going to be your opportunity to combat the erosion that has occurred?

Okay. Good question. Compressors are very labor -- rebuilding the business itself is as you would imagine is a labor-intensive business.

Yes.

So our forecast is that by relocating the compressors to Mexico, the labor savings are in the range of $7 to $10 apiece. Now, our goal -- our main competitor now in the compressor business is new units coming in from China. Now, they don't cover the whole line but they cover the fast-moving parts of the line. Many of our customers have purchased these and they haven't taken us out of their business but they have put them alongside us. Okay, that is what we call the erosion.

Now, we believe and our goal is that once we have fully relocated this to Mexico, we will be able to sell a rebuilt unit for roughly 30% below the cost of a new unit coming in from China. And with that kind of -- you need that kind of price differential we feel to sell a rebuilt versus a note even though the new is coming from China. So we think we will be able to do that once we are there and that is the strategy. Okay? Does that answer your question?

Yes. So in large measure, you think you can recapture much of what you've lost?

Yes, we do. We -- it's going to take a while because it's going to take a while to get down there, but, yes, we do think we can.

It might happen faster, Larry, if they find that the Chinese product is contaminated.

You bet ya. Wait till they find out they are full of lead paint.

Okay. This OES business, is that repeatable -- the contracts that you've already gotten?

They are typically multiyear contracts. They are typically three- to five-year contracts.

Okay. You introduced the call with your comment about the market reaction which is a little overboard, so to speak. I'm wondering what if you came in with a penny or two lower? But anyway, do you have any comment about what upset the street?

We are not experts in the stock market --

Well, I grant you that. But it seemed --

It's hard for me to speculate --

Unusual --

It's hard for me to understand it. And I don't want to comment on it. It's not our business.

Okay. Good luck.

Thank you.

We have no further questions in the queue.

Okay. Thank you everyone for joining our second-quarter conference call.

Goodbye.

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