Standard Motor Products Inc (SMP) 2007 Q3 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. Please note that this call may be recorded. I will now turn the program over to your moderator, Mr. Jim Burke. Go ahead, sir.

Thank you. Good morning and welcome to Standard Motor Products third-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 will begin with the financial highlights and then turn it over to Larry followed by a Q&A period.

Our consolidated net sales for the quarter were $206.2 million favorable $2.4 million and up 1.2%. For the nine-month period sales were $622.9 million down $20.1 million. However, the divestiture of our European temperature control business in December '06 accounted for part of the quarterly and year-to-date differences.

Adjusting for the prior year impact of $3.3 million in Q3 '06 and $11.4 million September '06 year-to-date our third-quarter '07 sales were up $5.7 million or 2.9%. For the nine-month period, sales would have been down $8.7 million or 1.1%.

Looking at our segments, engine management sales for the quarter were $130.5 million favorable $2.8 million or 2.2%. For the nine-month period sales were $406 million down $10.4 million or 2.5%. As previously discussed, the nine-months '07 reduction was impacted by a $12 million OE contract that expired in December of '06.

Temperature control sales for the quarter were $60.1 million favorable $200,000. The nine-month period sales were $174.3 million down $7 million or 3.9%. Our temperature control sales were slightly favorable in the third quarter despite 2007 lower pricing versus '06. Sales strengthened late in the summer season contributing to the $200,000 increase for the quarter.

Europe began excluding the impact of the 2006 temperature control divestiture which again was $3.3 million in the quarter and $11.4 million year-to-date for '06. Our '07 results for the quarter Europe sales were $11.2 million favorable $1.6 million and for the nine-month period sales were $32.9 million up $8.1 million.

Looking at gross margins by segment, engine management achieved a 26.9% in the quarter up a full four points. The nine-month period the margin was 26.7% up 2.5 points. We're very pleased with the continued strong showing from our engine management segment reflecting improved pricing and savings from global sourcing and conversion to in-house manufacturing.

Our temperature control business achieved 21.3% in the quarter down 2.1 points. For the nine-month period the margin was 21.1% down 1.9 points. As discussed in previous conference calls temperature control faced headwinds in 2007 as we reduced prices to compete against low-cost Chinese compressors. The third quarter '07 gross margin did improve 0.4 points over the second quarter '07 and Larry will discuss further our progress transitioning compressor remanufacturing to Reynosa, Mexico.

Europe in the quarter the margin was 26.3% favorable 2.2 points and year-to-date 25.8% up 2.7 points. The Europe results have been favorable reflecting a divestiture of the temp group and savings from outsourcing the low-cost countries and the transfer of manufacturing from the UK to Poland.

Overall, we're very pleased with the 2.3 points improvement in consolidated gross margin percentage and the incremental $5.3 million generated in the third quarter. Consolidated SG&A expenses for the quarter were $42.9 million an increase of $2.8 million and for the nine-month period $128.9 million an increase of $2.1 million.

Our consolidated restructuring expenses reflected a $2 million increase in the quarter and a $3 million increase year-to-date. The increase is primarily related to our Puerto Rico transition to Mexico and to a lesser extent the transition from our Fort Worth, Texas facility which we were able to vacate and sell for $4.5 million.

Consolidated operating income -- and I'm going to report these numbers excluding restructuring expenses -- for the quarter were $11.8 million favorable $2.5 million and for the nine-month period $34.3 million favorable $1.8 million. Quickly by segment, engine management achieved $10.2 million for the quarter up $3.2 million; nine-month period $35.4 million up $4.8 million. Temp control 3.9 million for the quarter down $300,000; nine-month period $9.5 million down $2.4 million. In Europe, for the quarter $700,000 which was an improvement of $300,000 and the nine-month period $2.2 million which was up $1.2 million.

Overall consolidated operating income excluding restructuring expenses increased $2.5 million in the quarter or 1.1 points and the year-to-date $1.8 million for the nine-months '07 or 0.5 points. Again, we're very pleased with the performance in engine management in Europe and we're transitioning our temperature control business to low-cost manufacturing sites to improve future profitability.

Other income in the quarter included a gain of $820,000 from the sale of our Fort Worth, Texas facility discussed earlier. Income taxes were lower $200,000 in the quarter and $2.1 million year-to-date. The lower effective tax rate of 31% year-to-date versus 43.3% for the nine-months '06 reflects primarily the benefit of improved European results.

In summary, our results from continuing operations excluding restructuring expenses and also the gain from the sale of the building were $5.6 million or $0.30 per diluted share in the quarter and for the nine-month period $15 million or $0.80 achieved per diluted share year-to-date. Our discontinued operations include the impact of our defense costs and reserve adjustments for asbestos liabilities related to a break business we sold in 1998. Annually we have an actuarial valuation performed in the third quarter each year to evaluate this liability.

The third quarter '07 includes an unfavorable pretax increase to the reserve of $2.8 million which effectively matched the favorable pretax adjustment of $3.2 million recorded last year. Looking at the balance sheet accounts receivables were up against December '06 due to the seasonal nature of the business and up $3.1 million versus September '06 essentially matching the increased $2.4 million sales in the quarter.

Inventories increased $5.1 million against December '06 and $11 million against September '06. This increase reflects the bridge inventories built up during our transition of our Puerto Rico and Long Island City facilities to Reynosa, Mexico and Independence, Kansas.

Total debt was $254.6 million at September '07 compared to $256.2 million at September '06. Total debt net of cash reflected a reduction of $6 million from September '07 to '06. During the quarter we also completed an approved share repurchase of approximately 542,000 shares at a cost of approximately $5 million.

Our current North American revolver reflects a drawdown of approximately 140 million with almost 100 million of excess availability. Lastly, our CapEx spending in the quarter was $3.5 million for the nine-months $9.6 million and depreciation and amortization was $3.8 million for the quarter and $11.3 million for the nine-months '07. At this point I'll turn it over to Larry.

Good morning. All right; you've just heard the numbers in a good amount of detail and I don't really have that much to add but just to say that it was a good solid quarter. Sales were up in every division. In temp the weather as usual had an effect. As you recall, we had a weak second quarter caused primarily by the wet weather in the spring but we had a nice third quarter because it stayed hot longer than usual.

Gross margin in engine management continues to be a good highlight four points better than the equivalent quarter in 2006. We're running 26.7% year-to-date, a result as Jim said of lowering our costs through increased manufacturing and through global sourcing and in pricing improvements. And we still feel there's room to improve in this area.

Our plant moves are on schedule. Engine management -- moving our Puerto Rican facility and our Long Island City facility primarily to Reynosa, Mexico with estimated savings as we have announced of approximately $9 million per year. And we will see some of that in 2008 and the full amount in 2009.

Temp -- we hope to be producing slightly more than 50% of our rebuild compressors in Reynosa during the year 2008. But here some of these savings are going to be given back in pricing as we work to compete with product coming in from China.

OES -- as previously announced we have been awarded approximately $35 million of new business this year which is starting to hit in the second half. I have no new news here since our last conference call but we are talking to many prospects and we remain quite optimistic about this business

Finally, we are pleased with Europe. It's a nice success story. We have gone from a loss to a profit. We sold off the temp business, we exited UK manufacturing which was high cost and we have opened up a low-cost operation in Poland which can serve both the European market and one day provide product for the US market. And we think we now have a good foundation in Europe to build upon in the future.

So all in all a good quarter and most important we feel we are building nicely for the future. And now we are open for questions.

(OPERATOR INSTRUCTIONS) Tony Cristello, BB&T Capital Markets.

Thank you, good morning gentlemen. I guess a couple of questions. One, can you quantify what part of the OES business hit this quarter and what we should expect for next quarter or the fourth quarter?

First of all, I have to apologize. The sound isn't coming in very well. I hope you can hear us.

I can hear you. Can you hear -- is this better?

I think I heard your question. You're asking what of that $35 million has hit this quarter? (multiple speakers) Is that what you are asking?

Yes, that is correct.

Well, without being too specific we have had a variety of accounts and they're coming in at various stages and rates. It's roughly three or four product lines that we have begun shipping. That just started for the end of the third quarter. And you're asking me to predict for the fourth quarter?

Well I'm just saying how much would you say if you were looking for it to hit in the second half will more of it hit in (multiple speakers) Q4?

There should be a little more in the fourth quarter then there was in the third quarter if that's the question.

Yes, that's correct. Okay.

(multiple speakers) apologize for hearing. It's a little shaky here so we may ask you to repeat the question. Go ahead.

Sure, not a problem. And then another question. When you look at the restructuring charge that you -- the restructuring cost that you had in the quarter related to the facility moves; obviously that number is up sequentially. It's yet up year-over-year.

How should we be looking at costs hitting next quarter and the future quarters? Is this the bulk of it? Will it be a number on this level for the next couple of quarters or should we see it start to wind down?

Tony, the amount that we are expecting for the full transition cost will be between -- for Puerto Rico and for Long Island City is $9 million and that amount, while I don't have it handy, to spread per quarter the majority if not all of it will hit by the end of '09. So we will be seeing more of it -- the bulk of it should probably be over with by the first half of '08 and record if I said '09 I'm sorry. We're going to record that amount that will be in the balance of '07 and the balance of '08 where you will see the charges. And again that number we're talking about is $9 million.

Okay, that's fine. And then when you look then at the temperature control business, I know it's been tough and I know you talked about pricing not being as favorable as you would like it. Are you expecting to see this continued downward pressure on pricing? And is it as much of a headwind when the environment is good maybe say business picked up this part than versus the last quarter when the environment certainly was soft in the middle of the summer?

Again you have two variables -- you have the pricing and the weather. Yes, we will expect -- we're still finalizing next year's prices so I can't really say what they are. But I would estimate that there will be some further price reductions in temp into '09 below where we are this year.

However, we're hoping to at least get back most of it through lower costs both as we move more compressors to Mexico and some reductions in SG&A. But yes, that's the business that it's in. It's a rough one right now and we do anticipate some further reductions in '08.

Okay, and I guess is there any update with respect to the move in Long Island where that stands and any thoughts on what you're expecting to do with the facility there?

You're talking about the building?

Yes.

Well, we are evaluating all of our alternatives and we're talking to various people and if we have -- as soon as we something to announce, we will announce.

Bill Dezellem, Tieton Capital.

Thank you. We have a couple of questions. First of all relative to the temperature control business, we believe that we heard you say in your opening remarks that sales picked up late in the quarter. Is that an indication from your perspective that inventories have basically hit rock bottom otherwise the buyers would not have been purchasing late in the quarter?

That's not a bad assumption. We would not normally expect sales in September because even if our customers made the sale you wonder why they want to replenish it and fill back on their shelves when they're heading into winter. So I would think it's not a bad assumption. We happen to be speaking to you from Las Vegas now where we are meeting with a lot of our customers and I get the sense that peoples' inventories are in decent shape.

That's helpful. And two additional questions please. First of all how much of the $9 million of cost savings that you referenced that you expect ultimately by 2009 do you expect to flow through to shareholders versus going to be required to maintain business from a price reduction standpoint? And then secondarily, the pipeline of OES business. How would you size it relative to the $35 million that you have already won?

Two very different questions and I'll try to remember them both. The $9 million savings in engine -- that should primarily flow into profit, okay? It's the savings in temp as we move compressors that some of that is going to have to be given back. So that's our forecast anyway; it's two years hence.

How big is the OES market? (multiple speakers) we feel it should be -- this is what we're telling people all the time -- typically, it should be 20% of sales. With us, right now it's about 6% of sales, six to seven. We ought to be able to triple the business and I think you can do the arithmetic to see how big that potential is.

Specifically where we were trying to go with that question is to get an idea your current pipeline of business how large is it -- pipeline of perspective business -- how large is it relative to the $35 million that you have already won?

That's something I don't feel comfortable disclosing. But just to know that the potential is in that area. We think it's not an unreasonable potential and not hoping overnight but not unreasonable potential.

(OPERATOR INSTRUCTIONS) Alan Weber, Robotti & Co.

Just a few quick questions. One is when you talked about the Long Island City and Puerto Rico moves I think you said, Jim that inventory was higher as kind of to bridge that gap. How much of a reduction over time will inventory be then or how much higher is it now?

Right now our bridge inventories are built up in the range of 12 to $15 million. And we feel that once the transition is completed in '08 we will be able to bleed that inventory back out. Again that's based on demand for our customers. It won't come all out in a single quarter, in a single half. But we expect that we should be able to be taking out inventories in excess of $15 million.

The only item I'll explain on that is total inventories will also be dependent upon any new OES awards that we achieve so that we would size inventories appropriately for any new business. But that's status quo once the transitioning is complete we would be expecting to take out at least $15 million.

Okay and then the issue with asbestos. That $2.8 million, did that go into your SG&A in the quarter?

No, that's broken out down at the bottom of the P&L in the discontinued operation net of tax. So in that line item is a combination of the increase of $2.8 million tax effected and then legal expenses tax effected for the quarter. So the amount was a net of $2.1 million charge for the quarter.

Okay so then why was SG&A up for the quarter year-over-year so much?

Looking at our SG&A expenses we provided for an allowance on our bad debts. We've had good experience in this area but we're looking strictly at the aging of our receivables. And the amount in the quarter was a provision for roughly a little over $1.3 million for the quarter and year-to-date the difference was about $1.1 million.

Okay.

So right now that's a non-cash provision that we have set up looking at the composition of our receivables.

Okay and then my final question was you mentioned about the repurchase of stock. Did you complete a program? I kind of missed the numbers you said.

Yes we did. We had a very small balance, a very small program that we had outstanding for a number of years and that amount was roughly $1.7 million. And then we had disclosed at the end of the second quarter that we had a new share program approved by our Board for $3.3 million. So the combination of it was almost 542,000 shares at roughly a cost of $5 million.

And so is there currently a program or are you down?

We're done. We've completed the authorized programs that we have.

We appear to have no further questions at this time, sir.

I want to thank all of our investors for joining in and we complete this conference call. Thank you.

This concludes today's teleconference. Thank you for your participation and you may disconnect at anytime.