Standard Motor Products Inc (SMP) 2007 Q4 法說會逐字稿

Welcome to Standard Motor Products fourth 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 -- 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 Larry will follow with a summary.

Our results for the fourth quarter 2007 were disappointing. The shortfall for the quarter was primarily in engine management, which experienced heavy sales deductions, primarily customer returns, which may be a function of the weakening economy. Larry will review this in more detail shortly.

But we also had other one-time-type events that we isolated in our GAAP and non-GAAP measures. As seen in the release, isolating restructuring expenses in both years, the loss on divestiture of the Europe temp business in '06 and also the gain from the sale of our Fort Worth facility in '07, our normalized results from continuing ops reflected $0.61 versus $0.76 last year. However, the fourth quarter shortfall was more dramatic at a $0.19 loss in '07 verse $0.14 earnings in '06. The vast percentage of the $0.33 shortfall was from engine management returns. We will review the results by segment.

Looking at engine management first. I've isolated sales deductions from net sales for the purpose of this quarter, so that you understand the gross sales out the door for the quarter were actually up $4.6 million. Sales deductions in the quarter were unfavorable 10.2 yielding a net sales variance in the quarter of $5.6 million. For the full year, engine management sales, gross sales out the door, were flat with the prior year. Sales deductions were unfavorable 16 million, leading to net sales being unfavorable 16 million.

The negative impact of customer returns obviously skewed our gross margins and operating profit also. Gross margin for engine management was 21.7% for the quarter, down 4.1 points, and for the full year 25.6%, favorable one full point. The shortfall was totally a function of sales deductions. Isolating sales deductions, engine management was able to reduce cost of sales 1.1 points in the quarter and on a full year basis, including the sales deductions, improved gross margin one point to 25.6%. Our target is 27 to 28%, though we are confident we can achieve these levels when our plant moves are completed.

Operating profit within engine management segment, excluding restructuring expenses for the quarter was $2.1 million, unfavorable $9.1 million. And for the full year, operating profit was $37.5 million, down $4.2 million.

Now looking at temperature control, our net sales in the quarter were $33.3 million. That was up $3.5 million, with the fourth quarter sales reflecting nice momentum from the late summer season. For the full year, net sales were $207.6 million, unfavorable $3.5 million. On a year-to-date basis, as we previously disclosed, we reduced temp pricing by approximately $6 million in 2007. However, offsetting lower pricing were reduced warranty costs and incremental OES business. Gross margin in temp business was 25.3% for the quarter, down 3.6 points, and on a full year basis, 21.8%, down two points.

Offsetting some of the price reduction were savings from our Mexican Compressor Manufacturing. Operating profit, excluding restructuring expenses in the quarter, was $1.9 million, and that was favorable $1.4 million for the quarter. On a year-to-date basis, operating profit was $11.3 million, and off $1 million. Despite the $6 million price reduction for the year, the temp group was able to reduce warranty costs, manufacturing costs, and SG&A costs resulting in only a $1 million operating profit shortfall.

Looking forward, further price reductions of approximately $7 million in 2008, to match Chinese imports, will be balanced by additional cost reductions and shifting compressor production to Mexico.

Our European segment, net sales in the quarter were $9.4 million. That was down $1.5 million. However, we need to isolate the divestiture of the temp sales at the end of '06, and in the fourth quarter '06, it was $2 million. Adding that back, our net sales in Europe were actually up $500,000 for the quarter. For the full year, net sales in Europe were $42.2 million, down $4.8 million. Add back the temp sales from '06 of $13.4 million, we actually raised sales $8.6 million in Europe for the full year.

Gross margin in Europe was 16.5% for the quarter, down 7.5 points. However, for the full year, it was 23.8%, favorable 0.5 point. The fourth quarter margin was primarily impacted by inventory obsolescence and discontinued products. The year-to-date results maintained 0.5 point improvement. Operating profit without restructuring in the fourth quarter was actually a loss of $800,000, and unfavorable $900,000 in the quarter. But for the full year, earnings were $1.4 million and favorable $400,000 over the prior year.

Our restructuring expenses in the quarter were $7.1 million, full year $10.9 million. The restructuring expenses are primarily in our engine management segment related to the closure of Puerto Rico and Long Island City Manufacturing, which are both being relocated to Reynosa, Mexico and Independence, Kansas, or outsourced to low-cost countries.

In engine management, our original estimates were for $9 million in shutdown costs and $9 million annualized savings. Two new costs have been identified for these closure or exit activities. A $3.3 million withdrawal liability was recorded for the present-value impact from a UAW multi-employer pension plan. The total cost of $5.6 million will be paid evenly on a quarterly basis over the next 20 years. This equates to less than $70,000 per quarter over the next 20 years.

Additionally, a $1.8 million incremental environmental remediation provision was provided as we exit the manufacturing in Long Island City. The two combined were $5.1 million incremental charges, again recorded in the fourth quarter '07.

Against our original $9 million one-time costs, we are comfortable with that level. We've incurred through '07, $3 million, roughly, and anticipate another $6 million to be recorded in 2008.

Also in engine management in '07, we also vacated a lease in Mexico, incurring approximately $800,000 charge as we required additional space for the expansion of our wire and cable product line. To a lesser degree, we incurred some expenses within our temperature control group, $1.1 million for the full year, related to vacating our Fort Worth, Texas facility, which we sold for $4.5 million, and recorded a gain of $800,000, and also costs related to the compressor manufacturing move to Mexico. Europe was an amount of $400,000 for the year.

Other income, and as we discussed earlier, in 2006, included a $3.2 million charge related to the divestiture of the majority of our European temp business. In 2007, it included a gain from the sale of the Fort Worth facility. Discontinued ops also experienced a swing from '06 to '07, and it primarily relates to our asbestos reserve adjustment based on a pre-tax favorable adjustment of $3.2 million in '06, offset by a pre-tax unfavorable adjustment of $2.8 million in '07. In reality, our experience has been unchanged over the past two years with incoming cases continuing to decline.

Looking at our balance sheet, accounts receivable increased $20.8 million, as a result of industry trends for longer terms. Inventory increased $18.3 million to cover plant moves, and we expect to reduce the bulk of this increase by the end of the quarter. However, inventory will increase for any new incremental OES volume awarded, such as Continental.

Total debt at December '07, was $255.3 million, an increase of $17 million. Inclusive in our total debt, our North American revolver had borrowings at December 30th of $150 million, with excess availability of approximately $80 million.

Lastly, from our cash flow statement, our CapEx spending in the quarter was $4.4 million, or $14 million for the full year, and our depreciation and amortization was $3.9 million in the quarter and $15.2 million for the full year. At this point, I'll turn it over to Larry Sills.

Good morning. Good morning. We're obviously disappointed in the fourth quarter results, but we're not at all disappointed with the overall trends that we see for the company.

As Jim said, the biggest single negative was engine management returns in the fourth quarter. It came in at the very end of the year. There were two main components to this. First was the returns and costs related to re-branding two of our major accounts. It's essentially a one-time event. Roughly half of it would hit in the fourth quarter of '07, and the balance should be in the first quarter of '08.

But the main one was just returns which came in at the very end of the year. We can only speculate that our distributors at all levels were reducing their stock levels in anticipation of deep -- of difficult economic conditions in 2008. It all came in right at the very, very end of the year. That was a bad number. It was a big, bad number. That was the bad number.

All of our other metrics are on or ahead of target. I'll give you a few of them. As Jim says, our gross sales, excluding the sale of Four Seasons in Europe, was slightly ahead of 2006. Our cost saving initiatives in global purchasing and new manufacturing and overhead reductions are all on target. The moves to Mexico from Puerto Rico, from Long Island City, and from Grapevine are all on or ahead of schedule. And we're growing OES business. So everything else we look at is doing fine.

Looking to 2008, it's very early, obviously. But sales for the first two months are holding up satisfactorily. We will begin to see savings from the move to Mexico towards the end of the year. We'll see the full benefit in 2009, which, as Jim said, we continue to estimate at $9 million a year for engine management only.

And now I'd like to talk about this new thing which we saw in the release. We have now finalized our deal with Continental. And this is a new venture for us, so I thought I'd talk about it for a second. The product is called Pressure Sensors, which is a product line we currently sell in the aftermarket. Continental, in their factory in Buffalo, New York, was producing it for the OE production, but it is no longer on OE production and now it's in the service end of the business. And they were happy to let us take that over and we were happy to take it over. This way they can concentrate on new OE production.

We estimate the volume at $10 to $15 million per year. We are going to begin shipping in the second half of the year and we are just beginning now moving this product line from Buffalo to our factory in Independence, Kansas. There are many benefits. It's profitable in its own right. We already sell this product in the aftermarket, and that's -- this will reduce our cost for that product. But the biggest benefit I believe this -- this is a good model for the future. We talked about our desire to grow OES business. And we see a good niche whereby we take over the equipment and manufacturing of a product line once it leaves new car production and goes into service. This is a -- this is an area that we're good at and we like and this is an area that the big OE houses would prefer to be done with so that they can concentrate on new car production. We see a good fit here and we see a good model for the future. And Continental, this piece of Continental is the first area of that.

Okay. With that, that's our summary. Let us now open it for questions.

(OPERATOR INSTRUCTIONS) And our first question comes from Tony Cristello with BB&T Capital Markets. Your line is open.

Thank you. Good morning, gentlemen.

Good morning.

Good morning, Tony.

I guess the first question, can you maybe clarify, when you talked about the engine management side, exactly how much then impact was there from these returns?

Well, what we identified in there, Tony, was the -- in the returns, we said the sales deductions were $10.2 million within the quarter over the prior year.

Okay.

It's $16 million on a year-to-date basis. The returns and the costs of the re-branding in there are, by far, the majority of that number.

Okay. And -- okay. So is it split evenly between the two?

No.

No.

The bulk of it -- the bulk of it is all -- is all returns --

Okay.

-- that we have in there. 80% or better in there for returns.

Okay. And then so maybe a couple million then will flow into this next quarter as part of this re-branding?

Yes.

Okay. And then can I ask you, you talked about sales sort of being satisfactory so far this quarter. Where are we on -- then on the gross margin? Are we still at these more depressed levels or have we seen gross margin come back up to a more normalized level as well?

Again, we're, as just finishing February and pulling our results together, we think that, twofold, we -- obviously this impact of sales deductions, which is returns, impacted the margins. And as I had said, the -- if you even look at the fourth quarter cost of sales, we gained one point, 1.1 points actually, in cost of sales. I don't believe that the margins are going to be impacted as we look in the first quarter. What the tendency has been in the industry is more towards the latter part of the year. And what we plan to do is to adequately accrue for returns at this level that we've seen. We're not going to anticipate any significant savings will accrue at this level for returns. But we think that -- excluding the one-time items related to re-branding. And we're going to see some of that in the first quarter. But after that, we think the normal margins should be tracking to what we were achieving the prior year and then, on top of that, we have cost reductions and price increases going through.

Okay. So not -- so outside of whatever incremental $2 million or more on the re-branding side, we should think of as a baseline gross margin of around the 26.3, which is where you were last year. Is that fair?

Well, again, we don't put out specific guidance. But we finished at 25.6 with that noise level that was in there. And we were at the -- above the 26. So we're in that range.

Okay. That's fine. Okay.

Okay.

Then the second question is with respect to the re-branding, is this common, one, and then, two, you know, how come it seems like you had to eat so much of the cost here?

Is it common, meaning, are we going to do a lot more of this? I don't anticipate it, if that's the first question.

Okay.

If you think in terms of the -- of the size of the accounts, and there were two very sizable accounts, it really wasn't that costly. It's re-boxing it and dealing with returns that come in.

Okay. Was this a major product line that all of a sudden you shifted and went away --

Yes. Yes, it was the whole engine management line.

Okay. Okay. Okay. All right. That's fine. And then one other question, I'll let someone else ask. Larry, can you just -- would you say that everything else, then, you talked about the move to Mexico, you talked about the temperature control, all other areas of your business outside of this seem to be at least on your path or trajectory that you've sort of outlined. Do you -- is that reflective of where we were in the environment in December? Are you expecting the environment to be any better than that in those assumptions or would that deter or change your sort of path as far as completion and then cost savings into '09.

Well, if I think I understand your question, what we have said -- what I said was, the returns was way beyond expectation. Everything else was as we forecast. Again, looking forward, everything else remains on forecast. We don't see a change and we are conservatively planning on not a major reduction in returns in '08. Again, a function of difficult economic conditions in the country. People are nervous and they're trying to return what they can, so --

So your accrual level then is now going to be based on where it was this year, so it's a pretty, pretty, I guess -- I don't know. If for some reason it's not, again, you could face a reversal of an accrual, right, at the end of the year, unlike you got hit this year? Is that --

Yes, that's fair enough. And we'll monitor it as we proceed. And as we did in '06 -- '07, I mean, we watch and we look at each quarter and we look at the historical that was in there, and we have a -- we have a plan. We put a specific plan by customer even there and we look at it, and, unfortunately, it all came in in the fourth quarter; and why, we have no answer on that. We look at the economic conditions. But we will accrue, looking at these levels, less the one-time items that we saw for re-branding, and at the end of the third quarter, with communications with our customers, trying to get as best information as we can, we may have -- we may adjust it. We don't want big surprises one way or the other. But there is the possibility of having favorable swing in the fourth quarter, hoping that it reverses itself.

We can't count on that. And essentially that we've done in Four Seasons and we've done it quite well. And we often wind up with a pickup in the fourth quarter in Four Seasons.

Okay. All right. And then I guess you would categorize the inventories with your customers as very lien right now. And if there were any type of acceleration and trend, that, you know, you've got more upside opportunity, I would expect at this point?

I'd really rather not make that forecast.

Okay.

Again, we are -- we're forecasting conservatively last year's level less the one time.

Okay. Perfect. Thank you, guys.

Okay.

Our next question comes from Joni Jensen with McMahan Securities. Your line is open.

Hi. Just a couple of questions. With respect to your upcoming convert maturity in 7 of '09, what are your thoughts on how you'll be able to redeem that?

Okay. Right now we're investigating all of our opportunities and options available to us. We're working with our bankers, who we have an excellent relationship with, and with investment bankers. We're considering that over the balance of '08 and into '09, and even have a feature within our revolver to be able to handle it. Our excess availability was $80 million at the end of December '07, and we will be considering what our alternatives are.

Now --

But we -- it's on our -- it's on our front burner to be able to address in '08.

Now, on your revolver, do you have sufficient borrowing base to be able to do the expansion of the additional $50 million accordion feature?

Well, right now, it's -- if we picked up, again, we would pick up additional assets. If we had to pick up additional assets, we could utilize, if needed, the accordion feature that's in there. But the underlying assets that we have today allow for excess availability of $80 million.

Okay.

Okay.

And as far as your projected cash flow for this coming year, do you expect to be operating cash flow positive in '08?

Again, we -- yes, we expect to be positive. We don't put out guidance. The key -- the key number that we're addressing this year, we really built it up at the end of '06 and '07, were those inventory levels, and we expect that to be a significant positive adjustment for us from working capital improvement in '08.

Okay. Do you have any magnitude as to how much improvement there may be from that?

Again, we don't put out specific numbers. But we're looking for the majority of what we've built up. And we've said that there's $18 million in there, that that should be able to bring -- come down. Now, we're -- the moves will be complete virtually by the end of the second quarter '08, and then we'll bleed that inventory out. We will have an increase for inventories on new incremental OES business. So we're looking for a, hopefully, a sizeable benefit from working capital improvement from inventory.

Okay. Thank you very much.

You're welcome.

Our next question comes from private investor, [Michael Willins]. Your line is open.

Thank you. Could you discuss the margins on the OES with Continental, please?

I don't have that in front of me.

Well, we don't go through the specific on individual customers. On our -- on our target, we're saying this is significant within our business to expand the OES end of our business. And you can look for margins to be in the 15 to 20% range. Now, the reason for the lower margin that I'm hitting on the floor there at 15% is because they virtually come with very little, if any, SG&A expenses.

Okay. Thank you.

You're welcome.

Our next question comes from Walter Schenker with Titan Capital. Your line is open.

Good morning.

Morning, Walter.

Congratulations, Larry, you've hit a new 15-year low on the stock.

Thank you. (laughs)

I had to go back and look, but by a few cents you broke the old 15-year low. You mentioned price increases this year. Could you -- obviously it's not in the temp control. Can you give us some idea of what the current magnitude is?

Yes. As I say, temp is in place for the year. That's it for the year. In the engine management, we are forecasting two to three, as we have done in the past, and we had a -- an increase for -- that is just kicking in today, I think. So it won't have much effect on the first quarter. But we'll start to see a -- we anticipate, you know, that number through the year. Okay?

Okay. Next question, the Continental deal is a specific OES contract, therefore, they were branding into one of the auto dealer networks or multiple --

They --

-- auto dealer networks?

No. They sold a wide variety of customers --

Okay.

-- of both U.S. and import. And this product, it's a range of products, and some they sold to one and some they sold to another. So it's a wide range of products and a wide range of customers.

But it was not going to NAPA, as an example --

No, no, no --

-- it was going to a dealer network?

-- no. They only sold -- no, this was not in the aftermarket, not directly. So this went to car manufacturers who sold it essentially through their dealerships.

Okay. So if I went out and bought it, I would be buying it at my GM dealer or my --

Correct. Correct.

-- Toyota dealer, whoever, but my dealer.

That's correct.

So it is an OES business.

Exactly.

You've talked about other OES business in the past. There are other OES business you already have beyond this, correct?

Correct. But -- and those -- this is a -- this is sort of a new development. The others were, we made the product and we sold it to GM or Ford or Chrysler for their service. Okay?

Certainly.

Here we're actually -- we went out and made the customer sale. Here we're taking over someone else's business in that area.

Right.

Okay. But it's the same idea.

And you had to pay them to take this on or they gave it to you?

We bought the equipment and we bought the inventory.

Okay. So it was you bought assets? It was just --

We bought the assets, correct.

-- an asset purchase?

Correct.

Okay. And these are products you already make?

I think most of them we actually purchased.

Okay.

That's why I say this will be a -- this will be a benefit to the standard side as well because stuff we were buying we will now be making. So it's a --

Okay.

It's a cost benefit on the traditional side as well --

Okay.

-- which we didn't put into our numbers. But it's a -- there's a benefit there.

Okay. And if we look at, in the past when you've had variations on fourth quarter returns, and I may be confusing things, I thought you did an averaging on that, you just didn't work off the prior year.

Yeah, for our -- for our balance and looking at our reserves at year end, we look at the -- we look at a two-year average when we identify what we think is returns outstanding within the field, we've reviewed, and that's a two-year average. But, obviously, whatever comes in, we expense as incurred.

No, I understand. But for --

Okay.

-- '08, it is the average of '06 and '07, you're using? Or you've decided to override that and --

Well, '07 ending --

-- just make it equal to '07?

-- would be the average of '06 and '07. For '08, as we go into it --

Right.

-- we will expense what's in -- what's received and incurred, and at the end of '08, we'll look to what the average is for '07 and '08.

Okay. I'm -- I don't want to kill a lot of time. But the accrual during the year is the average of the last two years?

No, the accrual of what we look at will be our best information, which we get information from the customers, our field sales people, of what we think individual customers are. We're going to be basing it on '07 results. We will not be looking to average it down to '06 results in there, 'cause we do not want to incur a surprise again in the fourth quarter. So we're assuming '07 results less anything that we identify as one time, and then we will incorporate any additional information that we learn during the year.

Okay. And just summing up, two last questions. '08, therefore -- this is to Larry. Your expectations for '08 are fundamentally the same as they were, with the exception you are now anticipating, don't know what will happen, somewhat higher returns?

That's a fair statement.

Okay. And you had expected, in your other discussions, that '08 would be better than '07?

That's also correct.

And lastly, in an effort to embarrass you, but to make my case, the company in the last quarter put in place a management incentive stock-related plan. I believe it would be helpful to all of us to understand the parameters and dynamics of that multi-year plan to give us some sense as to how you will be compensated based on achieving what levels?

Well, okay. It's a multi-year plan and it's based on 2010 results.

Right. Yes, I understand that.

And it's past sale based on 2010. It anticipates a healthy increase in sales, a healthy increase in profits, a healthy increase in OES business. Beyond that, we really don't want to disclose the actual numbers. But that is -- that plan is in place for the top executives and based on 2010 results.

Okay. And we're not disclosing it because we don't want to or is there some legal reason?

Well, because we normally don't give that kind of guidance. But just --

It's not guidance. It's not guidance.

The numbers are aggressive. I'll --

It's intended --

-- put it that way, Walter. The numbers are aggressive.

Okay. Thank you, Larry.

Okay.

Our next question comes from [Doug Workman] with Argent Financial. Your line is open.

Hi. Good morning. Most of my questions have been answered. Just wondering, do you have the level of where you are under the fixed-charge covenant for the quarter?

Our fixed-charge covenant is triggered based on our level of excess availability. So we're not governed by that unless our excess availability drops below $30 million. So -- and we were at $80 million.

So you don't have where you actually were, though, in the fourth quarter?

No, because there were significant one-time expenses that were in there. So, again, it was -- it was not significant or identified.

Okay. Thank you.

You're welcome.

Our next question is from Alan Weber with Robotti and Company. Your line is open.

Good morning.

Morning, Alan.

Just a quick question or two. When you talked about the customer returns, was that kind of -- were there any specific products or areas that it really hit you the most or was it kind of just across the board?

It was across the board, Alan.

And --

Just general returns.

Just general returns. And just curious, what is the age of those products?

I can't give you one flat answer. It covers a wide variety. It was mostly people just reducing inventory.

But are they products that they bought from you during '08, during '07 -- I mean -- I'm sorry -- during '07 or during '06?

Again, I don't know the answer to that. It's -- we don't keep track of it that way, because they buy the same products from us in '06 and '07 and '08, and then they send some of it back.

Okay. And then my --

It's not a concentrated thing. It was just an across-the-board event.

Okay. And then unrelated, the sale of -- your sale leaseback of the corporate -- of the corporate office there, when is that supposed to take place or close?

Our plan is to have that within the first quarter.

In the first quarter.

By the end of March.

Okay. And can you just kind of go through again how much cash do you expect to get and how that's going to work for the company?

Okay. The very high level, rough numbers that we have in there that we said the sale price is roughly $40 million. We'd record from the P&L side on there a gain of 20. Roughly $10 million would be deferred over the initial term of the lease. So that's over 10 years. We have a mortgage that we would defease, so we would have -- and that's approximately $7 million that's in there. And then we have other costs that are in there. So a little less than -- a little less than $30 million initially would be -- would materialize for cash.

And then you're going to rent back part of the building; is that correct?

Yes. And then we would lease back. And I think the rough numbers in there initially, as we're still in here winding down, the manufacturing number was approximately $2.6 million, I think, of lease expense. And then we would turn back parts of the building there and eventually get down to, I think it's approximately $1.6 million there.

Okay. Okay. My last question on the OES business. Any other developments in addition to the Continental that you talked about?

Well, again, we're talking lots of people. We're looking at lots of things, but we're not going to make a bad deal. And as things progress, we will inform you. But we're looking at lots of things right now.

Okay. Great. Thank you.

You're welcome.

Our next question comes from [Bob Sales] of LMK Capital. Your line is open.

My question's been answered. Thank you.

Thank you.

Our next question is with Robert Smith. Your line is open.

Morning.

Morning, Bob.

Tough business. So looking forward in '09, the savings coming from the shift to Mexico, is this going to be chipped away be, would you say trends, I mean further cost pressure from China? I mean, are we just buying time or -- I assume that the Mexican facility will be kind of pristine as far as taking costs -- costs out.

Well, the $9 million we're referring to, that's engine management. And I would, you know, it's hard to predict two years from now or a year and a half from now. But the pressure of product from China is more prevalent in --

In temp.

-- temperature control, than it is --

Yeah.

-- is engine. So again, our hope and anticipation is that most of that $9 million saving we'll be able to keep.

Yes, I'm understanding that. But I'm just trying to get an overview of the entire business structure, I mean. So in essence, it's --

Well, Bob, we've been able to get on the engine side as opposed to the temp side, price increases every year, not huge ones, but in the area of 2 to 3%. And we --

But that's going to be ameliorated to some degree by what's happening away from you with Mexico, I mean --

Well, that's (inaudible) --

-- the other side of the coin, so-to-speak.

Well, our forecast has been, and we see no reason to change it at this point, on the -- I'm talking engine now.

Yes.

On the --

No, I understand that, Larry.

-- engine management -- on the engine management side, we are forecasting flat dollar sales, which is actually what we got, gross sales in '07, and the flat dollars means a slight decline in units and a 2 to 3% increase in price, and that's our forecast going forward. We have no reason to change that at this point.

Yes. I was just trying to get an overview of the entire business structure, I mean, the pluses and minuses adding up to something, so-to-speak. All right. So we'll leave that. Would you say it's a fair statement that the future of the business may be in OES?

No. I think the future of the business will be a mixture. And, again, we've set ourselves a target of about 20% OES business, and we're about half of that right now. It'll be a little more than half when this Continental -- little more than half of the way to 20 when the Continental kicks in. And that just seems to me a good mix, 80/20.

But in order to grow the business, I mean where are you going to be looking?

Are you talking about the OES piece?

The entire company.

Well, again, our growth will be OES business which --

Yes. Well, that --

-- if we get --

Yes, that's what I kind of intimated at.

Right. And if we get that, then that'll be another $80, $90 million in volume, if we achieve 20%.

How important to you is what's going on with Delphi?

Well, again, we have gained some business as Delphi has exited some businesses. And we will continue to watch that.

The line in the balance sheets for accounts receivable is -- are you reserved sufficiently against it, because I noticed the reserves went down while the receivables came up somewhat.

Yes, we've -- we analyze the customers individually and we identify them and we're comfortable with the allowances that we have against our current receivables.

Okay. Thank you very much.

You're welcome.

Our next question comes from private investor, Michael Willins. Your line is open.

Thank you. I would like to know if the stock repurchase from '07, has that all been completed?

Yes, it has. We had repurchased 5 million in 2007, from the repurchase.

Is that something you plan on doing for '08?

And it's been all completed. No, in '08, our concentration will be addressing the refinancing of our converts. So I do not anticipate a new program from stock repurchase in '08 into '09.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from Efraim Levy with Standard and Poor's. Your line is open.

Hi. Thank you. You addressed a number of issues in the balance sheet. Could you address the, it looks like a 20% increase in accounts payable for trade?

Again, our accounts payable's a function in there of -- twofold, one our production levels and the buildup of inventory that we have for bridge inventories, and at the same time we're attempting to work with our vendors to try and match the -- what the industry trends that we're seeing in accounts receivable also.

Okay. And as far as Continental, is that something that -- like a normal contract for a product that would eventually run out and you have to get it replenished or is that something that'll just stay for a while because it's moving --

Yes, that's one of the benefits of service rather than OE, because it's a relatively steady business. So I think we'll see, and it's in our forecast, a slight decline here over the years, as all products tend to have a life. But it'll be a gradual reduction.

Okay. Thank you.

And in fact -- yeah.

Our next question comes from Robert Smith. Your line is open.

My question's been answered.

Okay. Thank you.

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

Okay. With that, I want to thank everyone for joining our conference call today. Good-bye.