Standard Motor Products Inc (SMP) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to the Standard Motor Products fourth-quarter earnings call.

At this time all participants are in listen-only mode.

Later you will have the opportunity to ask questions during today's question-and-answer session.

(OPERATOR INSTRUCTIONS).

Please note that this call may be recorded and I will be standing by if you should need any further assistance.

It is my pleasure now to turn the call over to Mr.

Jim Burke.

Good morning and welcome to Standard Motor Products fourth-quarter 2008 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 actual results to differ from our forward-looking statements.

I will begin with a review of the financial highlights and then turn it over to Larry, followed by a Q&A period.

Our results for the fourth quarter and full year included a number of nonoperational items that we have isolated in our GAAP to non-GAAP disclosure.

I plan to address our operational segment performance first and then review the nonoperational items afterwards.

At a very high level, overall SMP operating performance was affected primarily by two key drivers -- top-line sales and gross margin percentages.

First, net sales, as you may recall, were slightly positive through the first nine months of 2008.

However, fourth-quarter sales were down $18.4 million or 11%.

Larry will review the sales picture in more detail shortly.

Secondly, gross margins were impacted by our restructuring efforts, and I will discuss individually by segment.

Beginning with Engine Management, net sales were down in the quarter $10.4 million or 8.6%.

However, they finished up for the full year at 0.2%.

The gross margins for the year, as we previously discussed, were negatively impacted by our transition moves out of Puerto Rico and Long Island City manufacturing into Reynosa, Mexico.

The 2008 full-year figure margin was 23.3%, down 2.3 points.

Engine Management's fourth-quarter margin at 21.8% was impacted by the reduction in sales in the quarter and by efforts to reduce inventory, including shuttering production facilities for days during the quarter, which led to unabsorbed overhead.

Our outlook for 2009 and beyond are that Engine Management gross margins return to the mid-20s.

Temperature Control net sales were off $3.9 million for the quarter and $13.4 million for the full year.

Our Temp sales decreased for the year due to approximately $7 million of price reductions introduced in 2008, a weak summer season and deferred maintenance by consumers for discretionary repairs during a weak economy.

A slight benefit to sales in 2009 and, more importantly, to gross margins, will be the modest price increase introduced in 2009 after three years of reductions to complete against low-cost imports.

Gross margins in Temp finished at 19.3%, down 2.5 points for the year.

Our key strategy for margin improvement is to transition remanufactured compressors to Mexico.

In 2009 will have 70% production in Mexico and expect 90% by 2010.

Europe -- net sales were off slightly in the quarter, down 5.3% but up 4.7% for the year.

Impacting Europe's sales in the latter part of 2008 and into 2009 has been the weakening of the British pound against the dollar.

The average exchange rate in 2008 was $1.87 as opposed to the current rate, around $1.50 or lower.

This exchange rate is expected to negatively impact 2009 comparisons along with reduced OE/OES sales volumes from Poland.

Gross margins in 2008 were 24.4%, up [6] points.

However -- 0.6 points.

However, in 2009 we reduced -- reduced OE production orders will impact margins, and that will be slightly offset by a weakened Polish currency.

Consolidated SG&A expenses were reduced $1.1 million in the quarter and again favorable $1.7 million for the year.

Inclusive in the SG&A expenses in 2008 are accounts receivable draft fees totaling $600,000 for the quarter and $1.2 million for the year.

This program has allowed us to reduce our accounts receivable and interest expenses since the fees are classified in SG&A.

Overall, our after-tax results excluding nonoperational items was a loss of $2 million for 2008.

We have positioned the business for a significant recovery in 2009.

Consolidated restructuring and integration expenses were inclusive of Long Island City and Puerto Rico transition moves, our Reno distribution closure and Kansas wire manufacturing to Mexico, all in the Engine Management group.

In addition, we have costs for compressor moves to Mexico in Temperature Control and a voluntary headcount reduction across our Company in December of '08, reducing in excess of 70-plus salaried positions.

Again, Larry will go into more detail about our cost reduction initiatives and improvements for cash flow.

We also recorded a non-cash impairment charge for goodwill and intangibles of $39.4 million in the quarter related to our carrying cost of the business compared to our equity valuation in the current economic environment.

The nonoperational items we isolated in our GAAP to non-GAAP measures included the restructuring integration expenses and goodwill and impairment charge we just discussed.

But we also isolated a loss on the early extinguishment of a mortgage and gains from the sale of our Long Island City headquarters of $21.8 million pre-tax and $13.3 million after-tax, and also a gain from the repurchase of our convertible debentures of $3.8 million pre-tax and $2.3 million net after-tax.

Looking at the balance sheet, our primary focus in 2008 was to address our $90 million convertible debenture maturing in July 2009.

Our goal was to reduce our debt leverage and increase our excess availability under our revolver.

At December '07, total debt was $255 million.

At December '08, total debt was $194 million, for a total reduction during the year of $61 million, or almost 25%.

This is a result of selling our LIC headquarters, $37 million generated, reducing accounts receivable of $30 million and inventory reductions of $20 million.

In 2009 we have initiated additional actions to conserve cash and pay down debt which will generate additional liquidity to pay off the remaining $45 million converts.

Larry will go into more detail on this.

Lastly, from our cash flow statement, CapEx spending in the quarter was $2.5 million, the full year $10.5 million.

Depreciation and amortization for the quarter was $3.8 million and $14.5 million for the full year.

In 2009 we plan to curtail CapEx spending to $6 million net of $2 million allowance from our Long Island City landlord related to leasehold improvements.

With that, I'd like to turn it over to Larry Sills.

Good morning, everybody.

I want to cover three main topics, and then we will open for questions.

The three main topics, I want to cover sales, profit and then, I believe most important, debt reduction and refinancing -- and paying back the convertibles.

First, let me talk about sales.

I think we see that this is a good time to be in the automotive aftermarket.

People are not buying new cars.

They are keeping their old cars longer, and they have to repair them.

Also we see that new car dealerships are closing down; the estimate is 20% over the next few years.

Now, car dealers are to some extent a customer of our industry, but more significantly they are a competitor of our industry both at the repair end and the sale of parts.

So as these diminish, the competitive situation improves for our industry.

Other positive trends -- gas prices are down and miles driven is bouncing back.

As a result, and I think you see this from the public companies that have released their earnings, our industry is doing well and is expected to continue doing well even in these difficult times.

However, our own results in the fourth quarter did not reflect this.

As Jim said, our sales were down 11% for the quarter, which brought us down to minus 2% for the year.

But when we look further, what we saw that our customer sales of our products -- and we get this information -- was up nicely for this entire period.

And what was happening was that they were taking this opportunity to dramatically reduce their inventory.

This continued throughout the fourth quarter, and that is the primary reason that our sales were down in the fourth quarter.

Now, looking ahead, we see that their sales have continued solidly strong of our products during early 2009; and, as a result, we see a nice bounce back in our aftermarket sales early this year as our customers have returned to more normal ordering patterns.

That said, we are budgeting first-quarter sales in '09, while higher than the last quarter of 2008, lower than the comparable quarter in '09, the first quarter of '09, for the following reasons.

First, in Temperature Control, this year, for the first time in many years, we did not offer a preseason dating program, which -- this is part of our strategy to preserve cash.

And as a result, as you would expect, preseason orders are down.

This is not real sales, though.

This is people ordering in advance.

The result of this, we believe, will be to postpone these sales, which would normally occur in the first quarter, into the second and third quarters.

In engine, Engine Management, a variety of reasons.

First, at the end of 2008 we divested our share of a small joint venture called Blue Streak Electronics, which was a Canadian joint venture; and we rebuilt engine computers.

At the end of the year we sold our share to our partner.

Second, as Jim mentioned, the exchange rates -- significant drop in both Canada and the UK compared to the same period last year.

Third, OE sales are down, but these do represent a small part of our business, less than 5%.

But they are down, and that will affect the numbers.

Fourth, at the very end of 2008, we lost a portion of the Carquest business.

However, we're confident that we will be replacing this with additional volume from other sources as the year progresses.

Probably the biggest reason for the change versus '08 was that the first quarter of 2008 was far and away our strongest quarter in Engine Management for the entire year, so the comparisons were difficult.

However, the comparisons will get much more favorable as the year goes on.

The bottom line of all this is that, even when first quarter sales are down compared to the prior year, we do anticipate a solid sales year for 2009.

Okay, that's the sales story.

Profits -- profits were disappointing in '08.

Jim reviewed the numbers.

The drop was essentially the result of two one-time occurrences which are well behind us.

First was the drop in fourth quarter sales, which I mentioned already.

This is truly a one-time event.

The second, the cost involved in the moves from Long Island City and Puerto Rico to Reynosa.

Now, in addition to the physical move costs and the severance, which we account for under restructuring, there are substantial short-term inefficiencies under absorption of overhead, learning curves in the new locations; and last year, in the second and third quarters we were essentially operating inefficiently in three locations.

This is very costly.

Now all this is behind us.

Puerto Rico and Long Island City are fully closed.

Reynosa is up and running and doing well.

So what was a drain in 2008 should be a major contributor to profit in 2009.

My final subject and we will open for questions, is cash generation and the buyback of bonds.

This, for obvious reasons, has been our number one priority.

In 2008, as Jim mentioned, we were very successful; we reduced our debt by $61 million, almost 25%, and we are very proud of that.

We are taking further steps in 2009.

I'll list a few.

We temporarily suspended our dividend.

We have a substantial reduction in headcount.

In January 2009 compared to January 2008, we have 700 less people, which is about an 18% reduction.

This includes over 100 salaried people, many of which were the result of an early retirement program.

Three, we have instituted a salary freeze.

Four, we closed Reno distribution center and folded into Virginia.

And five, we have continued to work hard on reducing inventory, receivables, capital expenditures.

As a result of all these, our debt will continue to come down in 2009; and, as Jim said, we will have the liquidity to retire our bonds through internal resources.

We are very proud of that, and I want to compliment all of our people who have worked extremely hard to accomplish this.

So that's the summary.

I'm sorry for the longer than usual discussion, but we had a lot to cover.

In conclusion, we're quite optimistic about 2009.

The aftermarket is doing well, our customers are doing well, and we are confident of the good sales year.

On the cost end, as a result of all the changes we have made, the headcount reduction, the expense reduction, working capital reduction, moves to Mexico being complete, we're looking forward to a good, profitable year as well, with debt continuing to come down.

With that, we will now open it for questions.

Thank you.

(OPERATOR INSTRUCTIONS).

Walter Schenker, Titan Capital Management.

I thought a cute thing, which others may not have found cute, was this morning when I was listening to Bloomberg Radio, they were commenting that we now have an Obama bear market because since he took office, the market -- the stock market is down 20%.

It seems slightly unfair.

It was said someone lightly because he did inherit his problems.

Obviously, in your case, you didn't inherit them, very.

So I guess this is the Larry Sills 20% of book value bear market.

Now the question.

If you got rid of 700 people, and I realize some are low salary and some are high cost.

But if 100 of them were non-production people, and assume $30,000 a person -- you can give me any number you want -- that's $20 million of savings.

What's the offset?

Well, I'd say a lot of those were involved in the inefficiencies in the moves from Long Island City and Puerto Rico.

And some of the drop is also, as you bring inventory down, you are reducing production and you need less direct labor.

This is great for reducing inventory and saving cash but actually hurts your gross margin in the short time as you have less absorbed overhead.

I prefer to think of the true saving -- well, A, there's the savings of the moves to Mexico, which we have said are behind us; that's a big number.

And the savings in salary people, in my mind, are pure -- that's pure savings to the bottom line; that's overhead.

100 salary people, we'll call them $50,000 all-in each, is $5 million?

That's a reasonable statement.

Reynosa -- the swing year over year, or you can give it to me in a broad way and on an ongoing basis of manufacturing in Reynosa versus Long Island City and Puerto Rico, is $5 million, $10 million?

We have historically said that -- this has been our -- for the last few years that the savings are going to be in the $8 million to $10 million range once it's all complete.

Which we would expect half of, since you are up to 70% this year -- this year, roughly?

You mean '09?

Yes, it's a reasonable statement, maybe a little more.

The question your knew you were going to get -- and what have we done about pricing this year?

Pricing is going to be pretty good this year.

We have just announced our latest range of pricing.

In Temperature -- as Jim mentioned, it's not a big increase but it compares very nicely to the decreases of prior years.

In Engine -- again, it's going to roll out in the next couple of months.

In '08, if you recall, we had two increases in Engine, one in the spring and one in the fall.

This one will be, as a percentage, somewhat higher than either of those two of last year.

And either of those two last year were about 2%?

2% to 3% is probably a fair analysis.

And therefore, this one is less than the total of the other two but greater than either one of them?

That's a reasonable estimate.

And your cost structure from energy, raw materials -- we already have labor down versus that -- is flat?

Down?

Jim?

Well, our cost structure commodity pricing -- and we're talking materials -- that's coming down.

Again, we continue to get deflation from moving a lot of the resale type purchased items overseas that we're able to get there.

And, again, while we're holding salary freezes in 2009, we're expecting efficiencies to pick up and improve dramatically within 2009.

So, if -- my number, not your number -- if we raise prices 3.5%, which I would find disappointing, Larry, on Engine Management, we are talking about $15 million to $20 million, and a couple of million more on Temp Control, cost structure flat to down -- that's another increment this year over last year?

Yes.

Returns in the fourth quarter -- how significant were they to the sales decline?

They weren't that significant.

The sales decline was really people just buying much less, and that's what brought their inventories down.

So obviously, we have returns at the end of the year; we always do.

But it was within our estimate.

And therefore, incrementally, '09 over '08, the reserves used during the course of the year for returns should be roughly comparable as opposed to greater?

The returns reserve, I think, are lower.

Again, we were going against a very heavy fourth quarter last year in '07, so our reserve is lower.

We had accrued a significant amount that came in late in the year.

The actual returns were lower, and our reserve is lower.

And therefore, going forward, there will be a slight positive delta?

Well, I think going forward, more importantly, is probably to reduce sales that happened in the fourth quarter, which should be pruning our customers' inventories.

No, I'm just asking how you're accounting for returns in '09 versus '08.

Well, how we account for '09 -- we look and average it for the year, and then our reserve at the end of the year is an average of a two-year formula that we look at.

Again, we will accrue for returns, trying to match the returns to our sales.

Brian Sponheimer, Gabelli & Company.

Could you go into a little bit more to what is available to you internally to retire that convertible as compared to (inaudible)?

I'm sorry; I didn't hear the question.

Could you repeat it, please?

Sure.

Could you go a little bit more into what's available to you internally to retire the convertible?

Okay.

On -- again, we have an asset-based facility that's in place and we significantly reduced the debt levels during 2008.

At this point, as at the end of the year, prior to the reserve that we had for excess availability, we had an excess availability of about 50, mid 50s range.

And again, we have $45 million outstanding.

As we speak now, our excess availability is approximately $60 million, and we have reserved out of that $25 million, set aside for the convert maturity.

And, again, our reserve increase is $5 million per month for the next four months to achieve the $45 million.

And what's important is the internal steps that we've taken in place, which will continue to drive down the debt in 2009 and improve our availability.

So most -- on I guess, a time line basis, this $5 million a month is going to come out of increased sales and net savings from restructuring, or -- ?

Well, the $5 million is really -- is just setting aside like a sinking fund for the converts.

The real steps are going to be what we're doing in reducing the inventories, reducing accounts receivable, curtailing CapEx spending, the savings that we have from cutting the dividend and the other actions that we have in place.

On the working capital side, how much room do you think you have there to further cut before you start getting into bone?

We have action plans in place to significantly reduced levels of receivables and inventories.

(OPERATOR INSTRUCTIONS) Robert Smith, Center for Performance Investing.

I guess you can look optimistically that we're selling well above the price of Citi here.

We all need a smile.

I might have to make my livelihood by being an artist.

Who knows?

I noticed that the reserve for doubtful accounts was increased, and I'm wondering what is the situation in the industry as far as customers go?

Well, I think, as you look, we have increased that reserve slightly in there.

That was related to a vendor that we had a receivable on.

But our major customers are well capitalized within our business.

So, while we did increase the reserve, many of our customers are very large, well capitalized.

So there's no concern in (inaudible)?

It's minimal from the standpoint of what it would have been the picture 20 years ago with large customers.

Again, there is -- we do sell to OE/OES, and everybody realizes what's happening there.

We don't have the answers for it; but, again, it's not a significant number because our OE volume or OES volume is a small, small portion of our overall sales.

Would you say that the prospects for gaining any additional business is pretty much moot at this point?

It's not -- while we talked of growth in OE/OES, I think the past two years, it's not as high a focus for us because of the uncertainty in that market at the moment.

Can you tell me something about the remaining converts?

Where are they held?

Well, they are held in both institutional and retail hands.

We've bought back half of them, and the remaining holders are -- there's not much activity on them, and I expect the remaining holders are holding them until maturity.

I guess that answers my questions.

Thanks so much, and good luck.

It appears that we have no further questions at this time.

I will now turn the program back over to Jim Burke.

I want to thank everybody for joining our conference call today.

Goodbye.

This concludes our conference call today.

Thank you for your participation.

You may now disconnect.