Standard Motor Products Inc (SMP) 2009 Q1 法說會逐字稿

Good day and welcome to today's teleconference.

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

Later, you'll have the opportunity to ask questions during your Q&A session.

Please note today's call may be recorded.

And it is now my pleasure to turn today's conference over to Jim Burke.

Please go ahead, sir.

Okay, thank you.

Good morning and welcome to Standard Motor Products first quarter 2009 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 a review of the financial highlights and then turn it over to Larry, followed by a Q&A period.

On the whole, we are quite satisfied with the results in the first quarter.

However, one obvious number to address is our roughly $36 million sales shortfall.

As many of you recall, during our recent fourth-quarter conference call we identified specific reasons for this forecasted reduction.

Larry will review these items along with new business awards benefiting the balance of the year.

Consolidated gross margin was off $10.3 million in the quarter which was primarily volume driven.

The consolidated gross margin percent was 23.7% or down .9 of a point.

Looking at the segments, Engine Management was 24.8% or down 0.6 points.

However, Engine Management gross margin improved sequentially, up 3 full points over the fourth quarter '08 and up 1.5 points over the full-year 2008.

We expect to see further improvements from the first quarter level of 24.8% as we proceed through the year.

Temperature Control gross margin was 15.5%, basically flat with Q1 '08.

The full year 2008 gross margin was 19.3% and we expect to exceed that level on a full-year basis from the benefits of price increases in 2009 as opposed to reductions the past three years and also additional production from our Mexico facility where we plan 70% remanufactured compressors in 2009 increasing to 90% by 2010.

Europe gross margin was 24.6% versus 28.4% in Q1 '08.

The weak British pound negatively impacted margins in the quarter along with lower overhead absorption on reduced OES manufacturing volume in Europe.

Overall, our consolidated first quarter '09 gross margin at 23.7% essentially matched our full-year 2008 margin at 23.8%.

While we continue to reduce inventories and under-absorbed overhead, we fully expect in 2009 to exceed the 2008 gross margin level of 23.8%.

Our SG&A expenses were reduced very nicely.

They were down $7.8 million.

SG&A expenses were favorable also .2 of a point and are at 20.9% of net sales.

Some of this reduction is volume driven but also reflects the benefits of our cost reduction programs such as 2008 voluntary retirement program, our post-retirement plan amendment, our 2009 salary freeze.

Looking at our operating profit, excluding restructuring and integration expenses, was $4.9 million, down $2.5 million versus Q1 '08, and it was primarily volume driven.

Again, we fully expect to make significant headway over 2008 for the balance of the year.

In our GAAP versus non-GAAP measure, we isolate non-operational gains and losses for comparison purposes.

For the first quarter '09 non-GAAP earnings from continuing ops were $0.07 per diluted share compared to $0.17 in Q1 '08.

Looking at the balance sheet, we continued our forward progress from 2008 reducing our debt leverage and putting us in a position to redeem our outstanding 6.75% bonds maturing in July 2009.

Before I go into our convertible bonds discussion, I want to address our total debt.

Looking back, total debt March of '08 was roughly $271 million.

It was reduced to $194 million at December '08 and again reduced to $184 million at March of '09.

Overall, down $10 million for the first quarter and down almost $87 million over a 12-month period.

The primary driver to our debt reduction in the first quarter was a $20 million inventory reduction.

The debt reduction of $87 million since March of '08 was comprised of accounts receivable and inventory reductions and also the proceeds from the sale of our Long Island City building.

This past Friday, May 1, we successfully concluded our exchange offer for $12.3 million new 15% debentures maturing in April 2011 for old 6.75% debentures maturing in July 2009.

This leaves an outstanding balance of approximately $32.1 million old 6.75% debentures maturing on July 15 this year.

Looking at our existing US and Canadian revolver, as of March 31, outstanding debt was $134 million and excess availability was roughly $67 million.

To date, more currently, our debt under this revolver has been reduced to $122 million from $134 million as of March 31 and our excess availability has increased from $67 million up to $76 million.

With this current level of excess availability in $76 million, we will have adequate availability to retire the outstanding $32 million maturing bonds and to meet our working capital needs going forward.

Lastly, we concluded in agreement with Federal-Mogul to acquire their wire and cable product line.

The final purchase price will depend upon inventory levels when transferred to SMP in approximately August.

The total expenditure is estimated at approximately $9 million to be paid over a period from April '09 through March 2010 based on our consumption of inventory levels.

Larry will go into more detail on this opportunity.

From our cash flow statement for the quarter, CapEx spending was $1.320 million and our depreciation and amortization was $3.652 million.

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

Good morning everybody.

I believe our release, but Jim's discussion is fairly complete and self-explanatory.

I'll just review a few highlights and then we'll open for questions.

First on sales, as we reported, it was better -- the first quarter of 2009 was better than the last quarter of 2008 as our customers returned to their normal buying patterns.

However, we are behind the first quarter, the comparable quarter, of 2008 for reasons we also listed in the release.

To repeat them, they include-- the divestiture of our 50% share of Blue Streak Electronics; the drop of the exchange rate in the UK and Canada; the reduction in OE/OES volume which as you well know is an industry-wide problem; number four, the loss of a portion of the CARQUEST business; and five, the conscious decision not to have a pre-season dating program for Temperature Control.

We anticipate that both of these factors will be present for much of the year 2009 although of course we can't predict exchange rate.

But the exception is Four Seasons dating which should be self-correcting because the lack of the pre-season program essentially postpones orders into the season itself and so that should come out hopefully even.

The biggest variable for Four Seasons now is what the weather is going to be.

Now, those are the negatives.

On the positive side, we gained roughly $15 million to $20 million in new Temperature Control business from two major retailers.

And second, as Jim just mentioned, we have acquired Federal-Mogul's wire and cable business.

I'll give you a little more detail on that.

We anticipate that transaction will close in about four months.

The annual volume is roughly $30 million per year.

The largest account is NAPA or Genuine Parts and the manufacturing and distribution will be fully absorbed into existing SMP facilities.

We anticipate this being a very nice addition to our business.

The other areas in the P&L are doing quite well.

The gross margin continues to improve as we will be adding jobs and hours to our three Reynosa facilities and our most recent round of price increases takes effect.

I'm very pleased with how we did in SG&A and reduction in operating expenses.

As Jim mentioned, it's approximately $8 million below the comparable quarter last year.

To me, the highlight is the reduction of roughly 800 people or 20% from a year ago.

Now some of this is direct labor which is coming down as we reduced production schedules as we have reduced inventory.

But some of this represents true savings and we're quite pleased with that.

I believe our biggest area of improvement has been in generating cash and in reducing debt.

I won't repeat the numbers that Jim mentioned but they're obviously very healthy and satisfactory.

And when we couple this with our recent exchange offer, our successful exchange offer on debentures, as Jim said, we're going to be fully able to redeem the $32 million that comes -- bonds that come due in July and have working capital for going forward.

So overall we're quite comfortable and satisfied where we are at this time.

And with that, I will open it for questions.

Thank you.

(Operator Instructions).

We'll go first to the site of Tony Cristello with BB&T Capital Markets.

Your line is open.

Please go ahead.

Good morning.

This is actually Allen Hatzimanolis in for Tony.

First, just a housekeeping question, I want to make sure I heard correctly.

You said you had $134 million under the primary revolver with $67 million excess at the end of Q1.

And what were those numbers currently?

One second, Allen.

Yes, it was -- as of March 31, it was $134 million with excess availability of roughly $67 million.

And as of today, May 6, that's $122 million.

It's dropped -- that level has dropped $12 million and excess availability has increased to $76 million.

Okay, great.

And then in Q1, if we attempt to back out the impact of FX, the divestiture of Blue Streak and the lost CARQUEST business, what would have been a more normalized year-over-year decline in Engine Management sales?

Let me try to answer that.

The -- extracting, not counting the things you mentioned.

I would say we're pretty close to flat.

I'm looking at our major customers.

We get their reports and I think, as we've said, they've continued on balance; there were some pluses and some minuses, but overall our customers, our existing customers, are flat to up a bit.

So I think that's a fair normalized number for Engine.

Okay.

And that flat to up slightly type of run rate, is that pretty much what we've seen so far in April and May from Q1 levels?

I'd say that that's true from their sales point of view, although I have to say we're just talking to Engine now, their purchases seemed to have fallen a little bit.

But these come and go as they increase, reduce their inventory.

To me the key number is what their sales are because that's what ultimately it will be, and their sales are holding steady even though their purchases have been down a bit in April.

Okay.

And then looking at the two major retail accounts that you gained in Temperature Control, were you approached, did you actively solicit the business and when should we begin to expect some of those sales to flow through the income statement?

I'd rather not answer the first part of your question, but the second part is that we're receiving the orders right now.

Okay.

And then given the significant reductions that you made in your cost cutting and headcount, depending on where volumes shake out, is it fair to assume that operating expenses kind of run in the upper-$30-million to $40 million a quarter?

Well, Allen, we don't provide the hard guidance on that, but a large portion of those in the short term are fairly fixed except for distribution expenses that are in there.

And again, our second and third quarters are higher sales periods.

Okay.

And then just one last question.

You're looking at working capital and the decline in AP'd inventory.

Was there anything behind that that was maybe more one time in nature?

How should we be thinking about that moving forward?

And then, how much further room is there to maybe reduce inventory and move more [Sybils] through the draft program that you have established at this point?

Well, the question -- the question, allow me to repeat, it was on inventory, was there any big one-time that happened within the quarter.

No, we had a divestiture of BSE but that was recorded in the fourth quarter.

We are able to take out some of the bridge inventories that were built up, but again we continue to have moves to Mexico to get additional savings in there.

So I don't think there were any specific one-time items that I would isolate.

And we continue to work on further opportunities for improving working capital and looking for inventory reductions.

Right.

And should we think that AP'd inventory maybe moves closer to upper 20% or even 30% type of rate as the year progresses?

Again I don't have those percents of what you want to quote, Allen.

Okay.

We don't talk to guidance.

But we've taken them down significantly and we captured a lot of the low-hanging fruit.

We look for more savings.

Okay --

-- specific numbers on that guidance, Allen.

Okay.

Thanks, guys, I appreciate it.

You're welcome.

Thank you.

And next we'll go to the site of Walter Schenker with Titan Capital.

Your line is open, please go ahead.

I guess I will start with the bonds.

Excess availability, is only good to retire your bonds if the banks will let you do it or could you segregate the cash you're generating to be put aside to use to retire the bonds?

No, Walter, what we'll do is we'll work with our bank group; we have an excellent relationship with our bank group.

Any cash that we generate from working capital management under our asset base facility goes to pay down debt level.

So we do not set aside cash for that redemption there.

Within the measurement, I've excluded a reserve formula that's put in place there that we have sufficient capacity to redeem the bonds in July but we're working with our bank group and fully expect to reach an agreement with them for the maturity of the bonds.

Okay.

On Federal-Mogul, all you're buying is their inventory?

And fixed assets.

Yes, we're buying inventory and fixed assets and we're moving it into our facilities.

And the $9 million, that changeover, A, there's lift cost, B, there's some write-off with some of these assets or it's pretty clean?

There'll be some -- there's no lift cost that were going through there as we're acquiring their inventory and we're -- we'll make improvements on the product we believe shipping to the customer, but no lift cost.

And transition cost over a period, we anticipate that'll be in the $2 million range and possibly there may be impairment charge, non-cash charge for some fixed assets.

Okay.

And as we take excess capacity out of the industry.

And they are both OES and aftermarket, this is just aftermarket?

Heavily aftermarket.

Heavily means sort of like the way you are?

More.

Okay, so it's basically aftermarket.

And so this should just be very profitable incremental revenue going forward?

Yes, this could work out very nicely, yes.

Okay.

On the two retailers, Proliance earlier, who obviously has a bunch of problems, in Temp Control from a balance sheet standpoint has lost AutoZone, might that be one of your retailers?

Yes, I can -- we can give out that information.

The two ones are, yes, we picked up about half of AutoZone's business.

And the other big piece was when O'Reilly purchased CSK, CSK had a competitive line, and we're getting that.

So those are the two.

Okay.

And those are taken on terms -- we've had this discussion over decades, Larry -- those are taken on terms where we're actually going to make some money and the lift cost --

Yes, this is going to be good.

There's no lift, there's running changes.

It's heavily weighted to the remanufactured compressors which is a manufactured product for us and that's good, so to help us get a lot of weight.

This is a nice addition.

Despite the toughness of some of the -- or at least one of the customers?

I'm sorry --

We once shipped to one of those customers and found them difficult to deal with.

No, we'll be fine.

Okay.

And will you make any comment on the price increase which I thought would have been in place by now?

What we can say is that they're all in effect, some just recently, but all in effect.

And on average I'd say they are slightly higher than they have been historically.

And while I would not -- again, I don't think you have to defend your lack of profitability to justify price increase, but your cost structure forgetting about the benefits of Mexico, meaning more material cost, energy cost, shipping cost, everything else, on a year-over-year basis, Jim, running flat to down?

Our material purchases, we're running slightly favorable.

And again on the -- your other costs, it's really a function of how much production that we're building in there.

And in our numbers, we're reducing inventories and productions down, so it's higher costs within the factory versus when obviously the inventory levels, production matches sales.

And last question and I'll get off, a couple of years ago we were talking both about the benefits to us in sourcing from China and the competitive problems competing with China.

Can you just give us a sense on how you look at China both from a sourcing and competitive standpoint in your business today?

I don't think it's changed much since we talked last.

They're obviously -- they're a bigger factor in the Temp business where they're making new compressors at a low price competing with our rebuilds.

But as we move the rebuilds to Mexico, we should be able to maintain a 25% to 30% price spread which is what we need.

In Engine, they're less of a factor, again, because of the complexity of the technology and the proliferation of part numbers.

So -- but they're there.

So I would say they're there and I don't think they're any easier or harder than they were six months ago.

Okay.

Thanks, Larry.

Okay.

Thank you.

(Operator Instructions).

We'll go next to the site of Brian Sponheimer with Robotti and Company.

Your line is open, please go ahead.

Hey, good morning, Larry; good morning, Jim.

Good morning.

I just wanted to ask about maybe the pace of sales throughout the quarter.

You saw on the retail side, O'Reilly, AutoZone and Advance both showed -- all showed really strong comps for the first quarter.

And I was wondering if you saw the same flow-through sequentially as the quarter progressed.

I'm sorry, I don't understand your question.

Did sales get stronger per se March from February, February from January?

You're going month by month?

Yes.

I don't have that level of detail.

But they have been solid with us as well.

The reason why I asked is that with the retailer sales increasing, I'm wondering how much inventory is still left in the channel to -- that needs to be de-stocked or if that is completely over as we're looking towards the back three quarters of the year.

That's frankly a level of detail that I don't have.

Obviously, in the fourth quarter of last year they cut their purchases way back when their -- well their sales held steady or up.

The first quarter, their purchases improved.

Are they satisfied with their current level or are they looking to reduce it further?

I really can't answer that.

You have no indication from them that would indicate any increase in production volume for you?

No, we're going on the assumption that it's just going to be straightforward.

Okay.

I mean they share their forecast --

Yes, they give a forecast.

-- with our production people, our inventories, nothing is out of line where it's going to be increasing dramatically or being reduced dramatically from the standpoint of the norms.

There'll always be some movement, a little bit of noise and ups and downs based on purchase order.

Right.

In the short term they can fluctuate.

And as I said before, I think April is fluctuating down a bit.

But the big guys, they order in clumps and sometimes the clumps are big and sometimes the clumps are little.

In the short term that could be misleading.

What we're looking at is the overall trend.

And as long as their sales hold up, which they certainly are, their purchases are going to hold up also.

Okay, thank you.

Okay.

Thank you.

(Operator Instructions).

We'll go next to the site of Walter Schenker with Titan Capital for a follow-up.

Your line is open, please go ahead.

Just try one more long-term -- maybe short and intermediate term -- philosophical discussion.

The OES world is, and the dealer network, is clearly under some pressure.

There's going to be a bunch fewer, maybe a lot fewer, auto dealers, new car sales have now been down for sometime.

Is that not a fairly strong positive for your customers both on a near-term, long-term, and just to take it one step further, also hopefully give you more pricing flexibility, not that you don't have it, as they become less and less a factor in the marketplace?

Yes, we think that the -- and the statistics talking about it is 20% decline in dealerships over the next few years.

Yes, the car dealer is the largest competitor to our independent industry.

So obviously the fewer there are of them, the better it is for our industry.

So it is a bullish sign.

Is that going to happen overnight?

No.

But looking in the medium term, it is a very bullish one.

And one aspect that people may miss is that as these dealerships close down, yes, they'll be less of a competitor for selling parts but they have some of the best mechanics out there.

And as those mechanics migrate into our industry, that will also I think motivate car owners to bring their to the independent repair shops.

But again, we were talking long-term trends now, we're not talking something that's going to be overnight.

On the whole it's a bullish thing.

Okay.

And the second question, which also goes to the dislocations which we'll see how they play out over this year in the OE side of the business, you've talked for years about picking up bigger chunks of OES, not what you're doing with Federal-Mogul, OES, is that likely to accelerate or is that disruption, maybe you don't have the money, but is that disruption such that you had to see how this rolls out before you really conceive how that's going to play out for you?

Yes, I think we have to see how it rolls out.

There's going to be over the next 12 months major disruptions in the supplier base.

And we'll just have to see what happens.

And it may lead to some future opportunities for us.

We'll just see what happens.

But we have to see what -- who comes out of this how.

And we won't know that for another year yet, in my opinion.

And last question, the $9 million you're paying to Federal-Mogul, clearly from a cash flow standpoint and the banks and the converts, that is not likely to cause a problem?

No, no.

And again, we're not -- the bulk of it is inventory and we'll be paying for it as we consume the inventory.

Okay, thank you.

Okay, you're welcome, Walter.

Thank you.

And it appears that we have no further questions in the queue at this time.

Yes, very good.

All right, I would like to thank everyone for participating in our conference call.

Goodbye.

This does conclude today's teleconference.

Thank you for your participation.

You may disconnect at any time, and have a wonderful day.